1-Page Summary

In Zero to One, PayPal co-founder and venture capitalist Peter Thiel contends that creating new things is both the best way for a company to profit and the only way for humans to progress. However, he is concerned that technological progress has stagnated today. Zero to One presents his solution to this problem: nurturing small startups developing revolutionary new technologies.

In the book, Thiel weaves abstract philosophy and practical advice together, but in this guide, we’ll discuss them separately. First, we’ll unpack the foundational philosophy that motivates Thiel’s approach. Then, we’ll consider his advice on running a startup. We’ll also compare Thiel’s perspective with that of other innovation experts, like W. Chan Kim and Renée Mauborgne, authors of Blue Ocean Strategy, and Geoffrey Moore, author of Crossing the Chasm.

Why It’s Important to Create New Things

Thiel argues that social progress requires technological progress, specifically “vertical” technological progress. He differentiates between horizontal and vertical progress as follows:

• Vertical progress creates new things: new products, new systems, and new ways of doing things. It involves “going from zero to one” because you’re creating something that’s the first of its kind.
• Horizontal progress produces more of something that already exists, perhaps with minor refinements along the way.

(Shortform note: Thiel’s contrast between horizontal and vertical progress parallels other authors’ delineation between sustaining and disruptive innovation. For example, in The Innovator’s Dilemma, Clayton Christensen defines a disruptive innovation as a new product that changes the market landscape. Disruptive innovations correspond to Thiel’s concept of vertical progress because they redefine the market by creating capabilities that didn’t exist before. Meanwhile, Christensen defines a sustaining innovation as one that doesn’t disrupt the market—it’s just more of the same, like Thiel’s concept of horizontal progress.)

To illustrate his point, Thiel explains that from 1914 to 1971, businesses in the United States created a lot of new technologies, many of which improved Americans’ standard of living and had a positive impact on society. But from the 1970s to the present, he says this vertical progress changed into horizontal progress, which led to greater competition for resources.

Thiel goes on to say that globalization is the ultimate example of horizontal progress. Businesses take products and production methods that worked in the West and replicate them in less-developed countries. As products become more universally available, the standard of living becomes more homogeneous throughout the world.

But, as more people make, buy, and use the same types of products, they also compete for the same types of resources. For example, as automobile usage spread from the United States and Europe to Asia and Africa, more countries began competing for a share of the world’s supply of gasoline. Thiel argues that if everyone is competing for the same resources, there won’t be enough to go around, leading to conflict instead of progress.

Vertical Progress and Resource Creation

Thiel highlights how horizontal progress results in competition for resources and asserts that vertical progress provides a solution to the problem of resource scarcity, but he doesn’t explicitly describe how vertical progress alleviates competition for resources. In Homo Deus, Yuval Noah Harari suggests that new technologies create new resources. This explains why vertical progress may reduce competition.

Harari highlights the issue of global resource depletion. He points out that although raw materials can be depleted, humans tend to find new resources or develop new ways of making existing resources more useful. He discusses how humans once relied on oil and coal exclusively for energy production, but have since developed new energy sources, such as solar power. Similarly, the invention of the fission reactor made uranium a new source of energy.

The same principle can be seen at work even in antiquity. In the Bronze Age, nobody thought of iron ore as a valuable resource, but then the development of iron-smelting technology made iron a viable substitute for bronze.

This idea of resource creation bolsters Thiel’s argument: When more people adopt the same technology (horizontal progress), there’s more competition for resources, but vertical progress creates new resources, reducing the competition for them.

The Importance of Monopolies

Thiel asserts that horizontal progress and the competition it creates are bad for both business and society.

As a business owner, you want to make a profit. Competition eats into your profits—whether you’re competing with other producers for the same resources from the same suppliers (which drives up your production costs) or competing for customers in a market where there are many equivalent products.

Thiel’s solution to the problem of competition is the technological monopoly. He argues that monopolies are good for society, as well as good for business. When a business has a monopoly (meaning it faces no significant competition in the market where it operates), it has the freedom to consider the welfare of its employees and the broader impact of its products and operations on society because profits are assured. By contrast, competitors locked in a daily struggle for survival have to do everything in their power to minimize expenses and don’t have enough resources left over to consider their impact on their employees or communities.

That said, Thiel concedes that not all monopolies are created equal. When a single company manages to corner the market on the supply of a necessary resource and then arbitrarily raises prices, the company prospers at society’s expense. A few historical examples of this abuse have given monopolies a bad reputation.

However, Thiel contends that this can only happen in a static market. Vertical progress redefines markets and makes new resources available, so monopolies are always temporary. If you create a monopoly by inventing a revolutionary technology, your monopoly will only last until someone else invents a technology that eclipses it.

The knowledge that your monopoly is temporary should motivate you to invest your profits in developing other new technologies. This kind of creative, technological monopoly that both drives and facilitates technological advancement is what Thiel is talking about when he extols the virtues of monopolies. They expand consumers’ choices by creating new categories of things. By adding value, creative monopolies make society better.

Temporary Monopolies and Blue Ocean Strategy

Thiel’s thesis that monopolies are good for both businesses and society while head-to-head competition in the market isn’t good for anybody bears a strong similarity to the premise of W. Chan Kim and Renée Mauborgne’s Blue Ocean Strategy.

Kim and Mauborgne contrast “blue ocean” markets, where your company has room to grow and make a profit, with hotly-contested “red ocean” markets, where the fight for survival consumes your profits and there’s no opportunity for growth. Based on this dichotomy, they observe that the key to profitable growth is to find a “blue ocean” for your company.

If you have no competition in a given market, then for all practical purposes, you have a monopoly. As such, Kim and Mauborgne’s affinity for blue oceans mirrors Thiel’s affinity for monopolies. Yet, the different authors highlight different nuances of the issue.

While Kim and Mauborgne discuss the issue strictly in the context of business strategy, Thiel broadens his analysis to include the impact of monopolies on society. In his discussion of societal impacts, Thiel concedes that monopolies can become destructive if a company corners the market on a necessary product and arbitrarily raises prices. He contrasts these harmful monopolies with the beneficial monopolies that you can create by developing new technology.

Even though Kim and Mauborgne don’t discuss the broader social context of monopolies, they do address the issue of pricing, stressing that even in an uncontested market, your product must be priced to provide good value to customers. Implicitly, this is the case because you created an uncontested market by developing a unique product. If your product is new and fundamentally different from prior offerings, then by definition it’s not an essential good because people were living without it before you introduced it.

In other words, if you create a monopoly through innovation, then your monopoly cannot be of the destructive type, because your product is not essential—just beneficial. As such, Kim and Mauborgne’s discussion reinforces Thiel’s idea that the monopolies you create by developing new technology can only benefit society, even though Kim and Mauborgne don’t discuss social implications explicitly.

One point on which they differ, though, is the subject of technology. Thiel asserts that you must develop new technology to build a constructive monopoly. Kim and Mauborgne insist that you need innovation to establish a monopoly, but that innovation doesn’t necessarily mean new technology. Sometimes the innovation that gains you access to an uncontested market can take the form of addressing customers’ pain points in the purchasing or delivery process, or of providing a unique combination of features that meet their needs better than existing options.

In essence, Kim and Mauborgne’s discussion of innovation suggests that finding innovative ways to deploy the technology we already have is just as important to society as developing new technologies. Though Thiel doesn’t bring it up, he might concede this point because he points out that new technologies reduce competition for resources and developing better ways to use existing resources would have a similar effect of freeing up resources and reducing competition.

Technology in the Future

But if creating new technology is the solution to the problem of competition, could our own creations someday start competing with us? In particular, as computers and artificial intelligence algorithms become increasingly advanced, will there come a time when computers compete with humans for jobs?

(Shortform note: This is arguably already happening. For example, telephone marketing used to be done by humans. Now, most telemarketing calls begin with a computer playing a recording.)

Thiel says this is nothing to worry about. He argues that computers and artificial intelligence will only complement human workers, never replace them. This is because people and computers are good at different things. People excel at making plans and decisions in complicated situations; they’re not as good at analyzing huge amounts of data. In contrast, computers excel at processing data, but can’t make judgments.

As artificial intelligence improves, Thiel advises companies to pair humans with computers so that technology empowers their human employees rather than replaces them.

(Shortform note: Some telemarketing companies appear to be taking Thiel’s advice. A company that uses voice recordings usually still has human salespeople on hand to finish sales if people respond favorably to the initial recording, and to handle more complex calls. Some companies are even taking the integration of people and computers to the next level with call systems that provide branching, non-linear recordings, and allow a human to monitor and control the computer’s calls. In essence, the computerized system does the talking, but a human coaches it through the conversation, teaching it what to say.)

How to Build a Great Startup Company: A Checklist for Success

As we’ve discussed, Thiel stresses the importance of creating new technologies, both for businesses and for society as a whole. But how do you actually do that? According to Thiel, you do it by creating a startup company. He observes that startups originate most new technologies, while established companies focus primarily on horizontal progress and individuals seldom have the resources to develop new technologies on their own.

Thiel goes on to offer his advice on the particulars of creating a successful startup, listing what he considers the elements of a strong startup venture. If any of these elements are weak, the startup is likely to fail. But if you’ve got all of them in good order, you’re on your way to building a great business.

Why New Technology Comes From Startups

In The Innovator’s Dilemma, Clayton Christensen elaborates on Thiel’s observation that established companies seldom create revolutionary technologies. According to Christensen, revolutionary innovations typically start out in markets that are too small to interest established companies, though they can grow exponentially from there.

Meanwhile, to elaborate on Thiel’s point that individuals don’t usually have the resources to develop revolutionary inventions, financial consultants estimate that it takes a minimum of about $25,000 to develop a new invention. This estimate includes only $2,000 for engineering, implying that your invention only requires about half a week of engineering labor. And it does not include any cost for setting up production. So this estimate would be realistic for a product like a simple phone app that a software engineer can create in a few hours and costs nothing to manufacture, but physical products and more advanced software products would cost considerably more, putting them out of reach for most individual innovators.

1. Revolutionary Technology

First and foremost, Thiel asks whether you have an idea for a revolutionary technology to build your startup around. In other words, what great opportunity have you identified that everyone else has overlooked? As Thiel explains, there are two elements to answering this question:

First, have you really identified a great opportunity? Thiel cautions that making an incremental improvement to an existing technology is generally not a great opportunity. Instead, you need a breakthrough that provides fundamentally new capabilities, or, at the very least, increases existing capabilities by a factor of 10.

Second, are you the only one to identify this opportunity? If other people have already identified the same opportunity, then it’s probably not worth pursuing, because competition will consume your profits.

Shortform Commentary: Identifying Revolutionary Technology

Thiel says you need an idea for technology that can provide unique, revolutionary capabilities. In Blue Ocean Strategy, Kim and Mauborgne make a similar assertion and go on to describe analytical tools for assessing just how unique your idea is. One tool that helps you see at a glance just how unique your proposed product would be is their strategy chart. It consists of a two-dimensional line graph:

• On the horizontal axis, you list the characteristics or capabilities that your proposed product would provide.
• The vertical axis represents how much of each characteristic your product provides.

To make your strategy chart, you plot the value of each characteristic on the graph as a point and connect the points to create a strategy curve, both for your proposed product and for the closest alternatives that customers currently have. A generic example might look something like this:

As Kim and Mauborgne point out, if your product’s path closely follows another product (like Product X and Product Y in our example graph) then your proposed product is not unique enough to create an uncontested market. They also advise that if your proposed product curve is very flat (like Product Z), your offering may not be focused enough: You’re trying to be all things to all customers, and you’ll end up being a poor alternative for all of them.

In light of Thiel’s discussion, your proposed product also needs to score at least 10X higher than any other product on at least one characteristic. This is visible on the vertical axis of the graph, so Kim and Mauborgne’s strategy chart provides a way to visualize the uniqueness of your idea in terms of the value it provides to customers. This can help you determine if it is truly revolutionary.

2. Strategic Timing

Even if you’re the first to invent a revolutionary technology, Thiel asks you to consider whether it’s the right time to produce and market it. To illustrate his point, he contrasts the microprocessor market of the 1970s with the solar energy market of the early 2000s. Beginning in the 1970s, the capabilities of microprocessors increased exponentially, as did the market for them. The time for microprocessors to disrupt the market had come.

In contrast, in the early 2000s, there was a surge of interest in solar energy, but the capabilities of solar cells improved only slightly during this time. Eventually, the investment bubble burst and many solar companies failed. It was not the time for solar to disrupt the global energy market.

Timing and Technology

Is timing really separable from technological maturity?

Thiel presents the solar energy bubble of the early 2000s as an example of failed timing, but it seems like the only reason that it wasn’t the right time for solar was that the technology wasn’t ready or wasn’t advancing quickly enough. Hypothetically, if a solar energy company had been able to double the efficiency of their solar panels each year from 2006 to 2010, they would have been able to take advantage of all the loans, grants, and investment capital available at the time to expand their production capabilities, and they would probably have done very well. As such, Thiel’s example seems to blur the distinction between timing and technological maturity.

Nevertheless, timing can affect the success of your startup even if your core technology is solid. For example, as Thiel points out, both the technology and the timing were right for the microprocessor industry in the 1970s. But imagine what would have happened if Benjamin Franklin had invented a microprocessor in the 1770s. Even if it was a good processor, it would have gone nowhere at that time: The production costs would have been astronomical, because silicon processing infrastructure didn’t exist—he would have had to pay individual artisans to produce pure silicon in small batches, and other artisans to make chips from the silicon, a few at a time. And marketing would have been extremely difficult, because nobody was interested in microprocessors at the time—society hadn’t yet realized the usefulness of electricity, let alone electronic computers.

Thus, timing is related to technological maturity, but in a broader sense. Your product needs to be revolutionary in its time (solar cells weren’t revolutionary in 2000), but not too far ahead of its time to be practical and attract interest (like a microprocessor in the 1700s).

3. A Great Team

When you’re starting a company, Thiel says your team should be unified by your company’s unique mission. He also says it’s important to choose leaders who know each other well enough to be sure that both their technical skills and their personalities are complementary. A great combination of technical skills on your team won’t get you anywhere if the team members can’t get along. Thiel emphasizes that you also need a structure and clearly defined roles so everyone is aligned to move the organization forward. He explains that to establish this structure, you must make three decisions:

• Equity: Who will legally own the company? It’s not unusual for founders, investors, and employees all to have a share of ownership in a startup.
• Direction: Who will make the high-level decisions about what the company will do? In many startups, a board of directors consisting of the founders and investors fulfills this function.
• Operation: Who will figure out how to accomplish the company’s high-level objectives and take responsibility for getting the work done? Sometimes a founder assumes this responsibility, sometimes the company hires a chief executive officer (CEO) to do it, and sometimes this function is distributed among employees.

Furthermore, as you hire additional employees, Thiel emphasizes the importance of articulating your company’s mission to them. He advises hiring people who find your company’s unique mission compelling and want to work with the kind of people who are already on your team—not people who are just looking for money or special perks.

In particular, Thiel cautions you not to overpay your CEO. In his view, paychecks motivate people only in the short term because pay is derived from the present value of the company, not its future value. This can be especially problematic at the executive level since it’s crucial to have a CEO with a vision for building the company’s future. Paying your CEO too much can undermine her motivation to do whatever it takes to reach the company’s long-term goals.

Additionally, the CEO pay sets the standard for the rest of the company: If she draws a fat paycheck, her subordinates will expect proportionally high compensation. If she covers up problems to make the current situation look better and thereby protect her short-term interests, her subordinates will do likewise. But if she addresses problems head-on and works for the company’s growth in hopes of future rewards, this may inspire her subordinates to do the same.

Hiring a Great Team

In The Hard Thing About Hard Things, Ben Horowitz offers advice on hiring employees that both corroborates Thiel’s perspective and provides additional insight.

Like Thiel, Horowitz emphasizes that your company’s unique mission should serve to unify and motivate your team. He prefers to call this mission your “vision,” and describes it as the story of what your company is capable of doing, why it matters, both to you and to the world, and how it sets you apart from every other company out there.

When it comes to hiring employees, Horowitz echoes Thiel’s admonition to find people who see the success of the company as their route to personal success, not people whose personal ambitions run contrary to the company’s best interests. Additionally, he explains the importance of hiring for the particular strengths that will allow the new hire to excel in her role, rather than weeding out all the candidates who have weaknesses of any kind and hiring whoever is left.

Of course, to do this you need to understand each role that you’re hiring for. This, in turn, requires clearly-defined roles and responsibilities, reinforcing Thiel’s point that everyone on the team should have a unique role.

When it comes to dividing up equity, high-level direction, and day-to-day operation of the company, Horowitz argues that it’s crucial for the founders to take an active role in directing and operating the company. In his experience, the founders are the ones who really understand the company’s unique mission. They are the ones who can best articulate the mission to new hires and best translate it into tangible actions for people to work on. Without them, a startup will stumble off track.

4. Effective Distribution

Thiel asserts that planning how to distribute your product is an integral part of designing your product. He explains that there are two considerations for planning your sales strategy:

• Customer lifetime value or CLV is the profit you earn over the course of your relationship with a customer. For example, if you sell automobiles at a profit of about $5,000 per car, and your average customer buys a new car once every 10 years for about 40 years, then your CLV is $20,000. Or, if you sell vitamins that a customer would take every day at a profit of $0.05 per tablet, and the average customer takes your vitamins for forty years, then your CLV is $730.
• The customer acquisition cost or CAC is the amount you spend to acquire a customer. For example, if you spend $1 million on marketing, and you get 5,000 new customers, your CAC is $200 per customer.

(Shortform note: The terms CLV (customer lifetime value) and CAC (customer acquisition cost) appear to have been coined by Robert Shaw and Merlin Stone in their 1988 book, Database Marketing. CLV is also abbreviated LCV (lifetime customer value) or LTV (lifetime value) instead of CLV by other sources.)

Thiel explains that your CLV determines what types of marketing you can consider because your CLV needs to be greater than your customer acquisition cost for you to make a profit.

(Shortform note: Other sources amplify this assertion, saying that for a product or service to be viable, the CAC should not exceed 30% of the CLV.)

Thiel discusses four types of marketing with different customer acquisition costs:

• Viral marketing is the least expensive type of marketing. It involves inviting just a few people to try out your product, typically via email or social media, and then relying on these first customers to spread the word. It is ideal for low-cost (or free) products that have a low CLV because it costs almost nothing and enables your customer base to grow exponentially.
• Mass advertising (such as television ads) can be expensive but has a low customer acquisition cost because it allows you to reach many potential customers at once. This makes it the method of choice for most consumer products.
• Direct sales are more expensive because your sales reps have to meet each customer personally. But for individual sales ranging from $10,000 to $100,000 in value, this personal attention is justifiable and may be necessary to build your customers’ confidence by showing them how your product can solve their particular problems.
• Complex sales are the most expensive because they require the personal involvement of your CEO to coordinate with multiple stakeholders on high-value sales (typically over $1 million) that your customer may perceive as high-risk.

A Second Opinion on Distribution Channels

In Crossing the Chasm, business and marketing consultant Geoffrey Moore discusses marketing and distribution channels for startup companies much like Thiel does.

Thiel presents viral marketing as the cheapest marketing channel, suitable for products with low CLV. Conversely, Moore doesn’t treat viral marketing as a separate marketing channel. Instead, he argues that word-of-mouth (which is the basis of viral marketing) is always crucial for sales success, and the purpose of your marketing campaign is just to get word-of-mouth circulating.

If you need to keep the CAC to a minimum, Moore recommends distributing your product via web-based self-service and using targeted advertising to get the word out about your product. He points out that digital advertisements targeted at the people whose interests and demographics are the best match for your product provide a much lower CAC than un-targeted mass advertising.

Unlike Thiel, Moore doesn’t recommend using mass advertising, at least not for startups. A key part of his strategy is targeting a specific niche market that’s small enough for your startup to dominate. Mass advertising puts your product in front of a broad audience, but if your product is designed specifically for a small group of target customers, this is counterproductive.

Moore’s advice on direct and complex sales is similar to Thiel’s but with a few additional nuances. Most notably, he describes a special type of complex sale in which a company is looking at using your product as a component in their product. For example, maybe you invent a better type of transmission and an automaker is interested in using it in their vehicles.

In this case, the first people you need to win over to make the sale are the customer’s engineers, so you should post technical information about your product online, where engineers can find it—and stick to hard facts because engineers don’t respond well to promotional marketing. Offer to provide demonstrations or additional information so you can make contact with their engineers. Once you’ve convinced the engineers that your product is a good fit for their technical objectives, they can put your salespeople in touch with the executives who have actual purchasing authority.

Moore also describes a few channels that Thiel doesn’t mention, including value-added resellers (VARs) and “Sales 2.0”. He says VARs are particularly useful for marketing hi-tech products to people who aren’t particularly tech-savvy, because the VAR provides local, personal training and support.

Sales 2.0 represents an intermediate step between direct sales and online self-service: You have a website that provides general information up front, but when the user expresses interest by clicking on a link, the website connects her with a live sales representative. This hybrid system can be ideal for situations where the CLV is in between the level where you would use a direct sales model and the level where you would turn to mass marketing.

5. Enduring Value

Your goal is to build a monopoly that will generate long-term profits by introducing a revolutionary product that no one else can match. Thiel observes that to do this, you need to be the first to introduce your product. That said, he also cautions that moving first is just a means to an end, not an end in itself.

Can You Forecast Enduring Value?

To assess whether your product has the potential to dominate the market 10 or 20 years down the road, you need to make predictions about the future. In Superforecasting, Philip Tetlock and Dan Gardner discuss the art and science of making predictions, focusing on the traits of “superforecasters,” people whose predictions are correct more often than random guesses.

Superforecasters tend to consider everything from a variety of perspectives and are careful to avoid cognitive bias. They also tend to think about everything in terms of probabilities rather than absolutes, and they place more weight on aggregate statistics than on the details of any particular case. But most of all, superforecasters avoid making predictions more than one year in advance because studies show that even the best forecasters can’t accurately predict the state of the world several years from now.

The one-year horizon implies that making accurate, detailed predictions about the market for your product 10 or 20 years in the future is probably not possible. Ultimately, you’ll discover whether or not your product has enduring value over time, but you can’t predict it up front. That said, it’s still prudent to avoid common biases and analyze your product’s market from as many perspectives as possible. In the end, your prediction may just be a guess, but at least it will be an educated guess.

Introduction

(Shortform note: While our guide sticks to the general structure of Thiel’s book, we’ve made a few adjustments: We’ve grouped Chapters 9 and 10 together because they discuss similar ideas, and we’ve switched the order of Chapters 12 and 13 so as to present Thiel’s ideas in a more streamlined manner.)

Some animals have a drive to build things like dams, but only humans have the ability to invent entirely new things. In Zero to One, PayPal co-founder and venture capitalist Peter Thiel contends that creating new things is the best way to profit economically, as well as the only path of human progress.

This book, written with Blake Masters, is about launching companies that create new things. It stems from a course Thiel taught at Stanford in 2012 on startups. Masters was a student in the class and his notes, which were widely shared online, evolved with Thiel’s collaboration into this book.

The ideas are drawn from Thiel’s experience as a tech entrepreneur and investor, but they don’t comprise a formula for success—no one can tell you how to be innovative, because every innovation is by definition new and unique. However, the key to success is to look for value where no one else is looking.

Thiel refers to developing new technologies as “going from zero to one,” because there are zero units of a product until you create the first one. He contrasts going from zero to one with going from “one to n,” by which he means making more of something that already exists.

In Thiel’s view, technology has stagnated today. Much of what companies produce today simply replicates what they produced yesterday or, at best, improves upon it incrementally. This is because it’s easier to replicate existing designs than to create new and fundamentally superior ones.

In business, each jump from 0 to 1 happens only once. The next Bill Gates won’t invent an operating system; the next Mark Zuckerberg won’t build a social network. The next innovator of the same caliber will build something unimagined to this point. Successful people don’t look for formulas or choose from existing options, they “rewrite the plan of the world.”

Unless companies create new things, they’ll eventually fail, regardless of how profitable they are today. There’s a limit to what we can gain by refining things, a point at which best practices won’t get us any further. We need to open new paths.

We need miracles, which only technology can produce. Technology enables us to do more and keep pushing the envelope of our capability.

Chapter 1: The Challenge of the Future

Thiel likes to ask job candidates what he calls a contrarian question: “What important truth do few people agree with you on?” The best answers provide insight into the future. Thiel’s answer is that technology will dictate the world of the future, while most people think globalization will.

The future will be an outgrowth of the present, but there will be differences. The future may be further away or closer than we think, depending on how fast we progress: When change is rapid, the future comes upon us swiftly, but when things stay the same for a long time, the future is a long way away.

The Path of Progress

Progress can be either horizontal or vertical. Horizontal or expansive progress results from duplicating success—going from 1 to n. We can easily envision this kind of progress because it’s much like the present. Vertical or intensive (focused) progress requires originality—going from 0 to 1. It’s more difficult to envision because we’ve never seen it before.

An example of horizontal progress would be building a dozen horse-drawn carriages based on the design of an existing one. An example of vertical progress would be building the first automobile to replace a horse-drawn carriage.

Globalization is horizontal progress—it entails taking something that works in a particular place and replicating it everywhere. For instance, China’s 20-year plan is to be like the West is today.

Technology, going from 0 to 1, is vertical progress—it encompasses anything new and better, including but not limited to computers.

These modes of progress can occur simultaneously or one at a time. For instance, the period from World War I through Nixon’s visit to China in 1971 featured technological development but not much globalization. However, since 1971, we’ve seen rapid globalization without much technological development beyond information technology.

Globalization is a path to homogenization. The way we talk about “the developed world” implies a belief that technological progress has reached its apex in Western nations. Meanwhile, “developing nations” haven’t yet attained this plateau, but it’s just a matter of time before they do.

But continued globalization isn’t feasible without technological progress, because the industrialization of more countries will lead to more problems. For instance, if China doubles its industrial production without technology improvements, it will double its pollution, potentially making its cities unlivable. People associate Western business practices and lifestyles with wealth, but if the whole world tries to adopt current Western methods, they will only deplete their resources—bringing ruin, not wealth.

New technology has never been a given. From the primitive agrarian societies thousands of years ago up until the advent of the steam engine in the 1760s, there was little technological progress. From that point, technological advances continued through 1970. In the late 1960s, however, people looked forward to a future of tech advances that didn’t happen—for instance, cheap energy and recreational space travel. Although they expected great advances to be automatic, only computers and communications advanced dramatically. Imagining a better future is a prerequisite to creating it, but it’s only half the battle. Then we need to develop the technology to make it a reality.

Startup Thinking

For several reasons, startups consisting of a few people with a mission are the source of most new technology.

Big organizations don’t often produce new technology because they tend to avoid risk. People working alone seldom produce new technology either. A brilliant loner might produce great art, but she wouldn’t have the means to create a new industry.

Startups work because it takes multiple people to create new technology, but only small companies can be flexible and cohesive enough to embrace new thinking. Furthermore, high-tech startups recognize that original thinking is their most valuable asset, because their success depends on their ability to redefine their industry.

Thiel clarifies that his book is not a recipe for creating a successful startup—by definition, there can’t be a recipe for a successful startup, because successful startups require original thinking. But his book does provide a starting point for considering the questions that you must answer for your startup to succeed.

Chapter 2: Lessons of the Dot-Com Bubble

In the previous chapter, we discussed Thiel’s “contrarian question,” namely, what significant truth have you discovered that nobody else believes? Thiel affirms that you can sometimes answer this question by working backwards. First, ask what is the conventional wisdom that everyone believes. Then consider what the opposite of that would be. According to Thiel, the opposite of conventional wisdom is more likely to be true than the conventional wisdom. That said, he also emphasizes the importance of thinking for yourself rather than blindly following or opposing the crowd.

As a case study in the dangers of following conventional wisdom, Thiel recounts the dot-com bubble of the 1990s. Prior to that time, most people understood that businesses need to make money, but for a few years it became fashionable to believe that publicity and traffic were more important than profits. Companies sustained large losses under the delusion that they were investing in their future success. The bubble broke circa 2000, when investors realized that this cycle of unending losses was untenable, and the lessons learned from the crash became part of conventional business wisdom.

But did we learn the right lessons from the dot-com bubble? Thiel argues that we didn’t. To understand the real lessons of the tech bubble for startups today, first we need to review the 1990s. Then we’ll analyze the bubble in more detail, and finally we’ll consider Thiel’s conclusions about the lessons from it that became part of conventional wisdom.

Historical Overview of the 1990s

We remember the 1990s mostly positively for the rise of the internet, but the 18-month dot-com bubble at the end occurred against a backdrop of growing financial problems in the US and globally.

The US economy had been in recession in the late 1980s, and economic recovery was sluggish in the early 1990s. At the same time, Americans had rising concerns about globalization, because American companies were outsourcing jobs to countries with lower labor costs and Japan was out-competing the US in the global semiconductor market.

And the US wasn’t the only country facing financial challenges in the 1990s. For example, in 1997, the economies of Thailand, Indonesia, and South Korea crashed due to massive debt and government corruption. And in 1998, Russia, also facing insurmountable debt, defaulted on its loans by devaluing its currency. The European economy was also struggling through its transition to universal currency. These crises contributed to a bleak global financial outlook.

The rise of e-commerce was the only bright spot against this background of dim financial prospects. Many people saw their economic problems as evidence that traditional economic institutions couldn’t deal with the increasingly globalized economy, and concluded that the internet would provide the foundation for the global economy of the future.

This bright spot arguably first appeared in 1993 when a precursor of Netscape Navigator—Mosaic—first made the internet accessible to ordinary people. Internet usage subsequently grew exponentially, fueling the rise of Netscape, Yahoo, Amazon, and other internet companies. Investors flocked to internet-based companies, despite Federal Reserve chairman Alan Greenspan’s insightful warning in 1996 that these companies were being overvalued in the market.

History of the Dot-Com Bubble

Between September 1998 and March 2000, Silicon Valley was awash in money from investors, and entrepreneurs hastened to supply the insatiable demand for new internet companies to invest in. Lavish launch celebrations became the norm, as did a business model that encouraged growing your company by spending investors’ money, whether it was profitable or not. Thiel speculates that many entrepreneurs recognized this situation was unsustainable, but decided to enjoy it while it lasted.

PayPal’s Launch

This was the environment in which Thiel and his co-founders started PayPal. Their original vision was to create a kind of digital currency that could replace the dollar, but they started out by developing tools to send dollars electronically over the internet.

They experimented with a system that allowed people to send and receive money using PalmPilots, but there weren’t enough PalmPilot users for this to be tenable. Recognizing that email was becoming ubiquitous, PayPal pivoted to provide a way of sending money by email.

Like most companies of the time, PayPal prioritized rapid growth over up-front profits. At one point, they even offered people $10 to create a PayPal account, and another $10 for convincing a friend to sign up. However, Thiel maintains that, in PayPal’s case, the cost of growth was justifiable because they needed millions of users to become profitable in the long term.

History of the Dot-Com Crash

The dot-com bubble burst early in the year 2000. That year, the stock market peaked in March and then plummeted to a fifth of that peak value within the next month. Investors lost faith in the idea that the internet would shape the future of the global economy. For that matter, Thiel says investors became skeptical of any company that had aspirations of shaping the future. And their newfound skepticism became part of the new conventional wisdom.

Lessons Learned

Thiel identifies four specific lessons that came to be conventional wisdom in the wake of the dot-com crash:

1) Be satisfied with marginal improvements. Grandiose visions created the dot-com bubble, so don’t let yourself think you can change the world.

2) Manage your company reactively. The bubble was driven by unsustainable spending on the pretense of growing unprofitably in the short term to become hugely profitable in the long term. So, instead of creating bold, long-term plans, you should focus on staying flexible and adapting to situations in the short term.

3) Stick to established markets. The bubble was based on a presumption that the internet would completely reshape the global market landscape, and many internet companies failed to realize the new markets they envisioned. It’s less risky to compete in an existing market than to try to create new markets.

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4) Build a product that sells itself. During the bubble, companies wasted a lot of money on advertising, when they should have focused on developing a product that was good enough to spread virally.

Thiel contends that these are not the right lessons to draw from the crash of the dot-com bubble. Indeed, he asserts that, no matter how much they may be ingrained into conventional wisdom for today’s high-tech startups, they all represent bad advice: Thiel thinks it's better to have a grandiose vision than to be satisfied with marginal improvements, and long-term strategic planning is crucial for a successful startup. Sticking to established markets puts you into head-to-head competition that severely limits your ability to make a profit. And no product truly sells itself—distribution and marketing needs to be part of your plan.

Thiel concedes that the companies involved in the dot-com bubble made mistakes, as evidenced by the fact that they all ostensibly set out to introduce revolutionary technology, and very few of them actually did. That said, he affirms that we still need revolutionary technology, and expresses concern that post-crash conventional wisdom is preventing companies from developing it.

Chapter 3: Myths About Competition and Monopoly

Thiel observes that anyone starting a company needs to decide what kind of company to start. Of course, there’s only one kind of company that’s worth starting: a profitable one. To be profitable, your company needs to create something of value, and also monetize a portion of the value that it creates.

Thiel argues that to secure a fair share of the value that your company creates, you need to be a monopoly. If you have direct competitors, price competition will drive your profit margins to zero. He illustrates this concept by comparing the economic models of “perfect competition” and “monopoly.”

Perfect Competition

In economic theory, “perfect competition” happens when there are many suppliers of a given product and there is no appreciable difference between their products. Thiel says classical economists consider this an ideal situation because the market is governed completely by supply and demand: If demand increases, prices will rise, motivating suppliers to increase production or new suppliers to enter the market. If supply overshoots demand, prices will fall and suppliers will cut back or go out of business. So in the long run, supply and demand remain perfectly in balance.

According to Thiel, this is precisely the problem: When supply and demand are perfectly in balance, suppliers are just breaking even on production costs, not making a profit.

Monopoly

In a monopoly, one company controls the market and sets prices as it sees fit. This allows the company to incorporate a profit margin into its price structure.

Thiel observes that many Americans see monopolies as a bad thing, because the American economy is based on capitalism, and they associate capitalism with competition. He asserts that this viewpoint is flawed: The profit motive is what drives capitalism, and monopolies are the only type of business where long-term profits are possible.

That said, Thiel concedes that not all monopolies are created equal. If a company manages to corner the market on the supply of a necessary resource and then arbitrarily raises prices, the company prospers at society’s expense. Understandably, historical instances of this have given monopolies a bad name, especially when companies cornered the market through dishonest means.

However, Thiel contends that this can only happen in a static market. Vertical progress redefines markets and makes new resources available, so monopolies are always temporary. If you create a monopoly by inventing a revolutionary technology, your monopoly will only last until someone else invents a technology that eclipses it.

The knowledge that your monopoly is temporary should motivate you to invest your profits in developing other new technologies. This kind of creative, technological monopoly that both drives and facilitates technological advancement is what Thiel advocates.

Lying About Competition

In Thiel’s experience, most companies and markets closely approximate either a monopoly or a case of perfect competition. And most of them lie about it, because being seen as a monopoly makes your company vulnerable to antitrust suits, and being seen as an undifferentiated supplier in a perfectly competitive market makes it hard to raise investment capital.

Thus, according to Thiel, monopoly companies tend to argue that the market they control is just a small piece of a larger market. For example, a company with a monopoly on genetically engineered crops might claim to own just a small share of the global market for agricultural products. They may even introduce other products for the sole purpose of competing in other markets that they don’t dominate to make their claims of competition seem more legitimate. For example, they might sell a few proprietary seed drills, just so they can point out that John Deere is out-competing them in the machinery sector of the agricultural market.

By contrast, non-monopoly companies tend to claim that they are unique by presenting themselves as dominant players in an arbitrarily specific market sector. For example, Unique-ARs Corporation could legitimately claim to be the largest producer of hunting rifles with honeycomb-pattern handguards in central Idaho, even though they hold only a tiny share of the American sporting rifle market.

Either way, Thiel cautions that companies that misrepresent their status in the market are in danger of failing if they believe their own lies.

Monopolies Are Better for Society

Thiel argues that monopolies are good for society, as well as for business. When a business has a monopoly (meaning it faces no significant competition in the market where it operates), it has the freedom to consider the welfare of its employees and the broader impact of its products and operations on society because profits are assured.

By contrast, competitors locked in a daily struggle for survival have to do everything in their power to minimize expenses and don’t have enough resources left over to consider their impact on their employees or communities.

For example, monopolies can afford to pay their employees what they need for financial security and set their prices to assure enough profit that these wages are sustainable. Meanwhile, competitive companies have to pay the lowest wages they can get away with. Similarly, monopolies can choose to use alternative energy sources that may be more environmentally sustainable in the long run, but are more expensive up front, while competitive companies must use whatever energy sources will keep their short-term costs low.

Thiel brings up the subject of patents, remarking that patents exist because the government recognizes the value of temporary, creative monopolies. The opportunity to secure years of monopoly profits provides incentive to invest in research and development. And the incentive is recurrent because the patent is temporary. And even if patents weren’t temporary, every technology has the potential to be eclipsed by a better one. So companies have to keep innovating to maintain their monopoly status. The resulting creative development makes society better by creating new categories of things and expanding consumers’ options.

Chapter 4: Destructive Competition

Thiel believes that the idea of healthy competition is a myth. But it’s a myth that is so deeply ingrained in our society it tends to exercise a destructive influence on our business strategies. As such, Thiel spends a chapter exposing and debunking the myth.

He says the school system instills the importance of competition in students from an early age by forcing students to compete for grades. Schools also tend to teach a uniform curriculum, rather than catering to individual students’ strengths and interests. This parallels the model of perfect competition by minimizing the differentiation between products—in this case, the “product” is a student’s work.

Similarly, workers must compete for raises and promotions by conforming to companies’ performance expectations. The perception of conflict is so pervasive that war metaphors in business are commonplace: Companies talk about their labor force, their marketing campaigns, and their target customers. According to Thiel, this creates a competition mentality that blinds us to opportunities to create new things.

Fighting and Losing

According to Thiel, businesses often get so caught up in power struggles that they lose sight of their core business and make poor decisions. They waste money reinventing each other's products instead of creating new things and overestimate the value of the markets they’re competing for.

As an example, he discusses the rivalry between Microsoft and Google, comparing them to the Montagues and Capulets from Shakespeare’s Romeo and Juliet. He points out that the rivalry between these two companies made little business sense, because their core competencies were completely different: Microsoft specialized in operating systems, Google in search engines. Yet because they saw each other as rivals, they started introducing products just to compete with each other: Microsoft built a search engine (Bing) and Google built an operating system (Chrome). Thiel notes that while Microsoft and Google were locked in head-to-head competition, Apple surpassed both of them in value, depriving them both of the prestige they were competing for. He attributes this turn of events to their obsession over competing with each other.

Models of War and Business

Given the example of businesses’ competitive behavior, Thiel conjectures that seeking conflict is part of human nature. But why?

Thiel thinks it has to do with excessive similarity. Microsoft and Google were ideologically similar tech companies that both rose to prominence. Their products were different enough that they didn’t need to compete for market share, but they tried to compete for prestige—they both wanted to be the undisputed tech giant.

Again making reference to Shakespeare, Thiel discusses how the Montagues and Capulets were “alike in dignity”—they fought each other simply because they were equals with equal claim on the status and prestige that they both wanted to hold exclusively.

Thiel contrasts this with Karl Marx’s idea that people fight because their goals are incompatible. Marx believed people of different classes had different ideas about how society’s resources should be allocated, and that this was the source of conflict between them.

In Thiel’s view, Marx was wrong: People fight only when they are similar enough to want the same things, and want them enough to fight over them. Therefore, the solution to conflict is innovation. It’s better to create something new than fight over what already exists.

Chapter 5: Building for Future Profits

Thiel presents creative monopolies as the solution to destructive competition, but he also cautions that creating a technological monopoly does not in and of itself guarantee the success of your startup. Thiel measures the worth of a startup by considering how much profit it has the potential to bring in ten or twenty years down the road.

Thiel illustrates the importance of long-term value by contrasting traditional print media companies with social media platforms. Successful print media companies bring in steady profits, but their stock is valued relatively low because they have little potential for future growth. By contrast, social media companies often fail to make a profit during their first decade of operation, yet their stock value may soar because their revenues are growing exponentially, promising significant growth and future profitability.

Thiel cautions that many companies fall into the trap of focusing on short-term profits instead of long-term revenue potential because short-term profits are easier to track. But fixating on metrics that reflect only short-term performance can steer you away from long-term profitability. To be profitable in the long run, your monopoly must possess certain characteristics, and you must manage your company wisely.

Crucial Characteristics

Thiel discusses four characteristics of a startup that endow it with potential for long-term profitability.

1) Proprietary Technology

To build a monopoly in the first place, Thiel says you have to create something unique—ideally you create new capabilities that no one else has. If you’re just improving on existing capabilities, you need to improve them by an order of magnitude to have any chance of building a monopoly.

Moreover, to stand the test of time, your company’s unique capabilities must be difficult for anyone else to reproduce—whether because they’re protected by patents, copyrights, trade secrets, or just because you’re technologically a step ahead of anyone else, such that they can’t compete on your level.

2) Network Effects

Another key element of maintaining a monopoly is network effects. In essence “network effects” means that the value of your product is directly proportional to the number of people who use it. For example, in Thiel’s case, the more people and businesses started using PayPal, the more widely their service was accepted, and the more useful it became.

Network effects help to ensure the monopoly status of your product in the long-term, because once a lot of people are using your product, no one else can create a competing product with as much value, because they won’t start out with the same user base.

Thiel advises that to create network effects, your product must be valuable enough to its first users that they will want to share it around. As new users get their friends to start using it, your user base grows exponentially.

3) Economies of Scale

Economies of scale occur when your product becomes more economical to produce the more you scale up your operations. For example, in the software industry, there is an initial cost to develop an app, but once it’s developed, the cost of selling additional copies is negligible. Thus, the more copies you sell, the lower you can set your price and still make a profit.

Thiel advises you to plan out how you will scale up your business from the very beginning. Monopolies benefit from economies of scale much like they benefit from network effects, so your business model needs to scale well to support your monopoly.

4) Branding

Thiel asserts that your brand needs to be unassailable: If you want to hold on to monopoly status, everything about your product should be consistent with the claim that your product is in a class by itself, from the core technology to the user experience to the packaging.

Managing Your Startup for Long-Term Success

Even if your startup has characteristics that set you up for success, you still have to plan your moves intelligently to realize its potential. Thiel gives four pieces of strategic advice for managing your startup.

1) Choose Your Initial Market Carefully

Thiel advises you to start out targeting a small market, because your startup will be a small company, and you won’t have the resources to monopolize a large market yet. He warns against attempting to secure a small share of a large market, reiterating that if you’re a small player in a big market, competition will prevent you from making a profit. That said, he also cautions that your market needs to contain enough real customers to be profitable.

He illustrates this by recounting how PayPal targeted PalmPilot users as its first market, but found that they were too few and far between to represent a valuable market sector. Then they switched to targeting eBay sellers and found a small but lucrative market that they quickly dominated.

2) Expand Into Adjacent Market Sectors

Once you’ve dominated a small market sector, slowly expand into related markets that are a bit broader.

Thiel illustrates this concept with the example of Amazon. After establishing themselves as the dominant online book dealer, they expanded into selling other types of media and eventually all kinds of consumer products.

3) Don’t Pit Yourself Against the Establishment

As we’ve discussed, Thiel sees head-to-head competition as a death-knell to profitability. He warns that high-tech startups often fall into the trap of competing with established companies under the guise of “disrupting the industry.”

It’s true that sometimes new technologies disrupt the market, displacing established market leaders. But in Thiel’s experience, all too often, a startup will claim to be “disrupting the market” when in reality they are merely improving upon an existing technology and trying to take market share away from established players. Don’t fall into this trap.

Thiel conjectures that if your product is truly innovative, it will be unique enough to create a new market: There won’t be an existing market for you to disrupt or a direct competitor for you to displace. Focus on creating something that’s new enough to have no competition, not on creating a product to disrupt existing markets.

4) Secure Your Position as the Final Authority

Your goal is to build a monopoly that will generate long-term profits by introducing a revolutionary product that no one else can match. Thiel observes that to do this, generally you need to be the first to introduce your product. In industries where network effects and economies of scale are significant, the first product to rise to prominence becomes almost impossible to compete with.

As Thiel explains, this is known as the “first-mover advantage,” and he advocates using it to good effect. However, he also cautions that moving first is merely a means to an end, not an end in itself.

Exercise: Monopoly Profits

How your company chooses and expands its markets is critical to its success. You should target a small niche that you can dominate, then slowly expand to related markets and eventually larger markets while maintaining monopoly control.

• Think about your business or a potential future business. How would you define the market (target customer and size, other potential players)? How could you check to make sure that your intended market actually exists?

• Does/will your company dominate your defined market? How do you measure market dominance?

• What is your next logical step for expanding your market from a small niche to something related?

• What would it take for your company to be the last mover (to make the last spectacular improvement that ensures years of monopoly profits) in your ultimate market?

• Thiel argues that a 10x better product is necessary to building a monopoly. Is your product 10x better? If not, what could possibly make it 10x better?

Chapter 6: Success Comes From Planning

According to Thiel, the way you think about the future will influence how (and whether) you plan for the future, and the plans that you make will affect your future, or that of your startup company.

Thiel acknowledges that there is an ongoing debate in the business community about the relative importance of planning versus luck in determining the success of a venture. In particular, he quotes Malcolm Gladwell as saying that success is mostly a product of random chance. He also observes that Warren Buffet, Jeff Bezos, and Bill Gates all attribute their success at least partially to luck. If success is just a matter of luck, why bother with planning?

Yet Thiel argues that it’s a mistake to downplay the importance of planning. Today, most people equate luck with random chance, but he points out that this was not always the case. In the 18th and 19th centuries, most people believed there was a connection between your labor and your luck: The more you worked at something, the better your luck in that area became.

Ways of Thinking About the Future

Thiel says there are basically four perspectives you can have about the future, depending on how you answer two questions:

1. Do you expect the future to be better or worse than the present? If you think it will be better, that makes you an optimist. If you think it will be worse, then you’re a pessimist.
2. Do you believe the future can be predicted? If you believe the future is determined by a chain of cause and effect that we can study and understand, then you’ll see the future as determinate. If you see the future as a product mostly of random chance, you’ll view it as indeterminate.

Thus, the four possible perspectives are:

1. Determinate Optimism: You believe you can make the future better than the present, so you plan and work toward a brighter future.
2. Indeterminate Optimism: You expect circumstances to improve automatically, or feel entitled to automatic progress. This outlook may motivate you to look for opportunities for near-term improvement or profit. But it tends to dissuade you from long-term planning, because you can’t predict what opportunities may come up in the future.
3. Determinate Pessimism: You see the future in terms of concrete problems that you don’t have the means to solve. This motivates you to work to protect yourself from the fallout of these problems as much as possible.
4. Indeterminate Pessimism: You see the future as a gloomy blur. There’s no point in planning to do anything, because you’re not likely to benefit from it, and there’s no way of knowing what you should try to protect yourself against.

A Survey of Perspectives on the Future

Thiel illustrates his discussion of ways to think about the future with examples of how different views have prevailed in different societies throughout history, and how that affected their actions.

According to Thiel, Americans generally espoused a viewpoint of determinate optimism from the founding of the American colonies up until the 1960s. He attributes many of the feats of engineering that Americans accomplished in the 19th and 20th centuries to this attitude, including:

• 1843: A tunnel under the Thames River
• 1914; The Panama Canal
• 1929-31 The Empire State building
• 1933-37: The Golden Gate Bridge
• 1956: Beginning of the Interstate Highway System
• 1961-72: 12 men on the moon

However, Thiel says that the “Baby Boomer” generation grew up immersed in such a culture of constant progress that they came to regard progress as automatic. This triggered a shift from determinate optimism to indeterminate optimism. Since the 1970s, most Americans have had an indeterminate optimistic perspective. The emphasis on a “well-rounded education” over a highly focused course of study in American school systems exemplifies this mentality.

Consequently, technological progress largely stalled in the 1970s, and positions in politics and finance supplanted technological careers as the favored route to success for most upper-class Americans. Compounding the problem, politicians tend to fixate on polls and adjust their positions to cater to whatever seems to be popular, rather than proposing long-term solutions to societal problems.

Society has also turned increasingly to insurance to mitigate unknown (or supposedly unknowable) future risks. Thiel sees government programs like Medicare and Social Security as costly insurance programs motivated by the mentality of indeterminate optimism. Similarly, in finance, people regard the market as unpredictable and try to minimize their risks by diversifying their portfolios, rather than investing directly in ventures that have clear value.

Even in high-tech startups, business strategists often advise companies to keep their options open so they can adapt to a randomly-changing environment, rather than committing to long-term plans.

Meanwhile, Thiel says that from the 1970s through the time of his writing (2014) most European societies have been characterized by indeterminate pessimism. Not knowing what to expect or feeling like they have the ability to create long-term solutions, European social and financial institutions merely operate in damage-control mode.

According to Thiel, in modern-day China most people have a determinate pessimistic outlook on the future. They believe that there aren’t enough resources on Earth to sustain the global population (of which they comprise a significant fraction). As resources are depleted, the poorest people will be impacted first and most severely, and China’s average level of affluence is still lower than that of the West. China is investing heavily in modernization, in hopes of narrowing the gap between them and wealthier countries, but they don’t expect to fully catch up before the world’s resources are depleted. Wealthy Chinese people often try to relocate their assets to affluent Western countries, where they may be less vulnerable in the coming global resource crisis.

The Importance of Your Outlook

Thiel argues that only an outlook of determinate optimism will lead you to plan carefully enough and stick to your plans diligently enough to succeed, whether as a startup developing new technology, or as an individual. Even if you’re not an entrepreneur, your long-term goal should be to be the best at something, instead of being a “well-rounded” individual who does what everybody else does and thus competes with everyone at everything.

Thiel also expresses concern over the long-term societal effects of widespread indeterminate optimism, arguing that it is not a logically tenable position: Why should we expect the future to be better if we’re not doing anything to make it better?

Exercise: What’s Your Worldview?

If you’re optimistic, you tend to think of the future as definable and definite, as something you can understand and shape. If you’re a pessimist, you think of it as uncertain and indefinite; since it's random, you can’t intelligently predict or plan for it.

• What’s your view of the future? Are you an optimist or a pessimist? Explain your answer.

• How much of a role do you believe luck plays in success?

• How have your beliefs about the future affected the way you pursue your goals?

Chapter 7: The Power Law

In the last chapter, we discussed the importance of planning. In this chapter, we’ll discuss an important principle that should influence your planning: the power law.

Thiel explains that many things, both in business and in nature, follow an exponential growth pattern, or “power law”: The bigger they get, the faster they grow. In situations where this is the case, a few entities that got started sooner or had other early advantages tend to become much larger than the average, even if they started out only slightly ahead. This leads to a distribution that is different from the familiar bell-curves and uniform distributions that we often assume when analyzing statistics.

In a power-law distribution, the largest entity is typically bigger, more valuable, or more powerful than all others combined. The second-largest is likewise bigger than the total of all those after it, and so on.

Also, in a power-law distribution, the top 20% of the entities typically hold 80% of the value or power. This is known as the “80/20 rule,” or the “Pareto Principle,” after Vilfredo Pareto, an Italian economist who studied and wrote about it.

The Power Law at Work

Thiel explores several applications of the power law.

Venture capital is one area where the power law is applicable, because startups follow a power law distribution. They all start small, and the vast majority of them fail or stagnate before they have a chance to grow much. Even the successful ones take time to get established and become profitable. But then a few of them take off and grow exponentially. In the case of Thiel’s own venture capital investments, Facebook was the most successful, and ended up being worth more than the rest of his portfolio put together, just as we would expect based on the power-law distribution.

If you’re a venture capitalist, Thiel advises you to concentrate on a few startups that you think are most likely to succeed, rather than diversifying your portfolio, because the power law implies that most of your profits will come from just a few of your best investments. He also cautions that it takes years or even decades for a venture capital portfolio to become mature enough that the power-law distribution becomes apparent when you plot the value of your investments against each other. Don’t let premature statistics convince you that the distribution is uniform.

But what if you’re not a venture capitalist? According to Thiel, the same principle applies to almost any type of investment. Whether you’re an entrepreneur investing in your own startup, an employee investing your time in a career, or even a student investing in a college education, the power law implies that, out of all the possibilities you could choose to pursue, there is one startup, one job, or one course of study that will eventually prove more valuable than all other options. So choose wisely, and don’t get sidetracked trying to do a little of everything.

Chapter 8: The Value of Secrets

Thiel returns to the “contrarian question” that he introduced in the first chapter: “What revolutionary truth do you know that no one else agrees with?” If you know something, especially something important, that nobody else does, then by definition, you have a secret. You need a secret to answer Thiel’s question, so he spends a chapter discussing secrets and how to find them.

How to Uncover Secrets

Thiel’s favorite tactic to discover secrets is to look where nobody else is looking. Whether in business, science, or some other field, what questions do people in the mainstream refuse to address or investigate? Or what have they simply overlooked? Thiel calls this the “human approach” to discovering secrets, as opposed to the “natural approach,” which involves making comprehensive observations and analyzing the data to find new trends or new phenomena. He points out that often, these two methods lead to the same discoveries, but the human approach is typically more efficient.

He offers the dot-com and housing bubbles as an example of this principle: These bubbles were created by inefficiencies in the market, but no one was willing to question the efficiency of the market at setting prices. During those bubbles, you could have taken the natural approach and determined through careful analysis that first internet companies and then real estate was over-valued. But simply challenging the assumptions that no mainstream expert dared to challenge would have led you to the same conclusion with less analysis.

The Importance of Believing in Secrets

Of course, to discover secrets, you first have to believe that they exist. If you don’t believe there are revolutionary discoveries yet to be made and profitable new businesses to be built, then you won’t see these opportunities because you’re not looking for them. Thiel stresses the importance of this because in his view, most of society doesn’t believe in secrets anymore.

To explain his reasoning, Thiel contrasts secrets with conventions and mysteries:

• Secrets are knowable, but it takes effort and intelligence to discover them. Finding secrets is rewarding, both because it's challenging and because secrets are valuable.
• Conventions are, by definition, widely known. Sometimes they’re useful, but they don’t give you an advantage.
• Mysteries, in the sense that Thiel uses the term, are unknowable. They’re not useful in practice because they’re impossible to figure out.

According to Thiel, today most people tend to assume that all the questions in the world are either insoluble or have already been solved: There are no secrets left. Everything is either a mystery or a convention. He attributes this societal belief to the cumulative effect of four trends:

1. In the school system, we teach children to solve problems by following prescribed instructions, not by coming up with their own original solutions.
2. We tend to seek the approval of our peers, and conventions provide intellectual safety in this regard. No one will write you off as a weirdo if you stick to believing only what everyone knows is true.
3. The people with the most wealth want to preserve the status quo because they’re comfortable with their situation. As such, they have no motivation to search for new discoveries.
4. It’s hard to believe that there are new discoveries left to be made, because, with the globalization of the economy, there are a staggering number of people working in almost every industry. With so many other people out there, it’s easy to think that someone has already discovered anything that’s worth discovering.

As an example of this mentality carried to the extreme, Thiel discusses the case of Ted Kaczynski, the infamous “unabomber.” According to the manifesto that Kaczynski published, modern life was meaningless because personal fulfillment comes from solving meaningful problems and every problem worth solving had already been solved. Kaczynski’s solution to this problem was to destroy civilization as we know it, plunging the survivors back to the Stone Age so that they could start over.

Thiel contends that Kaczynski—and most of modern society—is wrong. There are still secrets left to be discovered. We haven’t found cures yet for cancer, dementia, or old age. We don’t really even have a good scientific understanding of nutrition. We need new sources of sustainable energy and better means of transportation. There are plenty of problems that are worth solving, and are likely possible to solve, but haven’t been solved yet.

Exercise: Thinking Unconventionally

Building a great company requires out-of-the-box thinking rather than following conventional wisdom. Often the truth is the opposite of what everyone believes.

• Make a list of the most common conventional beliefs you’ve heard at your company (things that are assumed to be true) about its product(s) and market.

• What would be the opposite of each of these beliefs?

• Could any of the opposite statements be true? If so, what are the implications?

• What is something you believe that very few other people believe?

• What is a promising area that has a ton of potential value, but that very few people are looking at?

Chapters 9 & 10 : Building a Strong Team

Thiel points out that the decisions you make when founding an organization will permanently shape how it operates in the future. You need to make the right decisions up front, because if you make mistakes at the formative stages of your startup, it may not be possible to fix them later. Thiel calls this principle “Thiel’s law,” and says that it applies to organizations of all types, whether businesses or governments.

As an example of how difficult it is for established organizations to change, Thiel points out how seldom the Constitution of the United States has been amended. The organizational structure of the US government is much the same as it was two hundred years ago, and it’s not likely to be changed, whether it still suits our needs well or not.

Choosing Partners

Thiel asserts that one thing you need to get right up front is the selection of your co-founders. In fact, he asserts that this is the most important decision you’ll make in founding a startup.

He even equates choosing a co-founder to choosing a marriage partner, claiming that the same issue of personal compatibility applies, and the consequences of incompatibility are just as severe. As an example, he recounts the tragic story of a company founded by Luke Nosek and an unnamed co-founder whose personality and ambitions were incompatible with Nosek’s. Thiel was an investor in the company, but he lost his investment when the company failed due to the founders’ incompatibility.

Corporate Structure

The structure of your startup provides a framework to support and constrain how the people of the company—founders, investors, employees, and so on—interact with each other. As Thiel notes, some people advise against imposing structure on an organization, saying that this will stimulate creativity by giving your team members greater latitude to implement their own innovative ideas. Thiel concedes that in a perfect world, full of perfect people, that would be true, but argues that in the real world, real people need some amount of structure in order to work together constructively.

As an example of how lack of effective structure can contribute to poor performance, Thiel discusses the notoriously poor customer service of certain government agencies.

(Shortform note: On paper, most government agencies have a formal structure, but Thiel equates “structure” with clearly defined roles, and bureaucracy, by definition, is when responsibilities are distributed over such a large organization that no individual holds responsibility for anything. Thus, to Thiel, a bureaucracy’s lack of clearly defined roles implies a lack of effective structure.)

He explains that to establish a structure that will promote alignment and progress, you must make three decisions:

• Equity: Who will legally own the company? It’s not unusual for founders, investors, and employees all to have a share of ownership in a startup.
• Direction: Who will make the high-level decisions about what the company will do? In many startups, a board of directors consisting of the founders and investors fulfills this function.
• Operation: Who will figure out how to accomplish the company’s high-level objectives and take responsibility for getting the work done? Sometimes a founder assumes this responsibility, sometimes the company hires a CEO to do it, and sometimes this function is distributed among employees.

Minimizing Conflict

Thiel explains that effective structure helps reduce conflict between different people with different interests, but doesn’t necessarily preclude it. In his experience, conflict in startups most often occurs between founders and investors on the board of directors. He advises keeping the size of the board small—preferably just three to five members—to make conflict easier to resolve by simplifying the logistics of communication.

Recruiting Employees and Consultants

As you build your startup’s talent pool, Thiel advises hiring only full-time, on-site employees. He acknowledges that part-time employees, remote employees, and consultants paid as contractors are cheaper to hire, and that startups must generally operate on a tight budget. However, in his experience, the less intimately people are connected to the company, the more they tend to focus on looking good in the short term, rather than building the company’s future. As such, even if you have to hire consultants to get the necessary talent, bring them on as salaried employees rather than contractors. And don’t even bother with part-time help or remote hires.

Culture

Thiel says your employees need to be unified by a zeal for your company’s unique mission. By way of illustration, he says there’s a fine line between a successful startup and a cult: Usually, cults are built on an idea or ideology that’s wrong, but that their members zealously support. Successful startups are built on an idea that’s true, and that their employees are zealous about, but that the rest of the world thinks is wrong, because the truth of the idea is not yet widely known.

Thus, as you hire additional employees, Thiel emphasizes the importance of articulating your company’s mission to them. He advises hiring people who find your company’s unique mission compelling, and want to work with the kind of people who are already on your team—not people who are just looking for money or special perks.

Thiel advocates building the unity of your team by minimizing the factors that differentiate the members of the team from each other. For example, he recommends issuing uniforms to your employees, although he remarks that for most startups, a “uniform” would just be a T-shirt with the company logo on it. He also suggests hiring people who share the same interests, even on things outside the scope of work. The less your people differ from each other relative to how much they differ from the rest of the world, the stronger your team identity becomes.

However, he adds one caveat: As you minimize factors that differentiate your people from each other, do not give them the same roles and responsibilities in the company. Returning to the subject of company structure, Thiel asserts that every employee in your organization needs to have a unique and clearly defined role. Overlapping roles and responsibilities lead to competition between employees, which, in turn, leads to inefficiencies that a startup simply cannot afford.

The Pitfalls of Professionalism

Thiel observes that some companies promote an atmosphere of “professionalism,” where you keep your work separate from the rest of your life. You limit your interactions with your coworkers to what’s necessary to get your work done. In theory, this produces a more cohesive workforce: All employees are unified by the company’s mission and they keep their personal lives out of their work so that differences in their beliefs, politics, or interests don’t cause disunity.

But Thiel sees this as a mistake. Instead, he argues that work should be a place to build lasting relationships. He recounts how the team he built at PayPal became so close that even after they went their separate ways people referred to them as the “PayPal Mafia.”

Compensation

Thiel cautions you not to overpay your CEO. In his view, paychecks motivate people only in the short term, because pay is derived from the present value of the company, not its future value. This can be especially problematic at the executive level, since it’s crucial to have a CEO with a vision for building the company’s future. Paying your CEO too much can undermine her motivation to do whatever it takes to reach the company’s long-term goals.

Additionally, the CEO pay sets the standard for the rest of the company: If she draws a fat paycheck, her subordinates will expect proportionally high compensation. If she covers up problems to make the current situation look better and thereby protect her short-term interests, her subordinates will do likewise. But if she addresses problems head-on and works for the company’s growth in the hope of future rewards, this may inspire her subordinates to do the same.

Similarly, Thiel argues that offering employees high salaries or cash bonuses makes them more prone to focus on looking good in the short term rather than making the company prosper in the long term.

He says that it's better to reward employees with equity in the company, because it gives them a stake in the company’s future. However, he concedes that it is difficult to distribute equity in a way that seems fair to everyone. Typically, employees who start earlier get larger shares of equity. This is fair in the sense that these employees took a greater risk in joining the company, but it doesn’t necessarily scale with their contributions to the company’s success: the company’s first janitor might end up owning more stock than the engineering manager who was hired a few years later to scale up their production operations. He recommends keeping the allocation of equity confidential to prevent it from becoming a source of resentment between employees.

Exercise: Building a Team

Thiel argues that startups should choose people for their initial team who are as similar as possible to enable the team to work cohesively and efficiently from the start.

• In building a team for your company or a potential new business, what common qualities would you look for?

• Thiel also stresses the need to create a team identity. How would you encourage a common look and common interests so that your employees are “different in the same way?”

• To attract talented people who have many options, you need a compelling answer to the question of why they should choose your company over others that might offer more pay and prestige. How would you answer this question? (Hint: Thiel says the answer must focus on why your mission and team are unique.)

Chapter 11: Sales and Distribution

As we discussed in Chapter 2, one of the lessons learned from the dot-com crash was to focus on building a product that’s so good it sells itself, rather than trying to drive sales of a mediocre product with marketing hype. And, as we mentioned before, Thiel is concerned that this conventional wisdom dangerously downplays the importance of marketing.

He contends that developing a plan for how you will distribute your product is an integral part of developing your product. In fact, sometimes a revolutionary sales strategy is enough to elevate an existing product line to monopoly status. On the other hand, a poor sales strategy can be the death of a company with a sound product. In fact, Thiel says more companies fail due to faulty sales strategies than faulty products.

Furthermore, Thiel expresses concern that most entrepreneurs (and people in general) misunderstand the nature of marketing: They think advertising and sales pitches don’t work, because when they hear sales pitches or see advertisements, they don’t rush out and buy the products, nor do they see other people doing so.

Thiel explains that the purpose of advertising is to carve out a place for your product in the viewer’s mind, not to make them go on a buying spree. If you can teach people to think of your product the way you want them to, then their own perception of your product will drive sales, which is your goal.

He goes on to say that teaching people to think a certain way about your product is a subtle art. If people feel like you’re trying to coerce them into buying something, they’ll be resistant to your message.

Methods of Selling Products

Thiel explains that there are a number of ways to go about selling your product. Which one is right for you depends largely on two metrics:

• Customer lifetime value or CLV is the profit you earn over the course of your relationship with a customer. For example, if you sell automobiles at a profit of about $5,000 per car, and your average customer buys a new car once every ten years for about forty years, then your CLV is $20,000. Or, if you sell vitamins that a customer would take every day at a profit of $0.05 per tablet, and the average customer takes your vitamins for forty years, then your CLV is $730.
• The customer-acquisition cost or CAC is the amount you spend to acquire a customer. For example, if you spend $1 million on marketing, and you get 5,000 new customers, your CAC is $200 per customer.

To make a profit, you need the CLV to be higher than the CAC. Different sales methods have different customer-acquisition costs. So your CLV determines your sales methods by constraining your CAC. Thiel discusses four specific sales methods:

1) Complex Sales

As Thiel explains, complex sales are the most expensive because they require personal involvement of your CEO to coordinate with multiple stakeholders on high-value sales (over $1 million) that your customer may perceive as high-risk. In other words, they have the highest CAC, and that’s justified because of their exceptionally high CLV. However, Thiel cautions that if your CEO has to be personally involved in every sale, you shouldn’t expect your sales to grow by more than 50% to 100% per year. This is because growth comes from making bigger sales, not more sales, since the number of sales per year is limited by your CEO’s limited time. And new customers are usually hesitant to place an order that’s worth much more than the sales you’ve handled up to that point.

(Shortform note: a complex sale is a business-to-business sale that involves multiple stakeholders in a company, takes considerable time to negotiate and finalize, is potentially high risk for the buyer, and involves a lot of money. Read more about complex versus traditional selling in the Shortform summary of The Challenger Sale.)

2) Direct Sales

Thiel says direct sales are expensive because your sales reps have to meet each customer personally, but they are cheaper than complex sales, because they can be arranged by sales reps instead of the CEO. For individual sales ranging from $10,000 to $100,000 in value, this personal attention is justifiable and may be necessary to build your customers’ confidence by showing them how your product can solve their particular problems.

3) Mass Marketing

Thiel notes that mass marketing (such as television ads) can be expensive, but it has a low CAC because it allows you to reach many potential customers at once. This makes it his method of choice for most consumer products. He says advertising can work well for startups when your CLV is too low to justify the CAC of direct or complex sales. However, he also warns that you can waste a lot of money on advertising if you let your corporate ego drive you to compete with larger companies for media attention.

4) Viral Marketing

Thiel explains that viral marketing is the least expensive type of marketing. It involves inviting just a few people to try out your product, typically via email or social media, and then relying on these first customers to spread the word. It is ideal for low-cost (or free) products that have a low CLV, because it costs almost nothing and enables your customer base to grow exponentially.

He recounts how PayPal started with only 24 users, all of whom were PayPal employees. Then they implemented an incentive program, whereby users would get paid for getting their friends to sign up. Their user base grew exponentially, eventually making the company highly profitable.

Selling Yourself

As we mentioned earlier, marketing is more about shaping how people perceive your product than it is about coercing them to buy it. As Thiel explains, you can (and should) extend this principle to more than just the product that your company produces. You need to shape investors’ perceptions of yourself and your company to secure their backing. You need to shape your company’s image, not only in the minds of potential customers, but also in the minds of potential employees and the media.

Exercise: Your Distribution Plan

Some entrepreneurs develop a great product but fail to plan for its distribution, or the process for selling the product (advertising, sales, marketing, and distribution). But customers aren’t going to buy it automatically. Distribution should be part of your product design.

• Think of a product you currently sell or a potential product. What are your current or planned methods for marketing/selling it?

• How did you decide your sales methods? How do they target your most valuable customers?

• How do you measure your sales effectiveness? How could you make your methods more effective?

Chapter 13: Checklist for Success

In Chapter 13, Thiel revisits many of the principles he presented in earlier chapters and puts them together into a checklist for success. He then elaborates on this checklist by discussing the clean-tech bubble of the early 2000s.

To position yourself for a successful startup, Thiel says you need seven things:

1. Revolutionary technology. Thiel cautions that making an incremental improvement to an existing technology is generally not a great opportunity. Instead, you need a breakthrough that provides fundamentally new capabilities, or, at the very least, increases existing capabilities by a factor of 10.
2. Unique insight. Thiel advises that if other people have already developed the same technology or identified the same opportunity, then it’s probably not worth pursuing, because competition will consume your profits.
3. Monopoly status. Thiel reiterates that successful companies don’t compete, they monopolize.
4. Strategic timing. Even if you’re the first to invent a revolutionary technology, Thiel asks you to consider whether it’s the right time to produce and market it. In addition to being revolutionary, is your technology mature enough to deploy effectively? And is the market ready to receive it?
5. A great team. Can you assemble a team of people who share a zeal for your startup’s unique vision and collectively possess the skills necessary to achieve it?
6. Effective distribution. Thiel reiterates that your strategy for selling your product is as important as your technical development work.
7. Enduring value. Remember, your goal is to build a monopoly that will generate long-term profits by introducing a revolutionary product that no one else can match.

Case Study: The Clean Tech Bubble

First, Thiel shows how most clean tech companies of the early 2000s scored poorly on his checklist for success, ultimately leading to the collapse of the bubble.

1. Revolutionary technology. Most clean tech companies only developed incremental improvements on existing technology, such as solar panels and wind turbines. A company called Solyndra came up with cylindrical solar cells that were unique, but they were actually less efficient than conventional flat ones. So the revolutionary technology just wasn’t there.
2. Unique insight. In the early 2000s, it was common knowledge that the world needed environmentally friendly energy sources. Thiel comments that it became fashionable for people to be “social entrepreneurs,” trying to build profitable companies around social issues like protecting the environment. But he says this was part of the problem, because if you build your company around an idea that everyone already agrees is good, then that idea is clearly not a unique insight.
3. Monopoly status. The global energy market is enormous—worth trillions of dollars. As such, it was far too big for a startup company to dominate, and there were hundreds of startups with similar clean energy products competing for market share.
4. Strategic timing. Despite the surge of interest in clean energy technologies in the early 2000s, technological advancement in that area continued to advance incrementally, as it had since the 1950s. There were no real breakthroughs that would have provided a strategic opportunity to meet the burgeoning demand, so the timing wasn’t all that favorable.
5. A great team. According to Thiel, most of the clean energy startups that failed during the bubble collapse were founded by people with little or no technical expertise, which contributed to their inability to develop revolutionary technology.
6. Effective distribution. This was another failure point for many clean-tech companies. Thiel discusses the example of Better Place, a company that developed an electric vehicle with interchangeable batteries. To refuel the car, you could just swap out the batteries. Thiel says their system worked well, in a technical sense, but the company went out of business because they didn’t make it easy enough for people to buy their cars.
7. Enduring value. According to Thiel, most clean tech companies made poor predictions about the future: They failed to consider the fact that China would enter the solar panel market and undercut their prices. They failed to predict that new “fracking” technology would expedite production of oil and bring fuel prices down. These effects both contributed to making their long-term strategy untenable.

A Clean Tech Success: Tesla

Thiel presents Tesla as an example of one of the few clean tech companies that succeeded, because it met his checklist for success:

1. Revolutionary technology. In Thiel’s opinion, Tesla’s 2013 model S sedan represented a technological breakthrough at the systems-engineering level: Most of its components were arguably conventional, but the way they were integrated together created a product with unique capabilities.
2. Unique insight. Thiel observes that Tesla had unique insight into the reason people bought electric cars: An electric car was a status symbol that showed off the owner’s commitment to protecting the environment, and this social movement was strongest among the social elites. So Tesla developed an electric luxury sports car that was vastly more appealing to wealthy elites than the utilitarian electric cars other companies were producing.
3. Monopoly status. Because the market for luxury electric sports cars was so exclusive, Tesla was able to dominate it quickly.
4. Strategic timing. Tesla started up right at the end of the clean tech bubble, taking advantage of government subsidy funding while it was still available.
5. A great team. The Tesla team was competent both at engineering and at sales.
6. Effective distribution. Tesla went with a direct-sales model. Thiel notes that building its own dealerships instead of selling wholesale to established dealers cost Tesla a lot of money up front, but saved money in the long run. It also gave them full control over the buying experience, enabling them to build a stronger brand by emphasizing customer satisfaction.
7. Enduring value. As the first company to dominate the market for electric luxury cars, Thiel believes Tesla is positioned to remain the market leader for the foreseeable future.

Exercise: Startup Success

To succeed, a company must have solid answers to the following questions: Engineering: Is your technology a significant advance or only an incremental improvement? Timing: Is this the right time to sell this technology? Monopoly: Are you targeting a big share of a small market? People: Do you have the right people on your team? Distribution: Do you have a plan to market and sell your product? Durability: Will you dominate your market in the next 10 to 20 years? Secret: Have you identified a unique opportunity overlooked by everyone else?

• Answer the above questions for your company or a potential future business.

• Which of your answers are the strongest? Which are the weakest?

• How can you improve your weakest points?

Chapter 12: Will Computers Replace Us?

Throughout the book, Thiel argues that developing new technology is the solution to the problem of competition. In Chapter 12, he addresses the concern that technology itself might begin competing with humans for resources.

In Thiel’s view, this concern stems primarily from a popular misconception that computers can be trained to do anything that humans do. He acknowledges that many computer scientists, particularly in academia, have devoted significant study to the problem of teaching computers to perform tasks that would otherwise be done by humans, but he points out that if anything, these studies only highlight the fact that humans and computers excel at different kinds of tasks. Even a low-end computer can solve arithmetic problems thousands of times faster than the world’s leading mathematicians. But by the same token, even a child easily outperforms the world’s leading supercomputers at tasks like object recognition and value judgements.

Thus, in Thiel’s view, computers and human workers don’t compete with each other—they complement each other. In the job market, computers don’t eliminate the need for human workers, they just empower human workers to be more productive. And in the resource market, computers don’t compete with humans for resources, because computers are not consumers.

Leveraging Complementary Capabilities

Furthermore, Thiel asserts that because humans and computers excel at different kinds of tasks, businesses can combine their respective strengths to provide unique capabilities. As an example of this, he discusses Palantir, a software business that he co-founded.

The premise of Palantir was that computers excel at filtering large amounts of data based on objective criteria, and identifying simple patterns, while human analysts are much better at figuring out what patterns in the data really mean or how they can be useful. Palantir’s software provides human analysts with a tool that can sift through vast amounts of data and flag patterns or items meeting certain criteria for human inspection.

Thiel recounts how government analysts used Palantir’s software to uncover fraud, insider-trading, and child-pornography rings; predict trends in the spread of food-borne disease; and even warn of insurgent attacks during the war in Afghanistan. He clarifies that the software did not identify these insights by itself. It was merely a tool that enabled the human analysts to gain these insights.

Will Artificial Intelligence Take Over?

According to Thiel, computer scientists in academia frequently overlook the obvious differences in human and machine capabilities: Instead of taking advantage of these differences to create computer software that will enhance people’s productivity, they struggle to create algorithms that can mimic human capabilities. The field of artificial intelligence (AI) in particular suffers from this tendency.

Extrapolating advances in AI to the extreme, some people anticipate that computers could someday become better than humans at everything and take over the world. This kind of “strong AI” could result in either a utopian society or an apocalyptic scenario, depending on how superhuman AIs decided to treat humankind.

Thiel doesn’t absolutely rule out that possibility, but he contends strong AI is so far beyond the state of the art in computer technology that it’s not worth worrying about in the 21st century. For now, we should focus on leveraging the advantages of computer technology and developing the next generation of technological breakthroughs.

Chapter 14: Eccentric Founders

Thiel observes that eccentric tastes are a common trait of successful entrepreneurs, if not an outright essential one. To create something new and compelling, you need to think outside the box, and there is a direct correlation between how well you think outside the box and how far outside the “box” of normal conventions your lifestyle and interests lie.

Furthermore, Thiel notes that many influential founders of successful companies exhibited extreme and sometimes strange personality traits. He contemplates whether these traits were innate, deliberately cultivated, or purely fabricated by the media and concludes that in most cases they were the result of a feedback loop: These people genuinely had some extreme traits, which they themselves and people who knew them tended to exaggerate, and the more their reputations grew, the more they tried to live up to them.

In any case, he argues that their uniqueness was important for building the company’s unique identity. As such, their eccentricity paradoxically made them both inspiring to their followers and frequently difficult to work with. Similarly, it made them outsiders to “normal” society, while simultaneously placing them in the inner circle of their company’s community.

To further illustrate his point, Thiel presents several examples of eccentric founders:

• Howard Hughes, who died in 1976, was known during his era as one of the richest people in the world. He produced nine successful Hollywood films and designed and built aircraft that set multiple speed records. Later, he became known for eccentric behavior and a reclusive lifestyle, driven by obsessive-compulsive disorder.
• Richard Branson won media attention and built his brand through various eccentricities—for instance, serving airline passengers drinks with ice cubes shaped like his head.
• Four of Thiel’s co-founders at PayPal experimented with explosive devices in their youth.
• Sean Parker, the founding president of first Napster and then Facebook, was arrested by the FBI as a teenager on charges of hacking. He got into legal trouble again with Napster, which was shut down by the courts. He had to leave Facebook after allegations of drug use, but he garnered admiration after Justin Timberlake’s portrayal of him in the movie The Social Network.
• Steve Jobs, Apple’s co-founder, was forced to leave the company in 1985 because of his eccentric personality: He refused to wear shoes, took exception to normal standards of hygiene, and ate a diet consisting entirely of apples. But after more than a decade away, he returned to Apple and transformed it from a struggling tech company into the most valuable company in the world by introducing the iPod, iPhone, and iPad.

Chapter 15: Four Views of the Future

In the concluding chapter to his book, Thiel contrasts four general views of the future of technological progress, which he attributes to Oxford processor Nick Bostrom:

1. The cyclical perspective: Technology will progress to some maximum threshold and then crash. After the crash, people will gradually rebuild and technology will advance again, eventually achieving about the same maximum level before it crashes again. The cycle will repeat itself indefinitely, with human technology oscillating between minimum and maximum values. Thiel acknowledges that many ancient civilizations held this perspective, but in the modern world he cannot conceive of any type of disaster that could realistically send all of humanity back to the Stone Age without bringing about human extinction.
2. The doomsday perspective: Technology and human civilization will progress up to some maximum point and then crash, resulting in the annihilation of humankind. Thiel acknowledges that this is a possibility.
3. The convergence perspective: Technology will progress up to a certain point and then remain relatively static. Soon the “developing nations” will catch up to the West in terms of their technological development. Technology and society around the world will become increasingly homogenous. Thiel sees this as the prevailing view in the modern world, but he argues that it isn’t actually possible due to scarcity of resources.
4. The acceleration perspective: Technological progress will continue to accelerate, making the future different and better in ways that are currently beyond our ability to imagine. Some people believe that this acceleration of technological progress is inevitable. Thiel contends that this is the future we need to pursue, but it won’t happen on its own. Instead, we need to actively pursue technological development and search for new breakthroughs that can unlock a better future. Because if we don’t make new breakthroughs that create new resources, competition for existing resources will lead to conflict and ultimately extinction. This is why Thiel believes it’s so important to create new technology.

Exercise: What Company Could You Build?

A key question that Thiel poses to entrepreneurs is, “What valuable company hasn’t been started yet?” Answering it requires discovering a secret—for instance, seeing untapped potential or solving a problem by looking at it in a new way.

• Think of a problem, inconvenience, or opportunity you encountered in the past week. What was it?

• Why does this problem still continue to exist? What are people not getting right about solving this problem?

• What might a radical business solution to this problem/opportunity look like?

• If you had unlimited money, how could you build a company to address this problem or opportunity?