Looking for a straight talk on the underpinnings of American-style capitalism that make you say, “Ah, now I get it”? “Zero to One” might be the only book you need to read.
The essential premise of the book is that creating something new (or going from 0 to 1) is fundamentally different than replicating an existing idea. Big and durable businesses such as Microsoft, Google, and Facebook succeeded by creating new things. If we do not do this enough, our economy will suffer and fail.
Creating something new is fundamentally different from replicating an idea.
Technology enables us to create new things, and it is a uniquely human ability. The book is about creating new businesses by thinking in a particular way that proved to be wildly successful in the last couple of decades. The author admits that entrepreneurship cannot be taught as a formula since each innovation is new and unique. Rather the focus is thinking about business from first principles or fundamental assumptions.
“What important truth do very few people agree with you on?”. This is a contrarian question to think about how the future will unfold. Future is not something that happened but rather a time when the world looks different from what it is today. If nothing changes in the next hundred years, then the future is 100 years away. The above contrarian question seeks answers on how somebody is looking into the future.
The progress in the future can take two forms. The first form is horizontal progress in which copying existing things or models that already work. An example would be China duplicating the American model. The second form is vertical progress (0 to 1) with a bigger leap such as going from a typewriter to a word processor. The vertical progress is often enabled by technology, as Information Technology has changed the world recently. We need a combination of horizontal and vertical progress to move the world forward.
A startup is the largest group of people you can convince of a plan to build a different future.
Technology usually comes from new ventures or startups and this is often because large organization curtails risk-taking and innovation. A small group of people bound together by a sense of mission have changed the world for the better. A lone genius might create a classic art or literature but it is almost impossible to create an entire industry. A startup is the largest group of people you can convince of a plan to build a different future. The biggest strength of such a startup is nimbleness and new thinking. Startups should question received ideas and rethink business from scratch.
The mistakes of conventional beliefs appear only in retrospect. When they collapse, we call them bubbles but distortions caused by bubbles linger on. The internet bubble of the ’90s was an example where group thinking threw even an elementary idea like “companies exist to make money” out of the window. When the bubble crashed, entrepreneurs took big lessons such as making incremental advances as opposed to trying to change the world, staying lean and flexible, improving on the competition instead of creating new markets, and focusing on products instead of sales.
The most contrarian thing of all is not to oppose the crowd but to think for yourself.
Yet the opposite principles are probably more correct:
- It is better to risk boldness than triviality.
- A bad plan is better than no plan.
- Competitive markets destroy profits.
- Sales matters just as much as product.
The bursting of the Internet bubble was warranted but it shouldn’t trap us into falling into mistaken reactions. The most contrarian thing of all is not to oppose the crowd but to think for yourself.
Be a monopoly
If you want to create and capture lasting value, don’t build an undifferentiated commodity business but build a monopoly! Americans mythologize competition but capitalism and competition are at the opposite ends. Under perfect competition, nobody makes a profit and it undermines the essential idea of accumulation of capital.
Google is an example of a monopolist business while airlines are very close to perfect competition. Monopolists often lie about their positions to escape from regulations.
Non-monopolists tell the opposite lie by describing their market extremely narrowly so that they dominate it by definition. Companies that lose sight of competitive reality and focus on trivial differentiating factors are unlikely to survive.
The problem with competitive business goes beyond a lack of profits. It pushes people to ruthlessness or death. In business, money is either an important thing or it is everything. Monopolists can afford to think beyond money. In perfect competition, a business is so focused on survival that it can’t think for a long-term future. There is only one way to escape: find businesses that have monopolist profits.
Monopoly is not a pathology or an exception that should be scorned but it is the condition for every successful business.
Creative monopolists, who invent new and better things, are good for society. These monopolies can keep innovating because their profits enable them to think long-term. Even with the obvious benefits of creative monopolies, economists are obsessed with competition as an ideal state. With perfect competition, the death of your business won’t matter to the world; some other undifferentiated players will take your place.
Monopoly is not a pathology or an exception that should be scorned but it is the condition for every successful business.
If creative monopoly benefits everybody, why do people still believe that competition is healthy? This is because competition is an ideology that is ingrained in our thinking, right from our school system where grades and competition are overemphasized. Things get fiercer in higher education, academia, and professional life. History is full of stories of companies fighting for the wrong reasons. Google and Microsoft were busy fighting each other about browsers, search engines, and Office tools while Apple came long and overtook them all.
If you can recognize competition as a destructive force instead of a sign of value, you can save yourself from a lot of trouble.
Creating a monopoly
The value of a business today is the sum of all the money it will make in the future. Of course, you need to discount those future cash flows to their present value. Comparing discounted cash flows make the difference between low-growth businesses and high-growth startups super obvious. Most of the low-growth businesses create value in the near-term but their cash flows may dwindle when customers move on to better alternatives. Successful technology companies often lose money for the first few years but the value will come 10 to 15 years in the future.
The importance of future profits is counterintuitive and even many entrepreneurs focus only on short-term growth. For a company to be valuable, it must grow and endure. The important question to be asked is “will this business still be around a decade from now?”. You need to look at both numbers and characteristics of the business to answer this question.
Every successful monopoly is unique but here are some common characteristics.
- Proprietary technology. This provides a clear advantage and makes your product difficult or impossible to replicate. As a rule of thumb, proprietary technology must be at least 10 times better than the closest substitute in some dimension. Anything less than that will be perceived as a marginal improvement and will be hard to sell in a crowded market. The best way to make 10x improvement is to invent something completely new or radically improve an existing solution.
- Network effects make a product more useful as more people use it. Social networks are prime examples where the value grows as more of your friends join the network. Even though network effects are powerful, you will never benefit from them unless your product is valuable to its very first users when the network is necessarily small. This also means network effects business must start with especially small markets.
- Economies of scale. A monopoly business gets stronger as it gets bigger. For example, software startups can enjoy great economies of scale because the marginal cost of producing another copy of the product is close to zero. Some such as services businesses, by their nature, are hard to scale. A good startup should have the potential for great scale built into its first design.
- Branding is another way to be a monopoly. Factors such as user interface, marketing, and the charisma of the CEO can boost the brand but no technology company can be built on just branding alone.
Brand, scale, network effects, and technology in some combination can help create a monopoly but to get there, a company should start with a very small market. It is easier to dominate a small market than a large one. Small cannot be a non-existent market though.
The perfect target market for a small startup is a small concentrated group of people that are served by few or no competitors. A big market is always a bad choice and it is a red flag when entrepreneurs talk about grabbing 1% of a $100 billion market.
Once you dominate a small market, you should gradually expand into related and slightly broader markets. This takes discipline – first to pick and dominate a small mark and then to scale to adjacent markets. Founders would be well-advised not to disrupt existing players in a big way inviting backlash, and get into a competitive race as much as possible.
The perfect target market for a small startup is a small concentrated group of people that are served by few or no competitors.
Startups shouldn’t overestimate the “first-mover advantage”. It is often better to be the last mover, to make the last great development in a specific market and enjoy years or even decades of monopoly profits. In other words, “you should study the endgame before anything else”.
Design Vs Chance
Does success come from luck or skill? People have debated this question for thousands of years but it is hard to find an agreement even among successful people. A more relevant question for entrepreneurs is if the future is a matter of chance or design.
You can either expect the future to take a certain form or to be hazily uncertain. If you believe in the first option, it makes sense to try to shape the future. Otherwise, you will give up on trying to master it. We can categorize our outlook about the future into four buckets.
- Definite optimistic (US, 1950s – 1960s)
- Definite pessimistic (China, present)
- Indefinite optimistic (US, 1982 – present)
- Indefinite pessimistic (Europe, present)
Present America is dominated by an “indefinite optimistic” attitude where we are generally optimistic about the future but totally uncertain on how it would unfold. To an indefinite optimist, the future will be better, but he doesn’t know exactly, so won’t make any specific plans. He expects to profit from the future but sees no reason to design it concretely. This also explains why are trying to train our kids to be good at a portfolio of things.
An indefinite pessimist looks into a bleak future and has no idea what to do about it. Indefinite pessimist can’t know whether the inevitable decline will be fast or slow. All he can do wait for it to happen, so he might as well eat, drink, and be merry in the meantime.
A definite pessimist believes the future can be known and prepare for it since it will be bleak. China is probably a prime example of this attitude and it influences the way the Chinese save everything. Every class of people in China takes the future deadly seriously.
To a definite optimist, the future will be better than the present if he works to make it better. The US in the 1950s epitomized this attitude and it led to the massive expansion of scientific and technological progress.
Our indefinite optimistic world
A “definite optimistic” future would need engineers to design big projects such as underwater cities, and space missions, an indefinite optimistic future calls for more bankers and lawyers.
Our politics and the very character of the government have become indefinite too. The government used to be able to coordinate complex solutions to problems such as lunar missions but today, the government mainly provides insurance in the form of medicare, social security, and other transfer payment programs.
The indefinite optimistic attitude is so ingrained in our thinking, politics, philosophy, and business, so it is important to ask what kind of future “indefinite optimism” would bring. The US households are saving almost nothing while US companies are letting cash pile up on their balance sheets without investing in new projects because they don’t have any concrete plans for the future.
Would-be entrepreneurs are told that nothing can be known in advance: listen to what customers say they want, make nothing more than a “minimum viable product” and iterate our way to success. Leanness is a methodology, not a goal. Iteration without a bold plan won’t take you from 0 to 1.
A startup is the largest endeavor over which you can have definite mastery. It gives you power over your destiny as well as a small but important part of the world, only if you are willing to reject the tyranny of Chance.
How will we prioritize design over chance? Steve Jobs is a good model to emulate. He not only obsessed with the visual aesthetics of personal devices but designed business by imagining and executing a multi-year plan to create new products and distribute them effectively. Jobs saw that you can change the world through careful planning, not by listening to focus group feedback or copying other’s successes.
A startup is the largest endeavor over which you can have definite mastery. It gives you power over your destiny as well as a small but important part of the world, only if you are willing to reject the tyranny of Chance.
Follow the money
In 1906, economist Vilfredo Pareto discovered what became the “Pareto principle” or the 80-20 rule. He noticed that 20% of the people owned 80% of the land in Italy. This pattern in which a small few radically outstrip all rivals can be seen all around us and expressed in terms of “power law”.
We don’t live in a normal world, we live in a power-law world.
In venture capital, power-law is even more visible where a few companies attain exponentially greater value than others. Venture capitalists typically invest in a portfolio of companies hoping to make money when these companies go public or get bought by larger companies but most venture-backed companies fail. Even seasoned VCs don’t understand the degree of differences between failed and successful companies, often expecting venture returns will be normally distributed: that is bad companies will fail, mediocre ones will stay flat, and good ones will return 2x or even 4x.
In reality, venture returns follow power-law which results in the best investment in a successful fund equals or outperforms the entire rest of the fund combined. This implies that VCs should invest only in companies that have the potential to return the value of the entire fund.
Every single company in a good venture portfolio must have the potential to succeed at a vast scale.
The professional VCs often fail to see the power law because it only becomes clear over a long time and doesn’t reflect the daily experience. Most of the differences that investors and entrepreneurs perceived every day are between relative levels of success, not between exponential dominance and failure. Since nobody wants to give up on investment, VCs usually spend even more time on the most problematic companies than they do on the most obviously successful.
Only less than 1% of new businesses started in the new US receive venture funding and total VC investments account for less than 0.2% of GDP. However, venture-backed companies create 11% of all private-sector jobs and generate revenues equivalent to almost 21% of GDP.
Power-law is equally important for an entrepreneur, who is making a major investment by spending her time working on a startup. Therefore the entrepreneur must think about whether her company is going to succeed and become valuable. Our school system imparts homogenized generic knowledge and forces us not to think in power-law terms. Universities make you believe that “it doesn’t matter what you do, as long as you do it well.”. This is completely false. You should completely focus on something you’re good at doing, but before that, you must think hard about whether it will be valuable in the future.
For the startup world, this might mean you should not necessarily start your own company even if you are very talented. People who understand the power law will know how tremendously successful they could become by joining the very best company while it is growing fast. Power law means that differences between companies will dwarf the differences in roles inside companies.
If you do start your own company, you must remember that power-law to operate it well. The most important things are: one market is better than all others, one distribution strategy usually dominates others, and some moments matter much more than others. In a power-law world, you need to think hard about where your actions will fall on the curve.
Today’s famous ideas were once unknown and knowing them now won’t necessarily give you an edge. The contrarian question of “what valuable company is nobody building?” relies on the assumption that there are still secrets, something important and unknown, remaining.
Of course, there are many things that we don’t yet understand but is it because they are difficult or impossible to understand? The difference matters. You can achieve difficult things, but you can’t achieve the impossible.
Most people act like there are no more secrets left to find. For example, religious fundamentalism allows no middle ground for hard questions: there are easy truths and there are the mysteries of God, which can’t be explained. In between, lies heresy. Even environmentalists and free-market proponents think this way. Free marketers think the value of things is set by the market but whether those prices make sense is not to be second-guessed.
Why has so much of our society come to believe there are no hard secrets left? One reason is that humans have mostly conquered geography. Even a couple of centuries back, there were still new places to go, today explorers are only in history books. Along with the receding of physical frontiers, four social trends have contributed to removing our beliefs in secrets.
- Incrementalism: We are taught from an early age that the right way to do things is to proceed one very small step at a time. This limits our ability to explore new frontiers.
- Risk aversion: People are scared of secrets because they are scared of being wrong. If your goal is to never make a mistake in your life, you shouldn’t look for secrets.
- Complacency: Why search for new secrets if you can comfortably collect rents on everything that has already been done?
- Flatness – Because of globalization, people perceive the world as one homogenous, highly-competitive marketplace. This creates a voice of doubt dissuading people from even starting to look for secrets in a world that seem too big a place for any individual to contribute something unique.
If you believe there are no more secrets you would have to believe that we’ve already solved all the great questions. In such a world, there will be perfect justice since everyone would have a perfect understanding of justice. In economics, disbelief in secrets leads to faith in efficient markets but the existence of financial bubbles shows that markets can have extraordinary inefficiencies.
You cannot find secrets without start looking for them and you cannot look without having belief.
When a company stops believing in secrets, there could be disastrous effects like in the case of HP which abandoned the search for technological secrets and its market position came down heavily.
You cannot find secrets without start looking for them and you cannot look without having belief. The truth is that there are many secrets left to find but they will yield only to relentless searchers. We could cure cancer, dementia, and all the diseases of age and metabolic decay. We can free the world from fossil fuels. We can find faster ways to travel and even escape from the planet earth. But we need to force ourselves to look.
A great business can be built on open but unsuspected secrets about how the world works. Companies like Airbnb, Uber, and Facebook are examples of tapping into simple secrets that could have been easily overlooked.
How to find secrets?
There are two kinds of secrets: secrets about nature and secrets about people. To uncover natural secrets, one must study some undiscovered aspects of the physical world. Secrets about people are things that people don’t know about themselves or things they hide because they don’t want others to know. When thinking about what kind of company to build, there are two kinds of questions to ask: what secrets is nature not telling you? What secrets are people not telling you?
The best place to look for secrets is where no one else is looking. The fields that are not standardized and institutionalized could prove to be fertile ground for finding secrets. We know more about the physics of faraway stars than we know about human nutrition, where there is plenty more to learn. It won’t be easy but it is not impossible and exactly the kind of field that could yield secrets.
A great company is a conspiracy to change the world, when you share your secret the recipient becomes a fellow conspirator.
if you find a secret, do you tell anyone or keep it to yourself? It is rarely a good idea to tell everyone instead just tell whoever you need to. Great businesses are built around a secret that is hidden from the outside. In other words, a great company is a conspiracy to change the world, when you share your secret the recipient becomes a fellow conspirator.
The beginnings of a startup are special. As a founder, your first job is to get first things right, because you cannot build a great company on a flawed foundation. The first crucial decision is deciding your co-founder. Optimism abounds at the start of every relationship, but if the founders develop irreconcilable differences, the company becomes the victim.
Technical abilities and complementary skills are important but more importantly, founders should have a history of working together before they start a company together.
It is not just founders but everyone in your company needs to be aligned. There are many sources for misalignment.
- Ownership: Who legally owns the company’s equity?
- Possession: Who runs the company day-to-day?
- Control: who formally governs the company’s affairs?
It is very often to have a misalignment in big companies and govt organizations. Unlike these, early-stage startups are small enough that founders usually have both ownership and possession.
Most conflicts in a startup arise between ownership and control – that is, between founders and investors on the board. The potential for conflict increases over time as interests diverge: a board member might want to take a company public as soon as possible to benefit his venture firm, while the founders would prefer to grow the firm by staying private.
The number of members on the board should be small, ideally between 3 and 5. Every single member in the board is important and even one problem director can even jeopardize your company’s future.
As a general rule, everyone in the company should be involved full-time. Sometimes, you may have to break this rule especially when you hire accountants and lawyers. However, anyone who doesn’t own your stocks or draw a regular salary from your company is fundamentally misaligned. Even working remotely should be avoided, because misalignment can creep in whenever colleagues aren’t together full-time, in the same place every day.
High-cash compensation teaches workers to claim value from the company as it already exists instead of investing their time to create new value in the future
For people to be fully committed, they should be properly compensated. A company does better the less it pays the CEO. If the CEO collects $300,000 per year, he risks becoming more like a politician than a founder. A cash-poor executive will focus on increasing the value of the company as a whole. Low CEO pay also sets a standard for everyone else in the company.
High-cash compensation teaches workers to claim value from the company as it already exists instead of investing their time to create new value in the future. A cash bonus is slightly better than a cash salary. The startup can offer something even better: part ownership of the company itself.
However, you need to allocate equity very carefully. Giving everyone equal shares is usually a mistake since every individual has different talents and responsibilities as well as opportunity costs. Granting different amounts upfront might seem unfair and resentment at this stage can kill a company but there’s no ownership formula to avoid it.
If you get the founding moment right, you can steer its distant future toward the continual creation of new things that extend its founding indefinitely.
The problem becomes even more acute over time as more people join the company. Early employees usually get the most equity because they take more risk but some later employees may be more crucial for a firm’s success. Most people don’t prefer equity since it is not liquid like cash. Anyone who prefers owning a part of your company to being paid in cash reveals a preference for the long-term and a commitment to increasing your company’s value in the future. Equity doesn’t create perfect incentives but is the best way to keep everyone in the company aligned.
The founding moment of a company happens only once, and only at the very start, you have the opportunity to set the rules that will align people towards the creation of value in the future. If you get the founding moment right, you can steer its distant future toward the continual creation of new things that extend its founding indefinitely.
In an ideal company culture, employees should love their work so much that they truly enjoy going to work. Many Silicon Valley companies provide perks to create a feeling of an enjoyable workplace. However, company culture doesn’t exist apart from the company itself. Every company is a culture. A startup is a team of people on a mission and a good culture is just what that looks like on the inside.
You should explain why your mission is important, not in general terms, but why you’re doing something important that no one else is going to get done.
To create a great culture, you need to hire people who are not just skilled on paper but who will work together well. Hiring the first four of five employees might be easier because of large equity stakes or high-profile positions. But why should the 20th employee join your company? The answer to this question should be specific for your company. You should explain why your mission is important, not in general terms, but why you’re doing something important that no one else is going to get done.
The mission is not enough, you also need to explain why your company is a unique match for the candidate personally. Instead of fighting the perks war, focus on the opportunity to do irreplaceable work on a unique problem alongside great people.
From the outside, everyone in your company might look similar since you need to create a tribe of like-minded people fiercely devoted to the company’s mission. It doesn’t matter what people looked like or which country they came from, but you need every new hire to be equally obsessed.
Inside the company, every individual should be sharply distinguished by her work. Employees should be assigned responsibility by matching talents with tasks. Startups face a high-risks of employees competing on job roles since they are fluid at the early stages. Eliminating competition among employees make it easier for everyone to build long-term relationships. Most often, startups fail because of internal conflict that is hidden from plain view.
People at startups tend to be fanatically right about something the outsiders have missed
When it comes to loyalty to the organization, there are two extremes: cult and consultants. Every company culture can be plotted on a linear spectrum from cult to consultants. Best startups might be considered slightly less extreme kinds of cults. The biggest difference is that cults tend to be fanatically wrong about something important while people at startups are fanatically right about something the outsiders have missed. You cannot learn these kinds of secrets from consultants and it shouldn’t bother you if your company doesn’t make sense to outside professionals. Better to be called a cult or even a mafia.
If you build it, will they come?
We underestimate the importance of distribution and there is a bias against the salespeople especially in Silicon Valley, where engineers like building cool stuff rather than selling it. In reality, customers will not come unless you make it happen.
Nerds are generally skeptical of advertising, marketing, and sales but advertising works on everybody including nerds. Advertising doesn’t make you buy a product right away; it exists to embed subtle impressions that will attract sales later. In engineering disciples, a solution either works or fails and it is easy to evaluate someone’s work relatively easily as surface appearances don’t matter much. In sales, it is the opposite, where the focus is changing surface appearances without changing the underlying reality.
All salesmen are actors and their priority is persuasion and not sincerity. Like acting, sales works best when hidden. This is one reason, everyone whose job involves distribution has fancy job titles like account executive, business development, and investment banker. It is delusional thinking that a great product would sell itself. It is better to think of distribution as something essential to the design of your product. If you have a new product but you don’t know an effective way to sell, you have a bad business no matter how good the product is.
Superior sales and distribution itself can create a monopoly even without product differentiation. The opposite is not true. Even for a great product, you need a strong distribution plan. Two metrics set the limits for effective distribution. The customer lifetime value and customer acquisition cost. The former should exceed the latter. The distribution process can be plotted on a continuum of viral marketing to complex sales.
If your average sale is seven-figure or more, you have to use strategies of “complex sales” which requires very close attention to every detail of the deal. The frequency of such sales might be once every year or two. Such complex sales work when you don’t have a “salesman” at all instead the CEO has to be the salesperson.
Businesses with complex sales models succeed if they achieve 50% to 100% year-over-year growth over a decade. Good enterprise sales strategy starts small, and customers will never be comfortable signing a deal completely out of scale with what you’ve sold before. Once you have a pool of reference customers, you can start working towards bigger deals.
Most sales are of average deal sizes that range between $10k and $100K, and usually, the CEO doesn’t have to do all the selling. The challenge is enabling a sales team of modest size to move the product to a wider audience.
In between personal sales and traditional advertising, there is a dead zone. For a product priced around $1000, it is hard to find a distribution channel. Even if you have a clear value proposition, how do you get people to hear it? Broad-scale advertising won’t convince anybody to part with $1000. The product needs personal sales effort but at that price point, you won’t have the resources to employ salespeople. For small and medium-sized businesses, distribution is the hidden bottleneck.
Marketing & Advertising work for relatively low-priced products that have mass appeal but lack any method of viral distribution. Proctor & Gamble can’t afford to pay salespeople to go door-to-door but they can employ people to talk to grocery chains and secure favorable deals. To reach the end customers, a packaged goods company has to produce television commercials, print coupons, etc.
Advertising can work for a startup when customer acquisition costs and customer lifetime value make every other distribution channel uneconomical. However, startups should resist the temptation to compete with bigger companies with TV ads or PR stunts.
Whoever is first to dominate the most important segment of a market with viral potential will be the last mover in the whole market.
A product is viral if its core functionality encourages users to invite their friends to become users too. The ideal viral loop should be as quick and frictionless as possible. Whoever is first to dominate the most important segment of a market with viral potential will be the last mover in the whole market. Paypal had great success by finding a small niche market in eBay “power sellers”, professional vendors who sold goods online through eBay’s auction marketplace.
The distribution channel also follows a power law of its own, where one channel is going to be far more powerful than any other for any given business. A broad approach of trying a collection of methods doesn’t work. If you can get just one distribution channel to work, you have a great business. If you have tried many but none works, your business is finished.
You also need to sell your company to employers and investors. This requires calculated recruiting and pitching beneath the surface. Selling your company to the media is another necessary part. You cannot expect that people will admire your company without a public relations strategy. Even if your company doesn’t need media exposure to acquire customers, the press can help attract investors and employees.
All of us want to believe that sales doesn’t work and we have independent minds but that’s not true. Everybody has a product to sell – no matter where you’re an employee, a founder, or an investor. If you are the founder and don’t see any salespeople around, you are the salesperson.
Man and Machine
Information technology has been advancing so rapidly that everyone expects computers to do much more in the future and this makes people wonder: 30 years from now, will there be anything left for people to do? This is a wrong question to ask. Computers are complements for humans, not substitutes. The most valuable businesses of the coming decades will seek to empower people rather than try to make them obsolete.
American workers were worried about competition from cheaper Mexican substitutes and they fear technology soon will do the same to substitute humans. But the situations are very different: people compete for jobs and resources, computers compete for neither. People don’t just compete to supply labor but also demand for the same resources. As globalization continues people from all over the world will yearn for the same types of resources enjoyed only by the rich.
The most valuable businesses of the coming decades will seek to empower people rather than try to make them obsolete.
The competition from computers is fundamentally different. People have intentionality like planning and making decisions in complicated situations. While humans are not good at making sense of the enormous amount of data, computers excel at efficient data processing but struggle to make basic judgments that would be simple for a kid.
The differences are even deeper on the demand side. Computers don’t yearn for luxury goods and all they require is a nominal amount of electricity. When we design a new computer technology to help solve a problem, we get all the efficiency gains of a hyper-sepcifalized trading partner without having to compete with it for resources. Computers are tools and as they become more and more powerful, they won’t be substitutes for humans but will be complimentary.
Complementarity between computers and humans is a path to building a great business. Companies like Paypal and Palantir leveraged technology to augment human decisions. Better technology in law, medicine, and education won’t replace professionals. Instead, it will allow them to do even more. LinkedIn is an example of providing great value to recruiters instead of trying to replace them.
Even with the overwhelming evidence of computers being complimentary to humans, why do we fear computers? It has a lot to do with the way we phrase ideas. The very term “machine learning” evokes imagery of replacement and gives the wrong notion that computers can be taught to perform almost any task. We are impressed with small feats accomplished by computers alone, but we ignore big achievements from complementarity. Most valuable companies in the future will ask: How can computers help humans solve hard problems?
The future of computing is necessarily full of unknowns. Once computers can answer all your questions, perhaps they’ll ask why they should remain subservient to us at all. The logical endpoint to the substituitionist thinking is called “strong AI”: computers eclipse humans on every important dimension. It is not clear whether strong AI would save or destroy humanity. It is like a cosmic lottery ticket. If we win, we get utopia; if we lose computers substitute us out of existence.
Even if Strong AI is a real possibility, it won’t happen anytime soon and it is a worry for the 22nd century. Indefinite fears about the far future shouldn’t stop us from making definite plans today. We shouldn’t be paralyzed by the fear of computers taking over the world and stop trying to build a vastly better world today. As we find new ways to use computers, they won’t just get better at the kinds of things people already do; they’ll help us to do what was previously unimaginable.
Seeing the Green
In the early 2000s, everyone thought cleantech was going to be the “next big thing” and investors poured more than $50 billion into it. It ended in a massive bubble with more than 40 solar manufacturers going out of business. Most cleantech companies neglected one or more of the seven questions that every business must answer:
- Engineering question – Is there a breakthrough technology instead of incremental improvements?
- Timing question – Is now the right time to start your particular business?
- The monopoly question – Are you starting with a big share of a small market?
- The people question – Do you have the right team?
- The distribution question – Do you have a way to not just create but deliver your product?
- The durability question – Will your market position be defensible 10 and 20 years into the future?
- The secret question – Have you identified a unique opportunity that others can’t see?
Whatever your industry might be, any great business plan must address every one of these questions. If you nail all seven, you’ll master fortune and succeed. Even getting five or six correct might work.
With the cleantech bubble, people were starting companies with zero good answers. Let’s look at the losing scorecard of cleantech in more detail.
A great technology company should have proprietary technology an order of magnitude better than its nearest substitute but cleantech rarely produced 2x improvement. Companies must strive for 10x better because merely incremental won’t result in a meaningful change for the customer.
The first silicon solar cell was created by Bell Labs in 1954 and it had about 6% efficiency. Today’s crystalline silicon cells or modern thin-film cells have not exceeded 25% efficiency. Contrast it with the evolution of microprocessors. The first was built in 1970 and it has been advancing exponentially since then. Entering a slow-moving market can be a good strategy but only if you have a definite and realistic plan to take it over, which the failed cleantech companies lacked.
The monopoly question
Cleantech investors like John Doerr espoused the size of cleantech markets calling them trillion dollar markets. What he missed was that trillion-dollar markets also mean ruthless and bloody competition. Some emphasized the bounty of an energy market big enough for all comers.
Customers don’t care about any particular technology unless it solves a particular problem in a superior way. If you can’t monopolize a unique solution for a small market, you’ll be stuck with vicious competition. Huge markets are highly competitive and not highly attainable.
Cleantech companies were run by salesman-executives who were good at raising capital and securing government subsidies, but they were less good at building products that customers wanted to buy. There’s nothing wrong with a CEO who can sell but if he looks like a salesman he is probably bad at sales and worse at tech.
The distribution question
Cleantech companies courted government and investors but not customers. They learned the hard way that selling and delivering a product is as important as the product itself.
The durability question
Every entrepreneur should ask the question: “What will the world look like 10 and 20 years from now and how will my business fit in?”.
Few cleantech companies had a good answer. When the bubble exploded, they started blaming China but was the competition from Chinese manufacturers impossible to predict? Cleantech entrepreneurs should have asked: What will stop China from wiping out my business? Besides, cleantech companies missed the trend of fracking in the US. Fracking may not be a durable energy solution either but it was enough to doom cleantech companies that didn’t see it coming.
The secret question
Every cleantech company justified itself with conventional truths about the need for clean energy, assuming that overwhelming social need for alternative energy implied overwhelming business opportunity. Cleantech companies lacked secrets, specific reasons for success that other people don’t see.
Cleantech companies aimed for not just business success but social good as well. This philanthropic approach to business starts with the idea that you can combine the best of both corporations and non-profits and “do well by doing good”. Usually, they end up doing neither.
The ambiguity between social and financial goals doesn’t help. If something is socially good, is it good for society or merely seen as good by society. Whatever is good enough to receive applause from all audiences can only be conventional, like the general ideas of green energy.
Doing something different is what’s truly good for society and it is also what allows a business to profit by monopolizing a new market. The best projects are likely to be overlooked not trumpeted by a crowd. The best business problems to work with are often the ones nobody else even tries to solve.
Tesla is one of the cleantech companies that became successful by answering the 7 questions.
Technology: Tesla’s technology is so good that other car companies rely on it. Tesla’s differentiation is its ability to integrate many components into a superior product.
Timing: Elon Musk saw a once lifetime opportunity in Jan 2010 and secured a $465 million loan from the US Department of energy. There was only one moment where that was possible and Tesla played it perfectly.
Monopoly: Tesla started with a tiny submarket of high-end electric sports cards. Starting small allowed Tesla to invest in R&D and build the slightly less expensive Model S.
Team: Tesla’s CEO is the consummate engineer and salesman so he could assemble a team that’s good at both.
Distribution: Tesla took the distribution so seriously that it decided to own the entire distribution chain. The upfront cost is high but it allows Tesla to own the entire customer experience.
Durability: Tesla had a head start and is moving faster than anyone else in establishing as a coveted brand in a hard to win consumer category
Secrets: Tesla knew that fashion drove interest in cleantech and decided to build a car that made drivers look cool. Tesla built a unique brand around the secret that cleantech was even more of a social phenomenon than an environmental imperative.
No sector will be so important that merely participating in it will be enough to build a great company.
Tesla’s success proves that there was nothing inherently wrong with cleantech. Rather it gave people a way to be optimistic about the future of energy. When indefinitely optimistic investors betting on the general idea of green energy-funded cleantech companies that lacked specific business plans, the result was a bubble. In the 1990s, there was a buzz about the internet going big and too many entrepreneurs had the same idea. An entrepreneur can’t benefit from macro-scale insight unless his plans begin at the micro-scale. No matter how big the general problem is, only a firm that offers a specific solution for a specific problem can make money. No sector will be so important that merely participating in it will be enough to build a great company.
The tech bubble was painful but the vision of the internet fundamentally changing the way we live turned out to be true.
Could there be an energy 2.0 from the debris of the cleantech crash? The macro need for energy solutions is still real but a valuable business must start by finding a niche and dominating a small market. Finding small markets for energy solutions will be tricky and the challenge for the entrepreneurs is to think small.
The founder’s paradox
Are founders unusual people? Do we tend to remember and exaggerate whatever is most unusual about them? Which personal traits matter in a founder?
Most people have average personality traits while founders tend to be at the extreme: from being nerdish, and weak on one side, to being polymath or charismatic on the other. However, this doesn’t capture the full picture. Normally we don’t expect a person to have opposite traits at the same time but it happens for founders. They often oscillate between jerkiness and charisma or can be insiders and outsiders at the same time.
Extreme founder figures are not new in human experience and they are littered all over the mythology.
These opposite traits could be from birth(nature) or acquired from the environment (nurture). But could it be that they strategically exaggerate certain qualities? The cycle usually starts with unusual people and ends with them acting and seeing even more unusual. Richard Branson, the founder of Virgin Group, is a good example. He is a born entrepreneur but other aspects of his renown such as his trademark hairstyle are less natural. He probably cultivated some extreme traits such as kiteboarding with naked supermodels as a publicity stunt. Sean Parker and, Lady Gaga are other examples of extreme personalities who are also world-famous founders.
Extreme founder figures are not new in human experience and they are littered all over the mythology. The famous and infamous have always served as vessels for public sentiment; they’re praised amid prosperity and blamed for misfortune. Primitive societies often need to find a scapegoat for their disasters and misfortunes. Before execution, scapegoats were often worshipped like deities. Paradoxically, these are the roots of the monarchy. Every modern king is just a scapegoat who has managed to delay his own execution.
Celebrities are American royalty; we create and eventually crucify them. We worship and despise technology founders just as we do with celebrities. Bill Gates has shown that highly visible success can attract highly focused attacks. Just as the legal attack on Microsoft was ending Bill Gate’s dominance, Steve Job’s return to Apple demonstrates the irreplaceable value of a company’s founder. Apple’s value crucially depended on the singular vision of a particular person, hinting that companies that create new technology often resemble feudal monarchies rather than modern organizations.
Founders are important not because they are the only ones whose work has value, but rather because a great founder can bring out the best work from others
The lesson for business is that we need founders and we should be tolerant of founders who seems strange or extreme., At the same time, founders need to be careful that individual prominence and adulation can easily be exchanged for individual notoriety and demonization. Founders are important not because they are the only ones whose work has value, but rather because a great founder can bring out the best work from others. The single greatest danger for a founder is to be so certain of his own myth. An equal danger for every business is to lose all sense of myth and mistake disenchantment for wisdom.