- Aim for 0 to 1 improvements
- The dot-com bubble made people cautious of innovation and big thinking
- Competition is usually bad for a business
- Monopolies exaggerate their competition, competitive businesses exaggerate themselves
- The value of a business today is the sum of all the money it will make in the future
- Characteristics of a monopoly
- A business should always start with a very niche market
- People from 15th to 20th century believed that luck was to be mastered and dominated
- Definite and optimistic outlooks of life
- Diversification doesn’t work well in investing because great success follows a power law distribution
- Why do so many people today believe there are no secrets left to be discovered?
- Founding decisions and initial alignment in startups should be done very carefully
- Compensation in startups should align employee and company interests
- Create a strong culture by choosing people who work well together and love the company mission
- Why should the 20th employee join your company?
- You need a great distribution plan or your company will fail
- The seven questions every company must answer in order to succeed
- Great founders are usually extreme figures and odd people
Aim for 0 to 1 improvements
- Horizontal/extensive progress: Globalization. Taking an idea from 1 to n. Easier to imagine.
- Vertical progress: Technology. Taking an idea from 0 to 1. Hard to imagine, since it requires doing something that no one has done before.
The only field that has improved dramatically since mid-20th century is computers and communications. There are plenty opportunities in many fields waiting to be uncovered. You need a contrarian view to find them: What valuable company is nobody building?
The most contrarian thing is not to oppose the crowd, but to think for yourself.
Ali Abdaal also had a video on this. He made the point that investing in equipment, knowledge, experiences, etc. that you have never done before gives you much more than marginally improving upon existing things.
If you already have an iPhone X and it works fine, buying an iPhone 14 would take you from 1 to 1.1. if your main reason for buying the phone is a better camera. You’re better off buying a camera instead. The quality of a professional camera is unmatched compared to the quality of iPhone 14.
Of course there are contradicting arguments to be made:
- if you would end up not using the camera because it would be inconvenient to carry around, then obviously the new phone might be a better choice overall.
- if you keep learning new tools instead of mastering the ones you know, you will never become productive. Principles for software engineers and other makers.
It might also be applied to productivity and business I guess. Learning a new tool that does a job you could previously just couldn’t do, might be better than improving your workflow with a tool that you are already quite acquainted with?
The dot-com bubble made people cautious of innovation and big thinking
Dot-com bubble happened during a period where everything was pessimistic and in decline except computers and the internet. A lot of people were quitting well-paying jobs to found or join startups.
Effect of dot-com bubble burst on people’s outlook:
- treat the future as indefinite. dismiss long-term plans as extreme. Promote globalization stay away from technology.
- Silicon valley thinking after dot-com crash:
- incremental advances over grand visions
- be lean (unplanned) and flexible. planning is arrogant and rigid. iterate agnostically until it works.
- improve on competition. new markets are dangerous.
- focus on product development. sales and distribution will follow. advertising is wasteful.
This lead people away from Definite-and-optimistic-outlooks-of-life.
It is easy to see why the thinking is wrong, and the opposite principles make more sense. Some examples:
- Competition is usually bad for a business
Competition is usually bad for a business
In perfect competition, no company makes economic profit. Capitalism and competition are opposites: capitalism believes in the accumulation of capital and competition balances pricing such that profits are competed away.
Taking monopoly and perfect competition as two ends of the spectrum, we tend to think that most companies are somewhere in the middle. This is because both monopolies and competitive businesses have incentive to make it look like that: Monopolies exaggerate their competition, competitive businesses exaggerate themselves.
In reality, most businesses are much closer to either perfect competition or monopoly.
Monopolies can afford to think about things other than money because their profit margins are big. Competitions struggle to survive, so long-term planning is harder.
Everyday business language uses war metaphors: headcount, sales force, captive market. Competition is like war, but a great business shouldn’t be.
In competition you can lose sight of what matters and focus on what your rivals are doing instead. Microsoft and Google were waging war on each other: Google Search - Bing, Chrome - Edge, Surface - Chromebook. Winning is better than losing, but everyone loses in a war: Apple did its own thing and overtook both of them.
Creative monopoly: give customers more choices by adding new categories of abundance, rather than competing on existing ones.
Monopoly is a condition for a successful business: it succeeds when it can do something others cannot.
All successful companies are different, since they earn a monopoly by solving a unique problem. All failed companies are the same: they fail to escape competition.
The trend for “disruptive startups” is counterproductive since such startups see themselves through the eyes of the eyes of the old players in a market. They define themselves as competition. If your business can be summarized as a competition to existing markets, you’re probably not creating something new, and therefore it’s unlikely to become a monopoly. Also, disruptive companies gather attention, sometimes picking fights they can’t win. When expanding to adjacent markets, don’t disrupt. Frame your market in a way that avoids competition as long as possible.
Monopolies exaggerate their competition, competitive businesses exaggerate themselves
Monopolies lie to protect themselves. They try to conceal the monopoly, and exaggerate the power of their competition, to avoid unwanted (regulatory and media) attention. They frame their market as a union of several large markets to look smaller.
Competitive businesses exaggerate the difference of their company compared to competitors to differentiate themselves and exaggerate their (market) power. They define their market as an intersection of smaller markets to look big 1.
The value of a business today is the sum of all the money it will make in the future
Nightclubs and restaurants are extreme examples of competition. They are all the same, exaggerate minor differences, and fade into non-relevance once their trend period is over. They accumulate decent amounts of money today but their profits often dwindle over time.
Tech companies usually lose money for the first few years. Most of their value comes 10-15 years in the future. Therefore, a tech company must grow and endure. Most companies focus on growth, which is easily measurable, and forget durability. The most important question for a business is: will this company still be around a decade from now? To answer this you must think about the qualitative characteristics of your business, which are usually hard to measure.
Future cash flows should be discounted since money today is worth more than in the future.
Characteristics of a monopoly
- proprietary technology: A business needs 10x technological improvement to have real monopolistic advantage
- network effects: Network effects make a product more useful as more people use it. Your product needs to be valuable when the network is still small, otherwise it will never become a big network. Therefore network effect businesses must start with very small markets. Successful network effects businesses rarely get started from business people because the initial markets are so small that they don’t appear to be business opportunities at all.
- economies of scale: Economies of scale work best when the cost of production, distribution, operation etc. doesn’t scale with the customer base. Software startups are exemplary examples since producing copies of the product has near zero cost. Service businesses are hard to make monopolies since they are hard to scale.
- branding: A strong branding can be a powerful ace in claiming a monopoly. Branding only works with strong underlying substance. Apple has superior materials, hardware, better software integration etc. Their branding only binds and strengthens everything else.
A business should always start with a very niche market
Startups should start with a very, very niche market. When in doubt, it’s almost always better to start smaller. It’s much easier to reach a few thousand people who desperately need your product than compete for the attention of a million scattered individuals. Small market doesn’t mean nonexistent.
Go for a small market of concentrated people served by a few or no competitors. Large markets either lack a good starting point, or they are open to competition. Competition means marginal to no profits.
First dominate your niche market, and then you can scale up. Amazon started selling only books. Then they expanded to CDs, videos and software, which were similar markets. Today they sell everything. Expanding gradually and with the right sequence is hard and requires strong discipline.
Being the first to dominate a market is irrelevant to the success of your business. You want to be the last dominating: make a great improvement and enjoy monopolistic advantage for years/decades.
Dominate your tiny niche market first, and then scale up to your grand long-term vision. Similar to start helping today rather than dreaming of big big big - Anything you want, Derek Sivers.
People from 15th to 20th century believed that luck was to be mastered and dominated
Proving whether success is luck or skill is impossible since each person/company starts only once, and always in unique circumstances. If it is luck, “serial entrepreneurship” is not explainable. Successful people can create new things easier, but dismissing all planned success as luck or privilege (Matthew effect) seems indignant.
From 15th to 20th century (Renaissance, Enlightenment, Industrial Revolution), luck was something to be mastered, dominated and controlled. Everyone agreed that you should focus on what you can control, not what you can’t. People believed in making their own luck by working hard rather than focusing on possible misfortunes.
People who think they can control the future make concrete and definite plans: Definite-and-optimistic-outlooks-of-life. People who think the future is indefinite, diversify to be “prepared for everything”.
Definite and optimistic outlooks of life
Depending on one’s beliefs about the definiteness of the future, and their outlook (optimism/pessimism), we can have four different scenarios.
Indefinite pessimism: the future will be bad, and I have no idea what to do about it. A good example are Europeans: they react to things as they happen and hope things won’t get worse.
Definite pessimism: the future will be bad in a known way, and I need to prepare for it. An example is China: they have experienced intense poverty and can project how it looks like in the future. Therefore they work hard to avoid it. They copy everything that worked well in the West: capitalism, factories, skyscrapers.
Indefinite optimism: the future will be better but I don’t know how, so I make no plans. I strive to prepare for everything. An example is high-performing students today: they gain diversified general knowledge, and go on to work as consultants or banking investors, keeping their options open. This might be a byproduct of Baby Boomers born in the 50s: things got better every year of their early life, without them causing it through their actions. So they had great expectations and few plans.
Definite optimism: the future will be better, if I plan and work to make it so. People-from-15th-to-20th-century-believed-that-luck-was-to-be-mastered-and-dominated. Each generation’s inventors and visionaries until 1960s surpassed their predecessors. Today, great plans from unknown people are mocked and long-range visions from powerful people are considered hubris.
In an indefinite world, money is more valuable than what you can do with it, because it provides unlimited optionality. In a definite future, money is a means to an end.
In today’s philosophy, politics, and business, everyone glorifies processes and shies away from plans.
Indefinite optimism is the only view of the future that cannot work: how can the future get better if no one plans for it?
Side note on startups:
Lean startups that adapt and evolve in an ever-changing environment making minimum viable products and iterating to success are the hallmark of indefinite optimism: we don’t know what will work so let’s just try things and see what sticks. But why would you expect a business to succeed without a plan to make that happen?
Founders only sell when they have no concrete visions of the company. The acquirer usually under or overpays. Definite founders with robust plans don’t sell, because they know what they will do with their company.
Steve Jobs was a definite optimist. Above all, he was a grand designer. He planned everything meticulously.
Diversification doesn’t work well in investing because great success follows a power law distribution
Diversification for VC funds
Having a diversified portfolio as a VC fund doesn’t make sense since the companies you invest in don’t follow a normal distribution: a handful of companies will vastly outperform all others. The vast majority of startups fail, some have mediocre success and few take off. Power-law-is-omnipresent-in-human-society
One investment usually equals or outperforms the entire rest of the fund combined. Funds should only invest in companies that have the potential to return the value of the entire fund.
When you invest in 10 startups, they all will have similar trajectory initially. Only after 10 years you will be able to see the dominant investment. It’s easy to miss the power law, since it doesn’t reflect daily experience.
Diversification for everyone else
You shouldn’t necessarily start your own company. Too many people start their own companies. Joining the very best company while it’s growing fast and owning 2% can be much more profitable than owning 100% of your own unsuccessful company. Also, roles between companies are much more important than roles inside companies.
Why do so many people today believe there are no secrets left to be discovered?
To build something great, you need a secret: a hard to discover, unpopular, and correct belief. It has to be hard but not impossible, because then it’s a mystery (what happens when we approach a black hole? what happens after death?). Not easy because then many people can find it, and it’s not a secret anymore.
A lot of people today act as if there are no more secrets to be discovered. If everything worth doing has already been done, you throw in the towel, feign an allergy to achievement, and become a barista.
Fundamentalists think that there are easy truths that everyone knows, and the mysteries of God/the universe. The hard truths in between are heretic.
Why did people lose the wonder of secrets?
- Most of geographical exploration is finished. There are no blank spaces on the map left anymore.
- Incrementalism: Most social environments reinforce the idea that the right way to do things is one step at a time. If you overachieve, you don’t earn credit. If you do exactly what is asked of you, you get an A. If you publish a lot of papers (instead of discovering new science), you will get tenure track.
- Risk aversion: Being wrong is hard and annoying. If you are looking for secrets, it’s a lonely road since, by definition, you’re looking for something that most people don’t believe in. Believing in the wrong secret can be soul crashing: you’ll be wrong and lonely.
- Complacency: The welcoming message of most elite education institutions is something along the lines of “You managed to get in here, and you can now chill. You are set for life.”
- The world has become flat: Globalization increased competition to a level where it is discouraging to try
As a result, very few people take unorthodox ideas seriously today. As a cost for having less cults and conspiracy theories, we have given up our sense of wonder at secrets left to be discovered.
- What secrets is nature not telling you?
- What secrets are people not telling you?
- Look where no one else is looking
- are there any fields that matter but haven’t been standardized and institutionalized? Example: nutrition. Most research is old, and paid by companies to promote certain agendas.
You should keep secrets to yourself, and the few people who need to know. Unconventional beliefs are often crucified and shamed. A great company is a conspiracy to change the world, and everyone involved is a fellow conspirator.
Founding decisions and initial alignment in startups should be done very carefully
Making bad decisions at the founding phase of a startup is like writing a bad constitution for a country. It’s almost impossible to fix that along the way.
Choosing co-founders is like getting married, and founder conflict is as ugly as a divorce. Founders should have a solid pre-history, otherwise they’re just rolling dice.
Areas of alignment at founding of startups:
- Ownership: who owns the company’s equity?
- Possession: who runs the company day-to-day?
- Control: who governs the company’s affairs?
Distributing these functions among different people ensures utilization of different people’s strengths, but it also increases the opportunities for misalignment. Most conflicts in startups are between ownership and control: the founders, and investors on the board.
Ideal size of a board is 3 people. It should never exceed 5 people, unless the company is public, where government regulations mandate otherwise. Large boards increase misalignment, reduce accountability, and cover-up who actually runs things. The corollary to having small boards, is that it should be chosen very carefully, since misalignment between the board and the founders can be catastrophic.
The founding of a company lasts as long as the company keeps creating new things. When creation stops, so does the founding. Try to extend the venture’s founding as long as possible.
Compensation in startups should align employee and company interests
Anyone who doesn’t own stock options or get their main salary from your company is de-facto misaligned with your company’s vision.
- cash promotes employees claiming from the current company’s value, rather than incentivizing them to invest their time in increasing the future company’s value.
- cash bonus incentivizes performance, but still no interest in the future of the company
- equity incentivizes thinking of the future
It’s very hard to distribute equity fairly:
- Giving equal shares is wrong, since not everyone has equal impact.
- Giving different amounts upfront, is unfair, since noone has proven their impact yet.
- Early employees get more equity since they take more risk, but later employees might have more crucial contributions to the company’s success.
Solution to this problem: Keep equity details secret.
Side note: One of the clearest patterns observed from investing in startups is that a company does better the less it pays the CEO. No more than $150.000 at an early stage venture backed startup (the book is from 2014).
Create a strong culture by choosing people who work well together and love the company mission
Cultures don’t exist apart from their companies. A company doesn’t have a culture, it is a culture. A company is a group of people on a mission. Therefore, the people and how well do they work together is what defines the culture, and the success of a venture.
Hiring the most talented people and pitching them together is not sufficient. People should like working with each other. They should be passionate about the work they are doing. They should believe in the company’s mission. Hiring talented people that work well together and care about what they’re doing will take you much further than hiring the “best” who might view the job purely transactionally.
From outside of the company, all company’s employees should look different than all other employees, but similar to each other. A tribe of like-minded people devoted to the company’s mission.
Inside of the company, everyone should have sharply distinguished roles. Each employee should have one thing they’re responsible for, and know that they’ll be evaluated only on that thing. This increases accountability, and eliminates competition. This way, employees build relationships that far transcend mere professionalism.
You want your team to have an almost cult-like spirit. Cults are groups of people who are usually fanatically wrong about something. A good startup is a team of people who are fanatically right about something people outside have missed. The extreme opposite of cults are consulting firms: the company lacks a discriminative mission on its own, and employees drop in and out with no long-term connection to the company.
Why should the 20th employee join your company?
The first people who will join the company will do so because they will have great equity and important roles. Why should the 20th employee join your company? Talented people don’t need to work for you, they have plenty of options. Why should one work for you when they can work for Google for more safety, money, and prestige?
The only good answers to this question are specific to your team, and have to do with your team, and your mission. Avoid the perk war at all cost. Anyone who will prefer the perks against the people and the mission is misaligned. You can’t beat Google’s offering in 2014 but you can be like Google in 1999.
Everyone underestimates sales because no one likes to be sold and sales tries hard to stay hidden
Customers will not come just because you built a product. You need to sell it. And You-need-a-great-distribution-plan-or-your-company-will-fail.
We don’t like salesmen because their priority is persuasion, not sincerity. No one likes being sold. But we only react to obvious and awkward salesmen, the bad ones. Great salesmen sell without you even noticing you’re being sold.
Sales works best when hidden. This is why job titles related with sales, have nothing to do with sales.
- account executives: sell advertising
- business development: sell customers
- investment bankers: sell companies
- politicians: sell themselves
The most fundamental reason that everyone underestimates the importance of sales is the systematic effort to hide it at every level of every field in a world driven by it.
Everyone wants to believe that we make up our own minds, and sales doesn’t work on us. But everybody around us is selling.
Apart from the product, your company needs to sell to investors and employees. There are equivalent lies for these markets to the lies that the company tells about it’s product. To employees: “this company is so great that everyone will want to join it”. To investors: “this company will be so valuable that all investors will want to get shares”. Selling the company to the media is necessary for selling it to everyone else.
You need a great distribution plan or your company will fail
If you have invented something and you haven’t invented a good way to sell it, you have a bad business, no matter how good is the product. Everyone-underestimates-sales-because-no-one-likes-to-be-sold-and-sales-tries-hard-to-stay-hidden.
Superior sales and distribution can create a monopoly even for a non-differentiated product. A superior differentiated product with bad sales and distribution cannot, and will probably fail. Most common cause of failure for companies is poor sales because of bad distribution, not a bad product.
Customer lifetime value (CLV): total net profit earned on average over the course of your relationship with the customer.
Customer acquisition cost (CAC): amount you spend on average to acquire a new customer.
As a general principle, the higher the value of the product, the more you have to spend to make a sale.
- Complex sales ~ O($10M): Every deal requires close personal attention. It takes months to develop the right relationships. You make sales every couple of years. They are hard. Customers want to talk to the CEO, not VP of sales. They succeed if they achieve 50-100% year-to-year growth over a decade. Example: SpaceX, Palantir.
- Personal sales ~ O($10K - $100K): The challenge lies in establishing a process by which a sales team of modest size can move the product to a wide audience.
- Dead zone ~ O($100 - $10K): Personal sales efforts are not justified, and traditional marketing is not enough. Most small businesses lie in here. They are small because distribution is the hidden bottleneck.
- Marketing & Advertising ~ O($100): Nike, Apple, etc.
- Viral marketing ~ O($1): A product whose core functionality encourages users to invite their friends to become users too. Should be as quick and frictionless as possible. Whoever is the first to dominate the most important segment of a market with viral potential will be the last mover in the whole market for several years (PayPal, social media platforms, messaging platforms).
Like in everywhere else, the power law is true for sales too. One distribution method will be far more powerful than any other for a given business. You need to get one distribution method to work perfectly for your business to survive.
The seven questions every company must answer in order to succeed
- Engineering: can you create a breakthrough technology rather than incremental improvements? A business needs 10x technological improvement to have real monopolistic advantage
- Timing: is now the right time to start your particular business? Keep in mind: entering a slow moving market can be a good strategy, if and only if you have a definite and realistic plan to take it over.
- Monopoly: are you starting with a big share of a small market? A business should always start with a very niche market. The trap to avoid here is exaggerating your own uniqueness: Monopolies exaggerate their competition competitive businesses exaggerate themselves. If you run a solar company that owns 10% of US solar energy market, it sounds cool. You are 1% of the global solar energy market though, and 0.02% of renewable energy market. This is not a market you can dominate.
- People: do you have the right team? Create-a-strong-culture-by-choosing-people-who-work-well-together-and-love-the-company-mission. If the CEO walks around with suit and tie, it’s a red flag. There’s nothing wrong about a CEO who can sell, but a CEO who looks like a salesman is probably bad at sales and worse at tech.
- Distribution: do you have a way to deliver your product? You-need-a-great-distribution-plan-or-your-company-will-fail.
- Durability: will your market position be defensible 10 years into the future? You should be the last mover. Ask what will the world look like 10 years from now, and how does your company fit in.
- Secret: have you identified a unique opportunity that others don’t see?
Great founders are usually extreme figures and odd people
( #TODO: the bell curves are nice here)
Companies that create new technology often resemble feudal monarchies rather than modern organizations. Powerful founders can make authoritative decisions, inspire strong personal loyalty, and plan ahead for decades.
We should be more tolerant of founders who seem strange or extreme. We need unusual individuals who can lead companies beyond incrementalism, towards innovation.
Founders are important not because they are the only ones whose work has value, but rather because of their ability to bring out the best work from everyone in their company.
Prominence and adulation cannot be enjoyed without the possibility of it being exchanged for notoriety and demonization at any moment.
The greatest danger for a founder is to become deluded by their own myth (sell themselves what they’re selling to everyone else), and lose their mind.