Zero to One - Book Review

When a risk taker writes a book, read it. In the case of Peter Thiel, read it twice. Or, to be safe, three times. This is a classic.

- Nassim Nicholas Taleb

Zero to One is written by legendary venture capitalist Peter Thiel on building companies and forward looking thinking. Half this book is on business/investing and the other half is on startups. Most of the points below are from the first half of his book. I recommend this as a fine book to own and read in your investment toolkit.

Below are the top 3 takeaways I have that are useful for us to have as investors.

1. What is technology, what is zero to one?

• Technology is any new and better ways of doing things.
• 0 to 1 involves vertical progress while horizontal progress involves copying new things. An example of the former would be having a typewriter and building a word processor. The latter would be taking a typewriter and building another 100 more.

Reflection 1: As investors looking towards the future, technology is definitely a key component of what powers a startup. 

• One should consider how Apple didn’t invent the mp3 (Creative did) but they made it better and from that ecosystem of music came many other wonderful things from a platform of software distribution. Today, music is just one element on the device we call iPhone. 
• What the iPod/iTunes did was create a new and better way of hitching onto the value chain of music distribution and origination creating what is today known as a network effect / flywheel effect (suppliers coming on board with their products because of large customer base and more customers coming on board because of the wide product offering).

2. Competition is not ideal. What you want is a monopoly.

• Competition is good for the consumer but as investors, the monopoly is what generates the dollars because of pricing power and it also allows you to maintain and develop good products to maintain that edge.
• An example of this in the technology world is the battle between Microsoft and Google. Windows v Chrome OS, Bing v Google search, Explorer v Docs, Surface v Nexus etc.
• Competition is costly. The war costed Microsoft and Google their dominance as Apple came along and overtook them. By Jan 2013, Apple was worth US$500B while Microsoft and Google were US$467B combined.

Reflection 2: Focusing on the competition will not give you a great product, focusing on customers does. Additionally, avoid crowded fights (red ocean) and seek out blue oceans (W Chan Kim) to find super normal profits.

3. The moats that make a monopoly (my favourite chapter) 

Peter list 4 moats that matter

i. Proprietary Technology

Technology that nobody else has that can meet and serve the customer needs. Be it through patent protection, secret formulas or complex algorithms that are hard to replicate.

ii. Network effects

Value of a business increases as more customers are on boarded.

iii. Economies of Scale

Fixed Cost of products are spread across a higher volume allowing the company to have an advantage in cost and therefore pricing to win market share.

iv. Branding

A strong brand attracts a following and this creates a repeated consumption pattern that can be measured in lifetime customer value.

A business value of a company is the cash flows generated between now and judgement day discounted at the appropriate rate and probability (how sure are you) - paraphrased from Warren Buffett.

• Frame in this manner, a company with high cashflow but in decline is certainly not an ideal company because the cashflow gets less over time. I can think of printed newspaper advertising as an example.
• On the other hand, a business with tremendous cashflow ahead but making a little money now is what could be a very valuable company. An example quoted was LinkedIn where the cashflow was only expected 5-10 years down the road.

And the reason for this high level of cashflow growth is related to the 4 moats mentioned above. They have a differentiating value proposition to solve and meet the customer’s needs taking market share and being the best.

Reflection 3: Look for signs of pricing power by identifying if companies have 1 or more of the 4 moats of a monopoly. Take a position and be patient.

----------------

Bonus point: Attending a conference the other day and listening to GGV Capital Jenny Lee (a Singaporean who has done very well in the VC space). The management also matters. Because an entrepreneur may be able to take a company from 0 to 1. But from 1 to 10, that may require a different skillset. (And I remember the two Google founders Sergey Brin and Larry Page hiring Eric Schidmt to be CEO very early on). 

Management is after all, a good source of where future moats could come from.

Invest well.