New book “Zero to One” released - Peter Thiel’s view on the startup world

I am happy to follow the development of all members of the early PayPal team, one of them is Peter Thiel, a venture capitalist and entrepreneur, co-founder and, in the past, CEO of PayPal. Now Thiel manages his own hedge fund and investment company, besides being a member of the board of directors of Facebook.

For more than 15 years of entrepreneurial and investment activities, he has accumulated a lot of valuable experience, and, in his book, “Zero to One: Notes on Startups, the formation of critical thinking, not tied to the generally accepted, traditional views on things, and also examines the problems of modern startups and business environment.

Since September 16, the book is available for purchase in English, and on October 20 it will be published in Russian. Recently, the second chapter of the book was posted to the network; under the cut, we offer you our own version of its translation. Translation of the author's text performed blaarb , all thanks to him. I would immediately like to warn you that the book intersects in some way with the course of lectures “Startup” from Stanford, but even those familiar with it will be interested in the book.

Til strongly opposes the repetition of previous experience, opposing the effectiveness of his own, completely new ideas. He expresses the thesis that competition deprives entrepreneurs of any profit and only a monopoly based on unique knowledge and developments allows them to get ahead and earn billions. Bill Gates or Larry Page of the future will not develop operating systems or search algorithms, because all this has already been invented and works fine now. Instead of trying to win a share from the giants of the market, successful entrepreneurs of the future will focus on completely unique ideas, and will be the first and sole owners of new markets created by their own efforts.
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In Zero to One, Til talks about the qualities and ways of thinking necessary to succeed in the modern business environment, along with examples from their own practice and summarizing the Silicon Valley experience over the past 20 years.

Have fun as in the 99th

Earlier, we asked the question: "Is there such a truth that only a few share with you?" It is not easy to give a direct answer. It will be easier, probably, to begin with the introduction: “With what statements does everyone agree?”. “The madness of units is the exception, and the madness of entire groups, parties, nations, times is the rule,” wrote Nietzsche (before he lost his mind). If you manage to recognize a popular delusion, you can also find the truth behind it - the truth that goes against the general concepts.

Think of a simple statement: companies exist to make money, not to lose it. This should be obvious to any thinking individual, but in the late 1990s there were quite a few people who thought otherwise. They could characterize losses of any size as an investment in a big and bright future. The generally accepted wisdom of the New Economy considered the number of page views as a more reliable and far-sighted financial metric, instead of something as prosaic as profit.

And only when we look back into the past, it becomes clear that the generally accepted views were biased and incorrect. We recognize the “bubbles” only when they have already burst, but the negative changes caused by them do not disappear anywhere with them. The “Internet bubble” of the 90s was the largest in the last 80 years, and the lessons that we learned from it, distorted the modern perception of technology, almost completely defining it. The first thing to do in order to learn to think without prejudice is to review our knowledge of the past.

90s short story

The 1990s have a good reputation. We tend to remember them as a decade of prosperity and optimism, which culminated in the Internet boom and collapse. Those years, however, were not as joyful as we are nostalgic about them. We have long forgotten about the global processes that accompanied the 18 months of madness at the end of that decade.

The 90s began with a flash of euphoria: in November 1989, the Berlin Wall fell. The joy did not last long. By the mid-1990s, the US was in recession. Formally, the recession ended in March 1991, but recovery was slow, and the unemployment rate continued to rise until July 92nd. The manufacturing sector has not been able to fully recover. The transition to a service economy was long and painful.

The period from 1992 to 1994 was alarming for everyone. Photos of dead American soldiers in Mogadishu regularly appeared on television news. Concerns about globalization and competitiveness intensified along with the outflow of jobs to Mexico. These hidden pessimistic sentiments cost Bush Sr. presidency, allowing Ross Perot to get almost 20% of the vote in the 92nd election — the best result for an outside candidate since Theodore Roosevelt in 1912. A general admiration for Nirvana, grunge and heroin, reflected that anything but hope or confidence.

Silicon Valley also made a lingering impression. Japan seemed to be winning the semiconductor war. The Internet had yet to begin its journey, partly because its commercial use was prohibited until the end of 1992, and partly because of the lack of convenient browsers. The fact that when I came to Stanford in 1985, economics was the most popular subject, not computer science, it speaks for itself. Most people on campus considered the technology sector to be something specific, if not to say, narrow-minded.

The Internet has changed everything. The official release of the Mosaic browser took place in November 1993, giving ordinary users a way to go online. Mosaic turned into Netscape, which, in turn, launched the Navigator browser in 1994. It gained popularity so quickly - from 20% of the browser market in January 1995 to 80% in less than a year, that Netscape was able to enter the IPO in August of the 95th, even without being profitable. Within five months, its value soared from 28 to 174 dollars per share. Other technology companies also thundered. Yahoo! entered the IPO in April of the 96th and was valued at $ 848 million. Amazon followed with c 438 million. By the spring of the 98th, the shares of all these companies had more than quadrupled. Skeptics questioned income and earnings figures that exceeded similar figures for any non-Internet company.

One can understand why they came to this inappropriate conclusion. In December 96, more than 3 years before the bubble burst, Fed Chairman Alan Greenspan warned that “irrational abundance” may have “excessively overestimates the value of assets.” Technological investors were too generous, but it’s impossible to say for sure that they acted irrationally: it’s too easy to forget that the rest of the world did not do well then.

In July 1997, the Asian financial crisis broke out. The corruption of capitalism in the countries of Southeast Asia and large external debt put the economies of Thailand, Indonesia and South Korea to their knees. Behind him, in August 1998, the ruble crisis followed, when Russia, weakened by a constant budget deficit, devalued its currency and declared a default. The concern of American investors about a nation that has 10,000 nuclear warheads, but no money has grown - the Dow Jones Industrial Average has fallen by more than 10% in just a few days.

People did not worry in vain. The ruble crisis launched a chain reaction that destroyed Long ‐ Term Capital Management, an American hedge fund with a large share of borrowed funds in circulation. LCTM managed to lose $ 4.6 billion in the second half of 1998, with liabilities of more than 100 billion at that time. The Fed intervened by conducting a major transaction to buy out its assets and sharply lowering the lending rate to prevent an economic disaster. In Europe, things went a little better. In January 1997, the euro was adopted, met with indifferent skepticism. On the first day of trading, it rose to the level of 1.19 dollars, slowly falling to 0.83 dollars over the next two years. In the mid-2000s, the Big Seven central banks had to artificially support its course with multi-billion dollar interventions.

Started in September 1998, the passing dot comics took place in a world where nothing seemed to work. The old economy could not cope with the challenges of globalization and at that moment something should have appeared that would have worked and it should have worked large. It was necessary to support the belief that the future could be better at all, and therefore, arguing from the contrary, everyone decided that the New Economy of the Internet would be the only way out.

Mania: September 1998 - March 2000

The dot-com mania was a short-lived, but striking phenomenon - 18 months of madness, from September 1998 to March 2000. It can be called the gold rush of Silicon Valley: money was everywhere. Enough and through the mind of the rich, often dubious personalities, chasing them. Every week, dozens of startups competed with each other, organizing parties in honor of their “launch” (parties in honor of the “opening of the company” were much more rare). Fictitious millionaires dined, writing checks for three-digit amounts, trying to pay off shares of shares of their start-ups and sometimes it even worked. Crowds of people left their well-paid jobs in order to set up their own startup or join an existing one.

I knew a forty-year-old graduate student who had six different companies in 1999. (It’s usually strange to be a 40-year-old graduate student. A half-dozen companies at the same time are also considered strange, but in the late 90s people could well believe that this combination would bring them success.) We should have realized then that mania couldn’t last a long time, since the most “successful” companies have chosen a kind of anti-business model, in which the more the company grew, the more money it lost. It is difficult, however, to blame people for wanting to dance while the music is playing. Irrational actions were the norm, given the fact that adding “.com” to your name could double your cost per night.

Paypal mania

When I managed PayPal at the end of 1999, I almost lost my head from fear. The point is not that I did not believe in our company, I just had the impression that the people in Silicon Valley were ready to believe anything. Where not to look, companies appeared, went to IPO, and immediately sold with alarming simplicity. An acquaintance of mine told me how he planned to conduct an IPO right from home, without even registering his company, and this did not seem strange to him. In this kind of setting, intelligent behavior looked too eccentric.

By the fall of the 99th, our email payment transfer product worked as it should. Anyone could enter our site and easily transfer money. However, we did not have enough customers, and the growth rate of expenditures significantly outpaced income. In order for PayPal to work, we needed to attract at least a million users. Advertising was too cost effective. Promising deals with large banks failed one after another. Therefore, we decided to pay people for registration.

We gave new customers $ 10 for registration and another $ 10 each time they brought friends. This gave us hundreds of thousands of new customers and exponential growth. Of course, this strategy of acquiring customers was not viable: a model in which you pay people to become your customers means an exponential growth of not only income, but also expenses. Crazy spending was quite a common situation for the Valley at that time, but we believed that our huge costs were justified: given the large user base, PayPal had a real way to become profitable - by introducing commissions for each transaction conducted by customers.

We knew that to achieve this goal we would need more funds. We also understood that the boom would end and since we did not expect investors to believe that our mission would survive during the impending catastrophe, we quickly turned to fundraising while this possibility still existed. February 16, 2000, in the Wall Street Journal appeared a laudatory story about our viral growth, which suggested that PayPal was worth $ 500 million.

The following month, we managed to get financing in the amount of 100 million. Our main investor then accepted the Journal’s calculations made on his knee for authoritative information. Other investors were also in a hurry. One South Korean company sent us 5 million, without first discussing the transaction or signing any documents. When I tried to return them, they absolutely did not want to tell where they should be sent.

The round of financing that took place in March 2000 gave us enough time to turn PayPal into a successful service. We had only to close the deal, as the bubble burst.

The lessons we have learned

Cause they say 2,000 zero zero party over, oops! Out of time! So tonight I'm gonna party like it's 1999!
- Prince, the song "1999"

The NASDAQ index reached a peak of 5.048 points in mid-March 2000, after which it collapsed to 3,321 in April. By the time he reached the lower limit of 1,114 points in October 2002, the country had long interpreted the collapse of the market as a kind of divine punishment for all the technological optimism of the 90s. The era of abundance and hope, renamed the era of insane greed, was declared complete.

We learned to treat the future as something fundamentally uncertain, and we simply did not take the people who dared to make plans for the years to come, but for the years ahead. Belief in a bright future was now ensured by globalization, not technology. The transition from “bricks to clicks” ¹ did not justify the hopes placed on it and investors returned to bricks (housing) and BRICS (globalization). As a result, another bubble burst, this time in real estate.
¹ - pun, bricks - creepy, clicks - clicks (approx. Translator)

Entrepreneurs who had to pay for the collapse of Silicon Valley learned 4 important lessons from the dotcom crisis that still underlie business thinking:

1. Move forward gradually
Bubble swelled thanks to grand designs, which means they should not indulge. We became suspicious of people claiming to be able to do something great, and those who wanted to change the world were asked to be more modest in their desires. Small, gradual steps are the only safe path to development.

2. Be rational and adaptive
Every company should be "rational", which in this case means "unplanned." You should not know what your business will do in the future. Planning is too presumptuous, limiting your ability to change. Instead, attempts should be made to “iterate” and look at entrepreneurship as a series of experiments that do not adhere to a certain vision.

3. Improve using competition
Do not try to prematurely create a new market. The only way to make sure that you are doing a real business is to start with existing customers, so you should create your own company, making better recognizable products previously offered by successful competitors.

4. Focus on product, not sales.
It’s not enough to sell your product with advertising or salesmen alone: ​​technology is first and foremost product development, not distribution. Advertising of the times of the bubble, obviously, turned out to be a waste of funds, therefore steady growth can be based only on the word of mouth and repost.

These lessons have become the dogmas of the start-ups world, and those who prefer to ignore them, according to universal conviction, incur the punishment of God, which overtook technology during the great collapse of 2000. Nevertheless, reverse principles are probably more fair:

1. It is much better to risk doing something bold rather than something ordinary.
2. A bad plan is better than no
3. Markets, where there is competition, destroy your profits
4. Sales are just as important as the product.

There is no denying that a technological crash has occurred. The late 90s were a time of arrogance: people believed that it was possible to turn from 0 into 1. Only some start-ups achieved this, while many of them did not go beyond talking, but people realized that they had no other choice except, with very little on hand, to do something big. The moment when in March of the 2000th the market was at the highest level, obviously, it became the peak of madness. What is less obvious, but no less important — it was also a moment of utmost clarity. People looked far into the future, saw how much new useful technologies we would need to achieve it, and decided that we would be able to create them.

We still need technology. Perhaps we even need a little arrogance and abundance in the spirit of 1999 to create them. In order to build the next generation of companies, we must cast aside the dogmas resulting from the collapse. This does not mean that opposing ideas automatically become true: it is impossible to avoid the madness of the crowd, blindly rejecting its dogma. Instead, ask yourself: how much did past mistakes affect your business knowledge today? Thinking contrary to the conventional wisdom does not mean doing the opposite, it means thinking with your head.