Brilliant thinking is rare, but courage is in even shorter supply than genius.
“Most people believe in x, but the truth is the opposite of x.”
In the most minimal sense, the future is simply the set of all moments yet to come.
What makes the future distinctive and important isn’t that it hasn’t happened yet, but rather that it will be a time when the world looks different from today.
Horizontal or extensive progress means copying things that work—going from 1 to n. Horizontal progress is easy to imagine because we already know what it looks like.
Vertical or intensive progress means doing new things—going from 0 to 1. Vertical progress is harder to imagine because it requires doing something nobody else has ever done.
Spreading old ways to create wealth around the world will result in devastation, not riches. In a world of scarce resources, globalization without new technology is unsustainable.
New technology tends to come from new ventures—startups.
It’s hard to develop new things in big organizations, and it’s even harder to do it by yourself. Bureaucratic hierarchies move slowly, and entrenched interests shy away from risk.
A new company’s most important strength is new thinking: even more important than nimbleness, small size affords space to think.
OUR CONTRARIAN QUESTION—What important truth do very few people agree with you on?—is difficult to answer directly.
Small, incremental steps are the only safe path forward.
All companies must be “lean,” which is code for “unplanned.” You should not know what your business will do; planning is arrogant and inflexible. Instead you should try things out, “iterate,” and treat entrepreneurship as agnostic experimentation.
Focus on product, not sales
The most contrarian thing of all is not to oppose the crowd but to think for yourself.
THE BUSINESS VERSION of our contrarian question is: what valuable company is nobody building?
your company could create a lot of value without becoming very valuable itself.
Creating value is not enough—you also need to capture some of the value you create.
Under perfect competition, in the long run no company makes an economic profit.
If you want to create and capture lasting value, don’t build an undifferentiated commodity business.
Entrepreneurs are always biased to understate the scale of competition, but that is the biggest mistake a startup can make.
you lose sight of competitive reality and focus on trivial differentiating factors—maybe you think your naan is superior because of your great-grandmother’s recipe—your business is unlikely to survive.
Non-monopolists exaggerate their distinction by defining their market as the intersection of various smaller markets:
Monopolists, by contrast, disguise their monopoly by framing their market as the union of several large markets: search engine ∪ mobile phones ∪ wearable computers ∪ self-driving cars What does a monopolist’s union story look like in practice?
In business, money is either an important thing or it is everything. Monopolists can afford to think about things other than making money; non-monopolists can’t.
The competitive ecosystem pushes people toward ruthlessness or death. A monopoly like Google is different. Since it doesn’t have to worry about competing with anyone, it has wider latitude to care about its workers, its products, and its impact on the wider world. Google’s motto—“Don’t be evil”—is in part a branding ploy, but it’s also characteristic of a kind of business that’s successful enough to take ethics seriously without jeopardizing its own existence. In business, money is either an important thing or it is everything. Monopolists can afford to think about things other than making money; non-monopolists can’t. In perfect competition, a business is so focused on today’s margins that it can’t possibly plan for a long-term future. Only
Only one thing can allow a business to transcend the daily brute struggle for survival: monopoly profits.
Creative monopolists give customers more choices by adding entirely new categories of abundance to the world. Creative monopolies aren’t just good for the rest of society; they’re powerful engines for making it better.
If the tendency of monopoly businesses were to hold back progress, they would be dangerous and we’d be right to oppose them.
in business, equilibrium means stasis, and stasis means death.
Every business is successful exactly to the extent that it does something others cannot.
Monopoly is therefore not a pathology or an exception. Monopoly is the condition of every successful business.
All happy companies are different: each one earns a monopoly by solving a unique problem.
All failed companies are the same: they failed to escape competition.
The more we compete, the less we gain.
It’s competition, not business, that is like war: allegedly necessary, supposedly valiant, but ultimately destructive.
If you’re less sensitive to social cues, you’re less likely to do the same things as everyone else around you.
Winning is better than losing, but everybody loses when the war isn’t one worth fighting.
If you can’t beat a rival, it may be better to merge.
Sometimes you do have to fight. Where that’s true, you should fight and win. There is no middle ground: either don’t throw any punches, or strike hard and end it quickly.
If you can recognize competition as a destructive force instead of a sign of value, you’re already more sane than most.
ESCAPING COMPETITION will give you a monopoly, but even a monopoly is only a great business if it can endure in the future
But a great business is defined by its ability to generate cash flows in the future.
The value of a business today is the sum of all the money it will make in the future.
A given amount of money today is worth more than the same amount in the future.
To properly value a business, you also have to discount those future cash flows to their present worth,
Comparing discounted cash flows shows the difference between low-growth businesses and high-growth startups at its starkest.
Most of the value of low-growth businesses is in the near term.
Technology companies follow the opposite trajectory. They often lose money for the first few years: it takes time to build valuable things, and that means delayed revenue. Most of a tech company’s value will come at least 10 to 15 years in the future.
If you focus on near-term growth above all else, you miss the most important question you should be asking: will this business still be around a decade from now?
Every monopoly is unique, but they usually share some combination of the following characteristics: proprietary technology, network effects, economies of scale, and branding.
As a good rule of thumb, proprietary technology must be at least 10 times better than its closest substitute in some important dimension to lead to a real monopolistic advantage.
Anything less than an order of magnitude better will probably be perceived as a marginal improvement and will be hard to sell, especially in an already crowded market.
The clearest way to make a 10x improvement is to invent something completely new.
Radically improve an existing solution: once you’re 10x better, you escape competition.
Network effects make a product more useful as more people use it.
Network effects can be powerful, but you’ll never reap them unless your product is valuable to its very first users when the network is necessarily small.
A monopoly business gets stronger as it gets bigger: the fixed costs of creating a product (engineering, management, office space) can be spread out over ever greater quantities of sales.
A company has a monopoly on its own brand by definition, so creating a strong brand is a powerful way to claim a monopoly.
Beginning with brand rather than substance is dangerous.
No technology company can be built on branding alone.
Every startup should start with a very small market.
Always err on the side of starting too small. The reason is simple: it’s easier to dominate a small market than a large one.
The perfect target market for a startup is a small group of particular people concentrated together and served by few or no competitors.
Sequencing markets correctly is underrated, and it takes discipline to expand gradually. The most successful companies make the core progression—to first dominate a specific niche and then scale to adjacent markets—a part of their founding narrative.
As you craft a plan to expand to adjacent markets, don’t disrupt: avoid competition as much as possible.
If you think of yourself as an insurgent battling dark forces, it’s easy to become unduly fixated on the obstacles in your path.
It’s much better to be the last mover—that is, to make the last great development in a specific market and enjoy years or even decades of monopoly profits. The way to do that is to dominate a small niche and scale up from there, toward your ambitious long-term vision.
Moving first is a tactic, not a goal. What really matters is generating cash flows in the future, so being the first mover doesn’t do you any good if someone else comes along and unseats you.
Luck was something to be mastered, dominated, and controlled; everyone agreed that you should do what you could, not focus on what you couldn’t.
Indefinite attitudes to the future explain what’s most dysfunctional in our world today. Process trumps substance: when people lack concrete plans to carry out, they use formal rules to assemble a portfolio of various options.
An indefinite pessimist looks out onto a bleak future, but he has no idea what to do about it.
A definite pessimist believes the future can be known, but since it will be bleak, he must prepare for it.
To a definite optimist, the future will be better than the present if he plans and works to make it better.
To an indefinite optimist, the future will be better, but he doesn’t know how exactly, so he won’t make any specific plans.
A whole generation learned from childhood to overrate the power of chance and underrate the importance of planning.
Only in a definite future is money a means to an end, not the end itself.
In an indefinite world, people actually prefer unlimited optionality; money is more valuable than anything you could possibly do with it.
In philosophy, politics, and business, too, arguing over process has become a way to endlessly defer making concrete plans for a better future.
Eroom’s law—that’s Moore’s law backward—observes that the number of new drugs approved per billion dollars spent on R&D has halved every nine years since 1950.
IT startups work because we created computers ourselves and designed them to reliably obey our commands. Biotech is difficult because we didn’t design our bodies, and the more we learn about them, the more complex they turn out to be.
Definite optimism works when you build the future you envision.
Definite pessimism works by building what can be copied without expecting anything new.
Indefinite pessimism works because it’s self-fulfilling: if you’re a slacker with low expectations, they’ll probably be met.
Progress without planning is what we call “evolution.” Darwin himself wrote that life tends to “progress” without anybody intending it.
Every living thing is just a random iteration on some other organism, and the best iterations win.
Leanness is a methodology, not a goal.
Making small changes to things that already exist might lead you to a local maximum, but it won’t help you find the global maximum.
Iteration without a bold plan won’t take you from 0 to 1.
Why should you expect your own business to succeed without a plan to make it happen? Darwinism may be a fine theory in other contexts, but in startups, intelligent design works best.
Every great entrepreneur is first and foremost a designer.
Forget “minimum viable products”—ever since he started Apple in 1976, Jobs saw that you can change the world through careful planning, not by listening to focus group feedback or copying others’ successes.
Long-term planning is often undervalued by our indefinite short-term world.
When a big company makes an offer to acquire a successful startup, it almost always offers too much or too little: founders only sell when they have no more concrete visions for the company, in which case the acquirer probably overpaid; definite founders with robust plans don’t sell, which means the offer wasn’t high enough.
A business with a good definite plan will always be underrated in a world where people see the future as random.
A startup is the largest endeavor over which you can have definite mastery. You can have agency not just over your own life, but over a small and important part of the world. It begins by rejecting the unjust tyranny of Chance. You are not a lottery ticket.
MONEY MAKES MONEY.
Never underestimate exponential growth.
We don’t live in a normal world; we live under a power law.
A venture fund makes money when the companies in its portfolio become more valuable and either go public or get bought by larger companies. Venture funds usually have a 10-year lifespan since it takes time for successful companies to grow and “exit.”
A small handful of companies radically outperform all others.
If you focus on diversification instead of single-minded pursuit of the very few companies that can become overwhelmingly valuable, you’ll miss those rare companies in the first place.
The biggest secret in venture capital is that the best investment in a successful fund equals or outperforms the entire rest of the fund combined.
Only invest 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 vast scale.
Since nobody wants to give up on an investment, VCs usually spend even more time on the most problematic companies than they do on the most obviously successful.
Venture-backed companies create 11% of all private sector jobs. They generate annual revenues equivalent to an astounding 21% of GDP. Indeed, the dozen largest tech companies were all venture-backed. Together those 12 companies are worth more than $2 trillion, more than all other tech companies combined.
WHAT TO DO WITH THE POWER LAW The power law is not just important to investors; rather, it’s important to everybody because everybody is an investor.
Life is not a portfolio: not for a startup founder, and not for any individual.
It does matter what you do. You should focus relentlessly on something you’re good at doing, but before that you must think hard about whether it will be valuable in the future.
People who understand the power law will hesitate more than others when it comes to founding a new venture: they know how tremendously successful they could become by joining the very best company while it’s growing fast.
The power law means that differences between companies will dwarf the differences in roles inside companies.
You could have 100% of the equity if you fully fund your own venture, but if it fails you’ll have 100% of nothing. Owning just 0.01% of Google, by contrast, is incredibly valuable (more than $35 million as of this writing).
The most important things are singular:
One market will probably be better than all others,
One distribution strategy usually dominates all others,
Time and decision-making themselves follow a power law, and some moments matter far more than others
You can achieve difficult things, but you can’t achieve the impossible.
Four social trends have conspired to root out belief in secrets.
Incrementalism. From an early age, we are taught that the right way to do things is to proceed one very small step at a time, day by day, grade by grade. If you overachieve and end up learning something that’s not on the test, you won’t receive credit for it. But in exchange for doing exactly what’s asked of you (and for doing it just a bit better than your peers), you’ll get an A.
Risk aversion. People are scared of secrets because they are scared of being wrong.
Complacency. Social elites have the most freedom and ability to explore new thinking, but they seem to believe in secrets the least.
“flatness.” As globalization advances, people perceive the world as one homogeneous, highly competitive marketplace: the world is “flat.” Given that assumption, anyone who might have had the ambition to look for a secret will first ask himself: if it were possible to discover something new, wouldn’t someone from the faceless global talent pool of smarter and more creative people have found it already? This voice of doubt can dissuade people from even starting to look for secrets in a world that seems too big a place for any individual to contribute something unique.
To say that there are no secrets left today would mean that we live in a society with no hidden injustices.
You can’t find secrets without looking for them.
If you think something hard is impossible, you’ll never even start trying to achieve it. Belief in secrets is an effective truth.
there are many more secrets left to find, but they will yield only to relentless searchers.
If insights that look so elementary in retrospect can support important and valuable businesses, there must remain many great companies still to start.
There are two kinds of secrets: secrets of nature and secrets about people.
Natural secrets exist all around us; to find them, one must study some undiscovered aspect of the physical world.
Secrets about people are different: they are things that people don’t know about themselves or things they hide because they don’t want others to know.
What secrets is nature not telling you? What secrets are people not telling you?
When thinking about what kind of company to build, there are two distinct questions to ask: What secrets is nature not telling you? What secrets are people not telling you?
Are there any fields that matter but haven’t been standardized and institutionalized?
Every great business is built around a secret that’s hidden from the outside. A great company is a conspiracy to change the world; when you share your secret, the recipient becomes a fellow conspirator.
A startup messed up at its foundation cannot be fixed.
When you start something, the first and most crucial decision you make is whom to start it with.
It’s not just founders who need to get along. Everyone in your company needs to work well together.
It’s very hard to go from 0 to 1 without a team.
You need good people who get along, but you also need a structure to help keep everyone aligned for the long term.
Ownership: who legally owns a company’s equity?
Possession: who actually runs the company on a day-to-day basis?
Control: who formally governs the company’s affairs?
In the boardroom, less is more. The smaller the board, the easier it is for the directors to communicate, to reach consensus, and to exercise effective oversight.
A board of three is ideal. Your board should never exceed five people, unless your company is publicly held.
As a general rule, everyone you involve with your company should be involved full-time.
A company does better the less it pays the CEO—that’s one of the single clearest patterns I’ve noticed from investing in hundreds of startups. In no case should a CEO of an early-stage, venture-backed startup receive more than $150,000 per year in salary.
A cash-poor executive, by contrast, will focus on increasing the value of the company as a whole.
If a CEO doesn’t set an example by taking the lowest salary in the company, he can do the same thing by drawing the highest salary. So long as that figure is still modest, it sets an effective ceiling on cash compensation.
Startups don’t need to pay high salaries because they can offer something better: part ownership of the company itself. Equity is the one form of compensation that can effectively orient people toward creating value in the future.
Giving everyone equal shares is usually a mistake: every individual has different talents and responsibilities as well as different opportunity costs, so equal amounts will seem arbitrary and unfair from the start.
Since it’s impossible to achieve perfect fairness when distributing ownership, founders would do well to keep the details secret. Sending out a company-wide email that lists everyone’s ownership stake would be like dropping a nuclear bomb on your office.
The most valuable kind of company maintains an openness to invention that is most characteristic of beginnings.
Only at the very start do you have the opportunity to set the rules that will align people toward the creation of value in the future.
It lasts as long as a company is creating new things, and it ends when creation stops.
If you get the founding moment right, you can do more than create a valuable company: you can steer its distant future toward the creation of new things instead of the stewardship of inherited success.
What would the ideal company culture look like?
“Company culture” doesn’t exist apart from the company itself: no company has a culture; 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.
If you can’t count durable relationships among the fruits of your time at work, you haven’t invested your time well—even in purely financial terms.
We set out to hire people who would actually enjoy working together. They had to be talented, but even more than that they had to be excited about working specifically with us.
You’ll attract the employees you need if you can explain why your mission is compelling: not why it’s important in general, but why you’re doing something important that no one else is going to get done.
“Are these the kind of people I want to work with?” You should be able to explain why your company is a unique match for him personally. And if you can’t do that, he’s probably not the right match.
Promise what no others can: the opportunity to do irreplaceable work on a unique problem alongside great people. You probably can’t be the Google of 2014 in terms of compensation or perks, but you can be like the Google of 1999 if you already have good answers about your mission and team.
From the outside, everyone in your company should be different in the same way.
On the inside, every individual should be sharply distinguished by her work.
Job assignments aren’t just about the relationships between workers and tasks; they’re also about relationships between employees.
Startups should make their early staff as personally similar as possible.
Startups have limited resources and small teams. They must work quickly and efficiently in order to survive, and that’s easier to do when everyone shares an understanding of the world.
Make every person in the company responsible for doing just one thing. Every employee’s one thing was unique, and everyone knew I would evaluate him only on that one thing.
Defining roles reduced conflict. Most fights inside a company happen when colleagues compete for the same responsibilities
Eliminating competition makes it easier for everyone to build the kinds of long-term relationships that transcend mere professionalism.
The 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. People at a successful startup are fanatically right about something those outside it have missed.
What nerds miss is that it takes hard work to make sales look easy.
All salesmen are actors: their priority is persuasion, not sincerity.
“the best product doesn’t always win.”
Economists attribute this to “path dependence”: specific historical circumstances independent of objective quality can determine which products enjoy widespread adoption.
If you’ve invented something new but you haven’t invented an effective way to sell it, you have a bad business—no matter how good the product.
Superior sales and distribution by itself can create a monopoly, even with no product differentiation. The converse is not true.
No matter how strong your product—even if it easily fits into already established habits and anybody who tries it likes it immediately—you must still support it with a strong distribution plan.
Two metrics set the limits for effective distribution. The total net profit that you earn on average over the course of your relationship with a customer (Customer Lifetime Value, or CLV) must exceed the amount you spend on average to acquire a new customer (Customer Acquisition Cost, or CAC).
Your average sale is seven figures or more, every detail of every deal requires close
If your average sale is seven figures or more, every detail of every deal requires close personal attention.
“Complex sales” is the only way to sell some of the most valuable products.
Our deal sizes range from $1 million to $100 million. At that price point, buyers want to talk to the CEO, not the VP of Sales.
Businesses with complex sales models succeed if they achieve 50% to 100% year-over-year growth over the course of a decade.
Most sales are not particularly complex: average deal sizes might range between $10,000 and $100,000, and usually the CEO won’t have to do all the selling himself. The challenge here isn’t about how to make any particular sale, but how to establish a process by which a sales team of modest size can move the product to a wide audience.
Sometimes the product itself is a kind of distribution.
Many small and medium-sized businesses don’t use tools that bigger firms take for granted. It’s not that small business proprietors are unusually backward or that good tools don’t exist: distribution is the hidden bottleneck.
Marketing and advertising work for relatively low-priced products that have mass appeal but lack any method of viral distribution.
Advertising can work for startups, too, but only when your customer acquisition costs and customer lifetime value make every other distribution channel uneconomical.
A product is viral if its core functionality encourages users to invite their friends to become users too.
If every new user leads to more than one additional user, you can achieve a chain reaction of exponential growth.
Whoever is first to dominate the most important segment of a market with viral potential will be the last mover in the whole market.
Most businesses get zero distribution channels to work: poor sales rather than bad product is the most common cause of failure.
If you can get just one distribution channel to work, you have a great business.
Your company needs to sell more than its product. You must also sell your company to employees and investors.
You should never assume that people will admire your company without a public relations strategy.
Even if your particular product doesn’t need media exposure to acquire customers because you have a viral distribution strategy, the press can help attract investors and employees.
Computers are complements for humans, not substitutes.
The stark differences between man and machine mean that gains from working with computers are much higher than gains from trade with other people.
Computers are tools, not rivals.
When we design new computer technology to help solve problems, we get all the efficiency gains of a hyperspecialized trading partner without having to compete with it for resources.
Big data is usually dumb data.
Computers can find patterns that elude humans, but they don’t know how to compare patterns from different sources or how to interpret complex behaviors.
Actionable insights can only come from a human analyst
Indefinite fears about the far future shouldn’t stop us from making definite plans today.
7 Questions Every Business Must Answer
The Engineering Question: Can you create breakthrough technology instead of incremental improvements?
The 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 don’t see?
Companies must strive for 10x better because merely incremental improvements often end up meaning no improvement at all for the end user.
Entering a slow-moving market can be a good strategy, but only if you have a definite and realistic plan to take it over. The failed cleantech companies had none.
“Internet-sized markets are in the billions of dollars; the energy markets are in the trillions.” What he didn’t say is that huge, trillion-dollar markets mean ruthless, bloody competition.
If you can’t monopolize a unique solution for a small market, you’ll be stuck with vicious competition.
Exaggerating your own uniqueness is an easy way to botch the monopoly question.
The best sales is hidden. There’s nothing wrong with a CEO who can sell, but if he actually looks like a salesman, he’s probably bad at sales and worse at tech.
Every entrepreneur should plan to be the last mover in her particular market. That starts with asking yourself: what will the world look like 10 and 20 years from now, and how will my business fit in?
You can’t dominate a submarket if it’s fictional, and huge markets are highly competitive, not highly attainable.
Selling and delivering a product is at least as important as the product itself.
What will stop China from wiping out my business?
rephrase the durability question and ask: what will stop China from wiping out my business?
Great companies have secrets: specific reasons for success that other people don’t see.
The ambiguity in the word “social” is even more of a problem: if something is “socially good,” is it good for society, or merely seen as good by society?
Progress isn’t held back by some difference between corporate greed and nonprofit goodness; instead, we’re held back by the sameness of both.
The best projects are likely to be overlooked, not trumpeted by a crowd; the best problems to work on are often the ones nobody else even tries to solve.
Doing something different is what’s truly good for society—and it’s also what allows a business to profit by monopolizing a new market.
An entrepreneur can’t benefit from macro-scale insight unless his own plans begin at the micro-scale.
No sector will ever be so important that merely participating in it will be enough to build a great company.
Only a firm that offers a superior solution for a specific energy problem can make money.
A valuable business must start by finding a niche and dominating a small market.
The most important task in business—the creation of new value—cannot be reduced to a formula and applied by professionals.
A unique founder can make authoritative decisions, inspire strong personal loyalty, and plan ahead for decades.
Impersonal bureaucracies staffed by trained professionals can last longer than any lifetime, but they usually act with short time horizons.
The lesson for business is that we need founders. If anything, we should be more tolerant of founders who seem strange or extreme; we need unusual individuals to lead companies beyond mere incrementalism.
Don’t overestimate your own power as an individual. 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 everybody at his company.
The single greatest danger for a founder is to become so certain of his own myth that he loses his mind. But an equally insidious danger for every business is to lose all sense of myth and mistake disenchantment for wisdom.
No matter how many trends can be traced, the future won’t happen on its own.
Whether we achieve the Singularity on a cosmic scale is perhaps less important than whether we seize the unique opportunities we have to do new things in our own working lives.
Our task today is to find singular ways to create the new things that will make the future not just different, but better—to go from 0 to 1.