Learning from Book: Zero to One by Peter Thiel. Part-1

I recently had a chance to read the book "Zero to One" by Peter Thiel. While the book appears to be on building successful startups, it has a lot of wisdom on looking at business, evaluating them and how to look at your career.

In the first part of this post I have tried to cover learning from the first 7 chapters of the book. The key points are given as per each chapter basis my limited understanding.

1. Preface
   1. Every moment in business happens once. That is why great business are built by finding value at unexpected places. These business solve problem using first principles and deriving learnings from multiple points.
2. The Challenge of Future
   1. To build great things in future you have to find or do things which lead to vertical progress and technology is for that. Extrapolating it to people you want to find people who can answer question " what important truth very few people agree with you". Difficult to answer since it means probably it will be an unpopular answer ( Brilliant thinking is rare, but courage is in even shorter supply that genius). Similar when u look at product u might need to think unpopular. Being Popular means u copy and break the concept of every moment in biz happens once. Example, copying Facebook or google will be incremental not vertical 0 to 1 growth.
   2. Deriving from above a startup is the largest group of people you can convince to build a different future. We can use this in investing to evaluate next big idea stock idea.
   3. The above paras kind of summarize why 0 to 1 is so difficult. It is about finding unpopular truth, then finding people for it and then probably tech to solve it.
3. Party like its 1999
   1. Learn from past. First step in good decision making is to think what we know about past. These are the 4 lessons learnt from dot-com bubble, but probably applicable for any business. Also, important for investors to evaluate management on these dimensions.
      1. Make incremental advances--> Grand visions often don't work or attract competition. make incremental steps, conquer one battle at a time.
         1. Stay lean and flexible--> Paramount in today's age as planning seldom works these days. ( Mike Tyson: Your plan is good, till you get punched in face). Also beware of arrogance arising out of plans. Example, remember the CAPEX's gone bad basis those perfect XL sheet plans
      2. Improve on competition--> Don't try to second guess customer. Look at an existing customer, find the poor solution, then improve it and monopolize it
      3. Focus on product, not sales--> though i don't completely agree as it should be balanced, but focus on product. After all that is what ur core solution is.
   2. Our default assumption is that contrarian means going against the crowd. Being contrarian is not to oppose crowd but to think for yourself.
4. All happy companies are different
   1. All happy companies are different in the sense they create monopolies which by definition can't be same as other.They solve unique problems. The trick is that due to business environment they will seldom say or portray they are monopolies. Example google says its revenue is ad sales which is a tiny portion of overall ad industry. Yet it has solved a unique problem. It has built a VALUABLE business which nobody is building or cant build. In investments this is what is separating wheat from chaff. Also links with the mental model that in traditional low value industries few companies create monopolies. 
   2. On other hand most companies who are run of mill will say they are different from competition and have a unique positioning. 
   3. Good example: Airlines. All biggies claimed they were unique and different, but it was south-west which created a monopoly.
5. The Ideology of competition
   1. Competition for the sake of it is futile. The less we compete the more we gain. That is what game theory proved. Example, Pepsi and Coke. Instead of fighting wars now they play the price game in tandem. Both price products at same cost and raise prices at same cost. . Shakespearean thought on war that all combatants are similar and often in war forget about why they are fighting cause there is nothing to fight about. In business happens often. Google and Microsoft fought OS/Browser wars and Apple came and changed the landscape itself. 
   2. Unfortunately our education system makes us think that beating competition is the only way out.Similarly, inside organizations people keep fighting for advancement without realizing that they are not on 0 to 1 path.
   3. As an investor we need to look at companies whose promoters think fighting competition is the most destructive activity. They either partner competition (refer Sun Tzu) or find a niche where people can partner them not compete with them
6. The last mover advantage
   1. A very counter intuitive thinking. First mover means you create a monopoly but it can be transient. Its a matter of time that someone comes and attacks you. The other inverted approach is move last in a specific market where needs are visible and then enjoy years of monopoly profit. From an investor perspective it often means that company might lose or may not be profitable initially, but can be immensely profitable later. And as investors that is what we should care about. Cashflows of future long out not the very near ones. Links to the bias of being attracted to whats nearby
   2. Once a company is last mover it needs to create a moat to keep generating profit. Links to Buffet on moat definition. This can be done using Proprietary Tech, Network Effect, Economies of Scale, Branding. Very similar thought process shared by Pat Dorsey.
   3. Bringing it together, to build a monopoly start with small specific segment. Don't disrupt and avoid competition at all costs. "If your company can be summed by its opposition to already existing firms then it can't be new and probably not a monopoly. So,monopolize this small segment and then move ahead. This movement ahead can be unpredictable but you need so scale in slightly broader markets where your tools of monopoly ( tech, network effect etc) still work
7. You are not a lottery ticket
   1. Again counter intuitive and contradicting to earlier idea of staying lean. He says that we are now overestimating role of luck. We use it as an excuse to defer definite planning. The thought process works if the company has managed to find the segment it wants to monopolize. It can then make small plans and not grandiose ones which we often hear.
   2. Investment thought, " A Business with a good definite plan will always be underrated in a world where future is seen as random". Powerful idea.
   3. Key I think is balance between appreciating role of luck and planning.

The Worst Bet You Can Make

The realization of this bet came to me when i met a friend of mine over at lunch. So here it goes.

You work in an a great company and have  had a healthy career. The ultimate success metric for you is becoming the CEO/Head of the company. 

For this you spend a lot of time probably much more that others do. In this path sometimes you miss out on things you want to do. Miss out thinking what is your passion. 

And as your skill enhances, as you grow higher you get more confident of achieving this goal. 

Now lets for a moment lets step aside and look at this goal mathematically.

• Approx number of companies you would want to be CEO/Head=  5000
• Approx number of people who are employed in all these= 50 lacs
• Approx number of people who you think have similar capabilities as you (5%) = 2.5 lacs
• Chance of you becoming a CEO= 0.2% ( 5000/2.5 lacs)

If you are a poker player or investor considering the odds how much time and money will you put on this bet? To my mind playing this bet is one of the worst bets you will undertake.

IMHO, don't play this bet. Do things that you enjoy. Enhance your skills. Enjoy the process and don't be obsessed over winning this losing bet.

And if you want to play this bet, then loads of luck from my side, cause that is what you will need in loads.

cheers.

PS- Apologies for not declaring upfront that this is not an investment blog :)

The "WHY" Mental Model

I was thinking  of  writing on this topic after after I saw this lecture on TED by Simon Sinek and then read his book. 

The trigger came after reading this paragraph in Kiran's superb blog 

1) Owner’s View: Look at every business from the owner’s standpoint. What motivates the owner? What are 1 or 2 key factors that the owner  understands that bring value to the business? How will the owner react in adverse conditions? That’s absolutely critical to value the business. .

So here goes my rant :) 

The Traditional way of evaluating a business has this flow:-

• What's of the business/Evaluation of outcomes- To quote Simon Sinek all business know what they are doing. They know are selling cars, homes, pipes, IT services etc etc. These "what's" are evaluated using metrics like Revenue, Profits, Growth Rates etc
• How's of the business/ Levers of business - We then try to evaluate the levers of business like the domains in which business competes, which products sell where, what are their weaknesses, Moats etc etc. These " how's" are evaluated using metrics like Return on capital, Return on Assets, cash flow etc.
• By this time our investment decisions is almost made and we typically look for confirming evidence. Very rarely will we go to the next step of 
• Why's of the business/ Purpose of business- This is the domain where things become grey and fuzzy. This is where we need to think of words like Trust, Loyalty, Vision etc. There are no metrics to evaluate these. Think of a stock in your portfolio and ask can you measure the trust or loyalty generated by it. Its a tricky one to answer. And therefore most of the times this is ignored.

To summarize, we start with what are the outcomes of business, then try to identify how they are achieved and then pretty much stop.

The new way of thinking prescribed by Simon Sinek is to invert this process:

• Start with the "WHY"- Try to identify the purpose of existence of a company. Great enduring businesses know this crystal clear and all their actions are defined basis that. Few examples
• Apple- The founders gene was to rebel and almost all their products reflect that
• Coke- All along the single message they have tried to convey is Coke stands for happiness. Look at any campaign, product , communication and its always has this philosophy
• Google- Do no evil. Again every single google product tries to do this. Every communication to their hiring page reflects this

From a business perspective this defines the way it creates space in its customers mind.                   We ( can say for most of us) trust Google, We ( can't say for most in India) love every apple               product.

Their "WHY's" have resonated with their customers to create an unflinching loyalty.     

I realized while reading few Buffet letter that how rarely does he comment on metrics related               to How and What of business. Most of the times he comments on "Why" and things associated           with it like Trust, Loyalty, Belief etc

• The "How" is next- This is where we start to look at how business is trying to achieve the why. Spends on moats, technology, asset turns, RoE etc etc
• The "What" is last- This is where we evaluate if the How's are working. 

For me this has been a great mental model to use. Now I try to find the "WHY" of business using

• Mission/Vision Statements
• AR Commentary on these statements, if any
• Promoter interviews
• Scuttlebutt to see how these are translated at ground level for companies

Earlier I would ignore these portions. Now, I read them and try to see if its just  jargon or does the business actually try to follow it. If its jargon then for me that becomes almost like a no-go criterion.  

In some cases these statements will be so obfuscated that you just can't figure out the WHY. To me that is also a no-go.

As of now with my limited experience I see the clarity of "WHY" beautifully displayed in few businesses which i own.

Look forward to more suggestions on finding the "WHY" :)

cheers,

Saurabh

PS- The stocks mentioned above are held by me. This is not a recommendation to buy or sell any stock.