## Zero to One – Peter Thiel & Blake Masters

### Bottom line, if you’re in business, invest in business, thinking about starting a company or are currently starting a company, you should read this book!

The premise of the book is that you have to control your destiny, do not depend on luck and do not think it will happen automatically. Creating a new business category happens only once, hence 0 to 1 (technology). Whereas incremental progress is 1 to n (globalization). Thiel outlines how to make that happen, drawing from his experience as one of the founders of PayPal and Palintir. He offers very good advice, but no magic bullet, because there are no magic bullets.

Brief chapter overviews:

In the 1999 crash, businesses learned the wrong lessons and they are still practicing them. They should have learned to be bold, plan, not enter competitive markets and put energy into distribution.

You must create a monopoly company. Monopolies are what drive the future as they allow founders to do long term planning vs. short term planning. Competition kills the ability to do long term planning so avoid it at all costs.

To build a monopoly company you need some combination of proprietary technology, network effects, economies of scale and branding.

You must take control of your future by planning for it, chance will not get you there.

Remember the power law, only a small percentage of companies can ever succeed at a substantial scale. When it comes to your own life think hard about what will be valuable in the future, then pursue that will everything you have.

To build a valuable company you have to do something nobody has done before. To do that you have to tap into secrets that aren’t already universally understood.

When starting a new company you have to start right and have committed founders that add value.

Company culture should be of like minded people with individual talents. Internal conflict will tear a startup apart.

It is essential to have distribution and count it as part of your initial design. A company that has a product without good distribution is doomed to failure.

The computer should be a complement to human activity, it should supplement decision making.

If you want a successful business you must answer the following questions:

Do you have a breakthrough technology? Why is now the right time? Are you starting with a big share of a small market? Do you have the right team? Do you have a way to deliver your product? Will your position be defensible for 10 – 20 years? Have you identified a unique opportunity that others don’t see?

Thiel’s overriding question is whether we will be able to escape from optimistic indefinite and get back to optimistic definite. To do this we must think for ourselves and build businesses that go from 0 to 1. I get the feeling Thiel isn’t so optimistic about this.

I thoroughly enjoyed Thiel’s book and feel that he shared some of his secrets with us. I also think it is important to move the dial back to doing some planning after moving so far toward indeterminism. Creating a unique technology is no doubt a difficult task, but it is what is needed to keep our society moving forward. As a country we need to create the proper incentives so that smart people work on hard problems instead of spending that intellectual capital in the markets. It should be just as attractive for someone with the capabilities to be a scientist or engineer as it is to be a Wall St. trader/analyst. How do we get there?

A special thanks the Zero to One team for the advanced reader’s copy!

Book Notes

## The Forgotten Man

“As soon as A observes something which seems to him to be wrong, from which X is suffering, A talks it over with B, and A and B then propose to get a law passed to remedy the evil and help X. Their law always proposes to determine what C shall do for X or, in the better case, what A, B and C shall do for X. As for A and B, who get a law to make themselves do for X what they are willing to do for him, we have nothing to say except that they might better have done it without any law, but what I want to do is to look up C. I want to show you what manner of man he is. I call him the Forgotten Man. Perhaps the appellation is not strictly correct. He is the man who never is thought of. He is the victim of the reformer, social speculator and philanthropist, and I hope to show you before I get through that he deserves your notice both for his character and for the many burdens which are laid upon him.”

See the whole article

## Before You Bet, Understand Expected Value!

With the upcoming super-bowl and all the betting surrounding it, you should understand expected value before you make any bets.

Informally, the expected value can be interpreted as the long-run average of the results of many independent repetitions of an experiment. (from wikipedia)

By using expected value as a guide over your life, you should come out ahead.

How to calculate expected value:

Say you have two options, one is to bet in a superbowl grid and the other is to bet on a 0-9 pool. To calculate the expected value of each do the following:

Expected Value = – (chance of losing * amount lost) + (chance of winning * amount won)

Ex. -(.99 * $100) + (.01 *$10,000) = $1 (Superbowl Grid) (The above is simplified as with the grid you have a .01 chance of winning each quarter and for the half) Ex. -(.9 *$100) + (.1 * $1,000) =$10 (0-9 pool)

Which would be the better choice?

In most decisions in life you would prefer the expected value be more than the amount at risk, this rarely happens with betting and is the reason the house always wins.

## Stop Blaming the Employer!

Over the past few days I’ve had several people tell me that business is taking advantage of employees. When recessions hit, the employer exploits the situation in his favor, to the employees’ detriment. While this may be the case in some situations I don’t think it is in the majority of cases.

The employer may be an easy target in this situation, but the anger and frustration is misguided. The ability of an employer to pay an employee stems from demand for the employers product. If the demand shrinks, then his demand for employees with the skill to produce the product shrinks. With shrinking demand comes shrinking revenue. Without revenue to pay the bills, including payroll, expenses have to be reduced. There really is no other choice here if the business wants to remain viable.

There are several reasons why demand might shrink. There are two overwhelming reasons in the current situation that I see. First is that consumers (including businesses) have reduced or are reducing their spending, this directly translates into reduced demand. The second is globalization is providing real competition for technology related skill sets. If you can’t differentiate yourself and provide real value it is hard for any employer to justify regular salary increases. Remember the employer must compete with other companies that can and will take advantage of these cost differences.

Another cause of reduced revenue is the inherent idea of consumers to want to buy the cheapest items possible that satisfies their need. With companies competing for the limited spending, this directly translates into less revenue for the company that you are buying from. The reduced revenue means reduced employment, but also means the most efficient business will be successful and will add jobs once demand increases. In a world of global competition keep this in mind when you think that your employer is not being fair. He is working in a world where to survive he has to make the best economic decisions to keep the business operating and competitive.

What can you do to change this and improve your situation? Learn new skills that makes your company more competitive. If you can show that your new skills bring value to the company then most employers will be willing to share that with you (remember it may take some time to actually realize revenue from your new skills). If they aren’t then maybe it is time to find a new employer. You can bring value by selling jobs, learning new skills that are in demand by current clients or by increasing efficiency and thereby reducing costs. If you are not willing to do anything then you really only have yourself to blame.

If you are feeling like a victim of the current recession my advice is to get up and do something about it. Learn something new, at no time in history has there been such valuable information available for free. Help make your company more competitive and you will come to realize that taking action is a much better path than dwelling on your perceived misfortune.

## Milton Friedman on Inflation

From “Free to Choose”, chapter 9

Below are Milton Friedman’s five simple truths regarding inflation.

1. Inflation is a monetary phenomenon arising from a more rapid increase in the quantity of money than in output (though, of course, the reasons for the increase in money may be various)
2. In today’s world government determines – or can determine – the quantity of money
3. There is only one cure for inflation: a slower rate of increase in the quantity of money
4. It takes time – measured in years, not months – for inflation to develop; it takes time for inflation to be cured.
5. Unpleasant side effects of the cure are unavoidable.

The United States has embarked on rising monetary growth four times during the past twenty years. Each time the higher monetary growth has been followed first by economic expansion, later by inflation. Each time the authorities have slowed monetary growth in order to stem inflation. Lower monetary growth has been followed by an inflationary recession. Later still, inflation has declined and the economy has improved. So far the sequence is identical with Japan’s experience from 1971 to 1975. Unfortunately, the crucial difference is that we have not displayed the patience Japan did by continuing monetary restraint long enough. Instead, we have overreacted to the recession by accelerating monetary growth, setting off on another round of inflation, and condemning ourselves to higher inflation plus higher unemployment.

We have been misled by a false dichotomy: inflation or unemployment. That option is an illusion. The real option is only whether we have higher unemployment as a result of higher inflation or as a temporary side effect of curing inflation.

In my view, we have and will have higher unemployment as a result of higher inflation. I think we are currently in the economic expansion from monetary growth. Based on comments earlier in the same chapter, increased monetary supply takes six to nine months to work its way through the system to increase economic growth and employment. Another 12 to 18 months elapse before the price level appreciates and inflation occurs or is speeded up.Given that a sharp increase in money supply started mid 2008, that would point to first quarter 2009 impact. This may be consistent with the above as we saw a market bottom in March 2009. So that would point to the end of the 1st quarter 2010 to the 2nd quarter 2010 to start seeing increased inflation.

Let’s see what happens.

Last night we went to the BMA Awards dinner, the keynote speaker was Keith Pigues. He gave a very good speech about delivering value. Here are a couple of the key points that I wanted to remember.

The top priorities for marketing companies should be to either increase their clients revenue or decrease their costs. This brings real value to their clients.

Don’t make up a need, build a product for that need and then try to sell that product. This is backwards! Figure out the need first, then create the product that fulfills that need. If it creates real value, then you will have no problem selling it.

Larger organizations are moving toward partnering with service providers so they have some “skin in the game”. This would mean setting some kind of base cost and then using a bonus structure that was based on specified measurements of the company’s performance. Seems like a good idea, but how does the service provider evaluate the client and all their other vendors to ensure they are pulling their own weight?

## Language Mismatch

One of the reasons that I believe communication between developers and non-developers is difficult is because developers must work in a world of specifics and details whereas a non-developer can casually neglect those details without even knowing they’ve been neglected.

For instance a non-developer says we need to allow users to log into this system. Easy enough, non-developer thinks his part is done. The developer looks at this requirement and thinks, is it a single users system? Will people register for this system? Is htaccess acceptable? Should it be a web based login? Etc. etc.

The above example is overly simplified and does not entirely show the mismatch. The only way to improve communications between the two groups is to ensure both groups understand how the other thinks. Without this understanding there will be tension that doesn’t necessarily need to exist.

The non-developer has most likely been educated in a less scientific and more abstract manner. This leads the non-developer to neglect details that are essential to any system designed to run on a computer that has to understand all paths through the system.

The developer on the other hand has to think about and understand all these paths to be able to build a system that fully functions. Always thinking about and contemplating whether or not the requirements are complete enough and whether they conflict with each other.

I believe the only way to resolve this mismatch is through educating both parties to be more understand of how the other must think. With this education maybe each party can move toward the others way of thinking enough to make the resulting system that much better.

A few questions to stimulate conversation for our business group.

1. Have you recently read any thing that may be of interest to the group?
2. Have you heard of anyone failing in business lately, what was the reason?
3. Have you heard of any business thriving lately, what was the cause?
4. Do you know of anyone that has lately done something worthwhile, what was it? Who has committed an error that we sho uld do our best to avoid?
5. Is there anything at present that we may do to help mankind, the country, our friends or ourselves?
6. Is there anyone you want to meet that the group can somehow arrange?
7. In what ways can the group assist you in your pursuit of success?
8. Do you have any ideas which would be a good fit for this group to execute?
9. Do you have any other questions that you feel should be added to this list?

## Entrepeneurial Lessons

In this post I will describe the lessons I learned from a failed start-up I was part of. It was a small company, underfunded and understaffed. We were naive and probably expected too much from too little work.

Need CEO leadership, responsible for final decisions It doesn’t seem to work to have multiple people as co-presidents (ceos). There needs to be an ultimate decision maker that is responsible for the company as a whole. This doesn’t mean that discussions and buy in aren’t necessary, just that someone has to be ultimately responsible and push to create action. With out these decisions and leadership there is limited action and none of it seems to be focused on the same mission.

Comitment is required, determining if someone is really committed or just riding along is the difficult part How do you determine if someone is committed to the company or just afraid of missing out? It is essential because someone uncommitted to the company will not provide the results required. Commitment means more than just doing your tasks, it means being proactive and trying to make the company better in all ways. It means trying to improve yourself so that you can better perform you tasks.

Everyone must wear many hats, somehow you have to figure out the value of the corresponding hat? If someone on the management team feels like someone else on the team is not performing as required then there will be issues.

Need performance measurement and consequences To avoid finding out too late that someone is not performing you need a way to measure results. If the measurements are showing weakness then you must act quickly to resolve the issue. If the issue cannot be resolved then that exec must be moved to tasks that can be performed to the appropriate levels or the exec must be replaced.

Ask for evidence on a claim before making decisions It is easy to make a claim, but much harder to provide real evidence of that claim. On any proposals ask what evidence they have supporting their claim. If it’s not real, they haven’t done their homework. Tell them to come back when they have evidence.

Money and cash flow management are essential Someone responsible must be in charge of money and cash flow management. This is the health of the business and if no one is handling this properly then a lot of other information is not going to be available and this information is required for proper analysis.

Financial analysis essential, what makes money, how much does it cost? How do you know what is making money and what is not? How do you compare what is more profitable to spend time on? Financial analysis is extremely important in business, it is the report card or medical report of the company, ignore it at your own peril.

Focus on one project at a time, ensure that projects success before attempting new opportunities There are always other opportunities, everything is always better than what your doing now. If you follow every opportunity you will never succeed at any. Focus on one at a time and you will be much more successful.

Have a mission, values and goals. Guide day to day operations by goals, create goals based on values and make sure your mission and values are consistent.

People don’t always deliver (almost always don’t) on their promises

It’s much easier for someone to talk about their expertise that to demonstrate it, measure on execution

Everything is easy until you are the one responsible for it

Assign responsibilities and hold people to them

If money is the only goal then the focus may be lacking or the persistence might not be there

Lots of ideas, not much follow through, again execution

Time management is important, are your partners spending time on the most important things? Are you?