A new book “Zero to One” has been released - Peter Thiel's view of the world of startups

Original author: Peter Thiel
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I am happy to follow the development of all the members of the early PayPal team, one of them is Peter Thiel, a venture investor and entrepreneur, co-founder and, in the past, PayPal CEO. Thill now manages his own hedge fund and investment company, in addition to being also a member of the Facebook board of directors.

Over more than 15 years of entrepreneurial and investment activity, he has gained a lot of valuable experience, and, in his book “Zero to One: Notes on Startups, or How to Build the Future” , he shares it, expressing many interesting thoughts and offering his own view on methods the formation of critical thinking that is not tied to generally accepted, traditional views on things, and also considers the problems of modern startups and the business environment.

From September 16, the book is available for purchase in English, and October 20 will be published in Russian. Recently, the chapter 2 of the book was posted on the network , under the cut, we offer you our own version of its translation. The translation of the author's text was done by blaarb , all thanks to him. I would immediately like to warn that the book somehow overlaps with the Startup lecture course from Stanford, but even for those who have read it, the book will be interesting.

Til categorically opposes the repetition of previous experience, contrasting him with 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 development allows them to break 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 great 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.

In Zero to One, Thiel talks about the qualities and ways of thinking needed to succeed in today's entrepreneurial environment, simultaneously citing examples from his own practice and summarizing the experience of Silicon Valley over the past 20 years.

Have fun like 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 to it. It will probably be easier to start with the introduction: "What statements do everyone agree with?" “The insanity of units is the exception, and the insanity of entire groups, parties, peoples, times is the rule,” wrote Nietzsche (before he lost his mind). Having managed to recognize a popular misconception, you can also find the truth that lies behind it - a truth that goes against the general notions.

Think of a simple statement: companies exist to make money, not lose it. This should be obvious to any thinking individual, but in the late 1990s there were many people who thought differently. They could characterize losses of any size as an investment in a large and bright future. The conventional wisdom of the New Economy viewed pageviews as a more reliable and forward-looking financial metric, instead of something as prosaic as profit.

And only when we look back into the past, it becomes clear that generally accepted views were biased and incorrect. We recognize “bubbles” only when they have already burst, but the negative changes caused by them do not disappear with them anywhere. The “Internet bubble” of the 90s was the largest over the past 80 years, and the lessons we learned from it distorted the current perception of technology, having almost completely defined it. The first thing to do in order to learn to think with an open mind is to revise our knowledge of the past.

Short story 90s

The 1990s have a good reputation. We tend to recall them as a decade of prosperity and optimism, which culminated in an Internet boom and collapse. Those years, however, were not as joyful as we nostalgic for them. We have long forgotten about the global processes that accompanied the 18 months of insanity 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 experiencing a recession. Formally, the recession ended in March of the 91st, but the recovery was slow, and the unemployment rate continued to rise until July of the 92nd. The manufacturing sector has not been able to fully recover. The transition to a service economy was lengthy and painful.

The period from 1992 to 1994 was alarming for everyone. Photographs 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 the senior 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. And the general admiration for Nirvana, grunge and heroin, reflected that anything but hope or confidence.

Silicon Valley also made a sluggish 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, the most popular subject was economics, not computer science, speaks for itself. Most people on campus thought the technology sector was something specific, if not to say, near-minded.

The Internet has changed everything. The official release of the Mosaic browser took place in November 1993, giving ordinary users a way to log out online. Mosaic turned into Netscape, which in turn launched the Navigator browser in 1994. He 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 go public IPO in August 95th, without even being profitable. Within five months, its value soared from $ 28 to $ 174 per share. Other technology companies thundered. Yahoo! went public in April 96th and was valued at $ 848 million. It was followed by Amazon c 438 million. By the spring of the 98th, the shares of all these companies had more than quadrupled. Skeptics questioned earnings and profits,

One can understand why they came to this inappropriate conclusion. In December 96th, more than 3 years before the bubble burst, Fed Chairman Alan Greenspan warned that "irrational abundance" may "overestimate the value of assets." Technological investors were too generous, but it is impossible to say for sure that they acted irrationally: it is too easy to forget that the rest of the world was not doing very well then.

In July 1997, the Asian financial crisis erupted. The corruption of capitalism in Southeast Asia and large external debt have brought the economies of Thailand, Indonesia and South Korea to their knees. It was followed in August 1998 by the ruble crisis, when Russia, weakened by a constant budget deficit, devalued its currency and defaulted. 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 worried not in vain. The ruble crisis triggered 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, having at that time liabilities worth more than 100 billion. The Fed intervened by conducting a major buyback of its assets and sharply lowering the lending rate to prevent an economic catastrophe. In Europe, things went a little better. In January 1997, the euro was put into circulation, 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 G7 central banks had to artificially maintain its exchange rate with multi-billion dollar interventions.

Beginning in September 1998, the fleeting mania of the dotcoms 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 work and it should work in a big way. It was necessary to maintain the belief that the future in general could become better, and therefore, arguing from the contrary, everyone decided that the “New Economy” of the Internet would be the only way out of the situation.

Mania: September 1998th - March 2000th

The dot-com mania was a short-lived but striking phenomenon - 18 months of insanity, from September 1998 to March 2000. It can be called the Silicon Valley Gold Rush: money was everywhere. Enough and through too many rich, often dubious personalities chasing after 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 rarer). Fictitious millionaires had dinner, writing checks for three-digit amounts, trying to pay off shares of shares of their startups, and sometimes it even worked. Crowds of people left their well-paid jobs in order to start a startup or join an existing one.

I knew one forty-year-old graduate student who had six different companies in 1999. (Usually, it’s strange to be a 40-year-old graduate student. Opening half a dozen companies at the same time is also considered strange, but in the late 90s people could well believe that this combination would bring them success.) We should have understood then that mania couldn’t go on for a long time, because 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 behavior was the norm, given the fact that adding ".com" to your name could double your cost per night.

Paypal mania

When I ran PayPal at the end of 1999, I almost lost my head in fear. It’s not that I didn’t believe in our company, I just got the impression that people in Silicon Valley were ready to believe anything. Wherever you look, companies appeared, went public, and immediately sold with alarming simplicity. A friend of mine told me how he planned to conduct an IPO right from home, before even registering his company, and this did not seem strange to him. In this kind of environment, intelligent behavior seemed too eccentric.

By the fall of 1999, our email remittance product was working as it should. Anyone could enter our site and easily transfer money. However, we did not have enough customers, and the growth rate of expenses was much faster than revenue. In order for PayPal to work, we needed to attract at least a million users. Posting ads was too cost-inefficient. 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 has given us hundreds of thousands of new customers and exponential growth. Of course, this strategy of acquiring customers was not viable: the model in which you pay people to become your customers means an exponential increase in not only income, but also expenses. Crazy spending was quite a common situation for the Valley at that time, however, we thought 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 upcoming catastrophe, we quickly moved to fundraising while there was such an opportunity. On February 16, 2000, a laudatory story about our viral growth appeared in the Wall Street Journal, which suggested that PayPal was worth $ 500 million.

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

The financing round in March 2000 gave us enough time to turn PayPal into a successful service. As soon as we closed the deal, the bubble burst.

The lessons we 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, song “1999”

The NASDAQ reached a peak of 5.048 points in mid-March 2000, after which it fell to 3.321 in April. By the time it reached a low of 1.114 points in October 2002, the country had long interpreted the market crash as a kind of godsend for all the technological optimism of the 90s. The era of abundance and hope, renamed the era of crazy greed, was recognized as completed.

We learned how to treat the future as something fundamentally vague, and we simply did not take seriously people who dared to make plans not for quarters, but for years ahead. Belief in a brighter future was now provided by globalization, not technology. The transition from “bricks to clicks” 1 did not live up to its expectations and investors returned to bricks (housing) and BRICS (globalization). As a result, another bubble burst, this time in real estate.
1 - pun, bricks - kryptichi, clicks - clicks (translator's note)

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
The bubble was swollen thanks to grandiose designs, which means they should not be indulged. We have become suspicious of people who claim that they are capable of doing 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 way 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 arrogant to limit 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 specific vision.

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

4. Focus on the product, not the sales.
It is not enough to sell your product using advertising alone or sellers: technology is primarily the development of the product, not its distribution. Advertising bubble times, obviously, was a waste of money, so steady growth can be based only on word of mouth and reposts.

These lessons have become the dogmas of the startup world, and anyone who prefers to ignore them, according to popular belief, incurs God's punishment, which overtook technology during the great collapse of 2000. Nevertheless, the reverse principles are probably fairer:

  1. It’s much better to take risks when doing something bold rather than something ordinary.
  2. A bad plan is better than no
  3. Competitive markets destroy your profits
  4. Sales are just as important as the product.

It is undeniable that a technological collapse has occurred. The late 90s were a time of arrogance: people believed that it was possible to turn from 0 to 1. Only a few startups did this, while many of them did not go further than talking, but people realized that they had no other choice. except how, having very little on hand, do something big. The moment when in March 2000 the market was at the highest level, obviously, 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 many useful new technologies we would need to achieve it, and decided that they would be able to create them.

We still need technology. Perhaps a little arrogance and abundance in the spirit of 1999 will come in handy for their creation. In order to build the next generation of companies, we must discard the dogmas that emerged from the collapse. This does not mean that ideas that are opposite in meaning automatically become true: the madness of the crowd cannot be avoided by blindly rejecting its dogma. Instead, ask yourself: How much did past mistakes affect your business knowledge today? Thinking contrary to conventional wisdom does not mean doing the opposite, it means thinking with your own head.

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