Zero to One: Notes on Startups, or How to Build the Future

Metadata

• Title: Zero to One: Notes on Startups, or How to Build the Future
• Author: Peter Thiel and Blake Masters
• Book URL: https://www.amazon.com/dp/B00J6YBOFQ
• Open in Kindle: kindle://book/?action=open&asin=B00J6YBOFQ
• Last Updated on: Thursday, October 1, 2026

Highlights & Notes

Of course, it’s easier to copy a model than to make something new. Doing what we already know how to do takes the world from 1 to n, adding more of something familiar. But every time we create something new, we go from 0 to 1. The act of creation is singular, as is the moment of creation, and the result is something fresh and strange.

humans are distinguished from other species by our ability to work miracles. We call these miracles technology.

by creating new technologies, we rewrite the plan of the world.

Indeed, the single most powerful pattern I have noticed is that successful people find value in unexpected places, and they do this by thinking about business from first principles instead of formulas.

WHENEVER I INTERVIEW someone for a job, I like to ask this question: “What important truth do very few people agree with you on?”

HENEVER I INTERVIEW someone for a job, I like to ask this question: “What important truth do very few people agree with you on?”

Brilliant thinking is rare, but courage is in even shorter supply than genius.

No one can predict the future exactly, but we know two things: it’s going to be different, and it must be rooted in today’s world. Most answers to the contrarian question are different ways of seeing the present; good answers are as close as we can come to looking into the future.

When we think about the future, we hope for a future of progress. That progress can take one of two forms. Horizontal or extensive progress means copying things that work—going from 1 to n. Horizontal progress is easy to imagine because we already know what it looks like. Vertical or intensive progress means doing new things—going from 0 to 1. Vertical progress is harder to imagine because it requires doing something nobody else has ever done. If you take one typewriter and build 100, you have made horizontal progress. If you have a typewriter and build a word processor, you have made vertical progress.

At the macro level, the single word for horizontal progress is globalization—taking things that work somewhere and making them work everywhere.

The single word for vertical, 0 to 1 progress is technology

any new and better way of doing things is technology.

But I don’t think that’s true. My own answer to the contrarian question is that most people think the future of the world will be defined by globalization, but the truth is that technology matters more. Without technological change, if China doubles its energy production over the next two decades, it will also double its air pollution. If every one of India’s hundreds of millions of households were to live the way Americans already do—using only today’s tools—the result would be environmentally catastrophic. Spreading old ways to create wealth around the world will result in devastation, not riches. In a world of scarce resources, globalization without new technology is unsustainable.

Today our challenge is to both imagine and create the new technologies that can make the 21st century more peaceful and prosperous than the 20th.

it’s hard to develop new things in big organizations, and it’s even harder to do it by yourself.

In the most dysfunctional organizations, signaling that work is being done becomes a better strategy for career advancement than actually doing work (if this describes your company, you should quit now).

Startups operate on the principle that you need to work with other people to get stuff done, but you also need to stay small enough so that you actually can.

Positively defined, a startup is the largest group of people you can convince of a plan to build a different future. A new company’s most important strength is new thinking: even more important than nimbleness, small size affords space to think.

what a startup has to do: question received ideas and rethink business from scratch.

what does everybody agree on?

If you can identify a delusional popular belief, you can find what lies hidden behind it: the contrarian truth.

The first step to thinking clearly is to question what we think we know about the past.

1. Make incremental advances

2. Stay lean and flexible

3. Improve on the competition

4. Focus on product, not sales

the opposite principles are probably more correct: 1. It is better to risk boldness than triviality. 2. A bad plan is better than no plan. 3. Competitive markets destroy profits. 4. Sales matters just as much as product.

1. It is better to risk boldness than triviality. 2. A bad plan is better than no plan. 3. Competitive markets destroy profits. 4. Sales matters just as much as product.

how much of what you know about business is shaped by mistaken reactions to past mistakes? The most contrarian thing of all is not to oppose the crowd but to think for yourself.

THE BUSINESS VERSION of our contrarian question is: what valuable company is nobody building? This question is harder than it looks, because your company could create a lot of value without becoming very valuable itself. Creating value is not enough—you also need to capture some of the value you create.

“Perfect competition” is considered both the ideal and the default state in Economics 101. So-called perfectly competitive markets achieve equilibrium when producer supply meets consumer demand. Every firm in a competitive market is undifferentiated and sells the same homogeneous products. Since no firm has any market power, they must all sell at whatever price the market determines. If there is money to be made, new firms will enter the market, increase supply, drive prices down, and thereby eliminate the profits that attracted them in the first place. If too many firms enter the market, they’ll suffer losses, some will fold, and prices will rise back to sustainable levels. Under perfect competition, in the long run no company makes an economic profit.

The opposite of perfect competition is monopoly. Whereas a competitive firm must sell at the market price, a monopoly owns its market, so it can set its own prices. Since it has no competition, it produces at the quantity and price combination that maximizes its profits.

by “monopoly,” we mean the kind of company that’s so good at what it does that no other firm can offer a close substitute.

Americans mythologize competition and credit it with saving us from socialist bread lines. Actually, capitalism and competition are opposites. Capitalism is premised on the accumulation of capital, but under perfect competition all profits get competed away. The lesson for entrepreneurs is clear: if you want to create and capture lasting value, don’t build an undifferentiated commodity business.

The fatal temptation is to describe your market extremely narrowly so that you dominate it by definition.

In business, money is either an important thing or it is everything. Monopolists can afford to think about things other than making money; non-monopolists can’t. In perfect competition, a business is so focused on today’s margins that it can’t possibly plan for a long-term future. Only one thing can allow a business to transcend the daily brute struggle for survival: monopoly profits.

But the world we live in is dynamic: it’s possible to invent new and better things. Creative monopolists give customers more choices by adding entirely new categories of abundance to the world. Creative monopolies aren’t just good for the rest of society; they’re powerful engines for making it better.

Creative monopolists give customers more choices by adding entirely new categories of abundance to the world. Creative monopolies aren’t just good for the rest of society; they’re powerful engines for making it better.

But it’s clear that something like Apple’s monopoly profits from designing, producing, and marketing the iPhone were the reward for creating greater abundance, not artificial scarcity: customers were happy to finally have the choice of paying high prices to get a smartphone that actually works.

Monopolies drive progress because the promise of years or even decades of monopoly profits provides a powerful incentive to innovate. Then monopolies can keep innovating because profits enable them to make the long-term plans and to finance the ambitious research projects that firms locked in competition can’t dream of.

in business, equilibrium means stasis, and stasis means death. If your industry is in a competitive equilibrium, the death of your business won’t matter to the world; some other undifferentiated competitor will always be ready to take your place.

In the real world outside economic theory, every business is successful exactly to the extent that it does something others cannot. Monopoly is therefore not a pathology or an exception. Monopoly is the condition of every successful business.

Monopoly is therefore not a pathology or an exception. Monopoly is the condition of every successful business.

All happy companies are different: each one earns a monopoly by solving a unique problem. All failed companies are the same: they failed to escape competition.

CREATIVE MONOPOLY means new products that benefit everybody and sustainable profits for the creator. Competition means no profits for anybody, no meaningful differentiation, and a struggle for survival.

War is costly business. Rivalry causes us to overemphasize old opportunities and slavishly copy what has worked in the past.

Competition can make people hallucinate opportunities where none exist.

Winning is better than losing, but everybody loses when the war isn’t one worth fighting.

If you can’t beat a rival, it may be better to merge.

But in February 2000, Elon and I were more scared about the rapidly inflating tech bubble than we were about each other: a financial crash would ruin us both before we could finish our fight. So in early March we met on neutral ground—a café almost exactly equidistant to our offices—and negotiated a 50-50 merger.

Sometimes you do have to fight. Where that’s true, you should fight and win. There is no middle ground: either don’t throw any punches, or strike hard and end it quickly.

anyone would fight for things that matter; true heroes take their personal honor so seriously they will fight for things that don’t matter.

ESCAPING COMPETITION will give you a monopoly, but even a monopoly is only a great business if it can endure in the future.

SCAPING COMPETITION will give you a monopoly, but even a monopoly is only a great business if it can endure in the future.

But a great business is defined by its ability to generate cash flows in the future.

Simply stated, the value of a business today is the sum of all the money it will make in the future. (To properly value a business, you also have to discount those future cash flows to their present worth, since a given amount of money today is worth more than the same amount in the future.)

Technology companies follow the opposite trajectory. They often lose money for the first few years: it takes time to build valuable things, and that means delayed revenue. Most of a tech company’s value will come at least 10 to 15 years in the future.

For a company to be valuable it must grow and endure, but many entrepreneurs focus only on short-term growth. They have an excuse: growth is easy to measure, but durability isn’t.

If you focus on near-term growth above all else, you miss the most important question you should be asking: will this business still be around a decade from now?

What does a company with large cash flows far into the future look like? Every monopoly is unique, but they usually share some combination of the following characteristics: proprietary technology, network effects, economies of scale, and branding.

Proprietary technology is the most substantive advantage a company can have because it makes your product difficult or impossible to replicate.

As a good rule of thumb, proprietary technology must be at least 10 times better than its closest substitute in some important dimension to lead to a real monopolistic advantage. Anything less than an order of magnitude better will probably be perceived as a marginal improvement and will be hard to sell, especially in an already crowded market.

Network effects make a product more useful as more people use it. For example, if all your friends are on Facebook, it makes sense for you to join Facebook, too. Unilaterally choosing a different social network would only make you an eccentric. Network effects can be powerful, but you’ll never reap them unless your product is valuable to its very first users when the network is necessarily small.

Paradoxically, then, network effects businesses must start with especially small markets.

This is why successful network businesses rarely get started by MBA types: the initial markets are so small that they often don’t even appear to be business opportunities at all.

A monopoly business gets stronger as it gets bigger: the fixed costs of creating a product (engineering, management, office space) can be spread out over ever greater quantities of sales. Software startups can enjoy especially dramatic economies of scale because the marginal cost of producing another copy of the product is close to zero.

A good startup should have the potential for great scale built into its first design.

A company has a monopoly on its own brand by definition, so creating a strong brand is a powerful way to claim a monopoly.

Beginning with brand rather than substance is dangerous.

Brand, scale, network effects, and technology in some combination define a monopoly; but to get them to work, you need to choose your market carefully and expand deliberately.

Every monopoly dominates a large share of its market. Therefore, every startup should start with a very small market.

It was much easier to reach a few thousand people who really needed our product than to try to compete for the attention of millions of scattered individuals.

The perfect target market for a startup is a small group of particular people concentrated together and served by few or no competitors. Any big market is a bad choice, and a big market already served by competing companies is even worse.

cutthroat competition means your profits will be zero.

The most successful companies make the core progression—to first dominate a specific niche and then scale to adjacent markets—a part of their founding narrative.

But if you truly want to make something new, the act of creation is far more important than the old industries that might not like what you create. Indeed, if your company can be summed up by its opposition to already existing firms, it can’t be completely new and it’s probably not going to become a monopoly.

As you craft a plan to expand to adjacent markets, don’t disrupt: avoid competition as much as possible.

You’ve probably heard about “first mover advantage”: if you’re the first entrant into a market, you can capture significant market share while competitors scramble to get started. But moving first is a tactic, not a goal. What really matters is generating cash flows in the future, so being the first mover doesn’t do you any good if someone else comes along and unseats you. It’s much better to be the last mover—that is, to make the last great development in a specific market and enjoy years or even decades of monopoly profits. The way to do that is to dominate a small niche and scale up from there, toward your ambitious long-term vision. In this one particular at least, business is like chess. Grandmaster José Raúl Capablanca put it well: to succeed, “you must study the endgame before everything else.”

“Shallow men believe in luck, believe in circumstances.… Strong men believe in cause and effect.”

No one pretended that misfortune didn’t exist, but prior generations believed in making their own luck by working hard.

Learning about startups is worthless if you’re just reading stories about people who won the lottery.

If you treat the future as something definite, it makes sense to understand it in advance and to work to shape it. But if you expect an indefinite future ruled by randomness, you’ll give up on trying to master it.

Indefinite attitudes to the future explain what’s most dysfunctional in our world today. Process trumps substance: when people lack concrete plans to carry out, they use formal rules to assemble a portfolio of various options.

a definite person determines the one best thing to do and then does it. Instead of working tirelessly to make herself indistinguishable, she strives to be great at something substantive—to be a monopoly of one.

An indefinite pessimist looks out onto a bleak future, but he has no idea what to do about it.

To a definite optimist, the future will be better than the present if he plans and works to make it better.

big plans for the future have become archaic curiosities.

To an indefinite optimist, the future will be better, but he doesn’t know how exactly, so he won’t make any specific plans.

Finance epitomizes indefinite thinking because it’s the only way to make money when you have no idea how to create wealth.

money is more valuable than anything you could possibly do with it. Only in a definite future is money a means to an end, not the end itself.

Modern polling enables politicians to tailor their image to match preexisting public opinion exactly, so for the most part, they do.

However, in exchange for better insurance contracts, we seem to have given up the search for secrets about longevity.

Today our society is permeated by the twin ideas that death is both inevitable and random.

But U.S. households are saving almost nothing. And U.S. companies are letting cash pile up on their balance sheets without investing in new projects because they don’t have any concrete plans for the future.

Definite optimism works when you build the future you envision. Definite pessimism works by building what can be copied without expecting anything new. Indefinite pessimism works because it’s self-fulfilling: if you’re a slacker with low expectations, they’ll probably be met. But indefinite optimism seems inherently unsustainable: how can the future get better if no one plans for it?

progress without planning is what we call “evolution.”

But leanness is a methodology, not a goal. Making small changes to things that already exist might lead you to a local maximum, but it won’t help you find the global maximum. You could build the best version of an app that lets people order toilet paper from their iPhone. But iteration without a bold plan won’t take you from 0 to 1. A company is the strangest place of all for an indefinite optimist: why should you expect your own business to succeed without a plan to make it happen? Darwinism may be a fine theory in other contexts, but in startups, intelligent design works best.

Darwinism may be a fine theory in other contexts, but in startups, intelligent design works best.

Forget “minimum viable products”—ever since he started Apple in 1976, Jobs saw that you can change the world through careful planning, not by listening to focus group feedback or copying others’ successes.

Long-term planning is often undervalued by our indefinite short-term world.

founders only sell when they have no more concrete visions for the company, in which case the acquirer probably overpaid; definite founders with robust plans don’t sell, which means the offer wasn’t high enough. When Yahoo! offered to buy Facebook for $1 billion in July 2006, I thought we should at least consider it. But Mark Zuckerberg walked into the board meeting and announced: “Okay, guys, this is just a formality, it shouldn’t take more than 10 minutes. We’re obviously not going to sell here.” Mark saw where he could take the company, and Yahoo! didn’t. A business with a good definite plan will always be underrated in a world where people see the future as random.

When Yahoo! offered to buy Facebook for $1 billion in July 2006, I thought we should at least consider it. But Mark Zuckerberg walked into the board meeting and announced: “Okay, guys, this is just a formality, it shouldn’t take more than 10 minutes. We’re obviously not going to sell here.” Mark saw where he could take the company, and Yahoo! didn’t. A business with a good definite plan will always be underrated in a world where people see the future as random.

A startup is the largest endeavor over which you can have definite mastery. You can have agency not just over your own life, but over a small and important part of the world. It begins by rejecting the unjust tyranny of Chance. You are not a lottery ticket.

• @sergeiw @gabrielhdm

never underestimate exponential growth.

And monopoly businesses capture more value than millions of undifferentiated competitors.

we don’t live in a normal world; we live under a power law.

But this “spray and pray” approach usually produces an entire portfolio of flops, with no hits at all. This is because venture returns don’t follow a normal distribution overall. Rather, they follow a power law: a small handful of companies radically outperform all others. If you focus on diversification instead of single-minded pursuit of the very few companies that can become overwhelmingly valuable, you’ll miss those rare companies in the first place.

The biggest secret in venture capital is that the best investment in a successful fund equals or outperforms the entire rest of the fund combined.

VCs must find the handful of companies that will successfully go from 0 to 1 and then back them with every resource.

After all, less than 1% of new businesses started each year in the U.S. receive venture funding, and total VC investment accounts for less than 0.2% of GDP. But the results of those investments disproportionately propel the entire economy. Venture-backed companies create 11% of all private sector jobs. They generate annual revenues equivalent to an astounding 21% of GDP.

An entrepreneur cannot “diversify” herself: you cannot run dozens of companies at the same time and then hope that one of them works out well. Less obvious but just as important, an individual cannot diversify his own life by keeping dozens of equally possible careers in ready reserve.

It does matter what you do. You should focus relentlessly on something you’re good at doing, but before that you must think hard about whether it will be valuable in the future.

The most important things are singular: One market will probably be better than all others, as we discussed in Chapter 5. One distribution strategy usually dominates all others, too—for that see Chapter 11. Time and decision-making themselves follow a power law, and some moments matter far more than others—see Chapter 9. However, you can’t trust a world that denies the power law to accurately frame your decisions for you, so what’s most important is rarely obvious.

Remember our contrarian question: what important truth do very few people agree with you on?

Contrarian thinking doesn’t make any sense unless the world still has secrets left to give up.

You can achieve difficult things, but you can’t achieve the impossible.

Recall the business version of our contrarian question: what valuable company is nobody building? Every correct answer is necessarily a secret: something important and unknown, something hard to do but doable. If there are many secrets left in the world, there are probably many world-changing companies yet to be started.

1. Goals that can be satisfied with minimal effort; 2. Goals that can be satisfied with serious effort; and 3. Goals that cannot be satisfied, no matter how much effort one makes. This is the classic trichotomy of the easy, the hard, and the impossible.

All fundamentalists think this way, not just terrorists and hipsters. Religious fundamentalism, for example, allows no middle ground for hard questions: there are easy truths that children are expected to rattle off, and then there are the mysteries of God, which can’t be explained. In between—the zone of hard truths—lies heresy. In the modern religion of environmentalism, the easy truth is that we must protect the environment. Beyond that, Mother Nature knows best, and she cannot be questioned. Free marketeers worship a similar logic. The value of things is set by the market. Even a child can look up stock quotes. But whether those prices make sense is not to be second-guessed; the market knows far more than you ever could.

Second is risk aversion. People are scared of secrets because they are scared of being wrong. By definition, a secret hasn’t been vetted by the mainstream. If your goal is to never make a mistake in your life, you shouldn’t look for secrets. The prospect of being lonely but right—dedicating your life to something that no one else believes in—is already hard. The prospect of being lonely and wrong can be unbearable.

Why search for a new secret if you can comfortably collect rents on everything that has already been done?

This voice of doubt can dissuade people from even starting to look for secrets in a world that seems too big a place for any individual to contribute something unique.

We can be glad that there are fewer crazy cults now, yet that gain has come at great cost: we have given up our sense of wonder at secrets left to be discovered.

If you think something hard is impossible, you’ll never even start trying to achieve it. Belief in secrets is an effective truth.

The actual truth is that there are many more secrets left to find, but they will yield only to relentless searchers.

But we will never learn any of these secrets unless we demand to know them and force ourselves to look.

The same is true of business. Great companies can be built on open but unsuspected secrets about how the world works.

only by believing in and looking for secrets could you see beyond the convention to an opportunity hidden in plain sight. The same reason that so many internet companies, including Facebook, are often underestimated—their very simplicity—is itself an argument for secrets. If insights that look so elementary in retrospect can support important and valuable businesses, there must remain many great companies still to start.

There are two kinds of secrets: secrets of nature and secrets about people. Natural secrets exist all around us; to find them, one must study some undiscovered aspect of the physical world. Secrets about people are different: they are things that people don’t know about themselves or things they hide because they don’t want others to know. So when thinking about what kind of company to build, there are two distinct questions to ask: What secrets is nature not telling you? What secrets are people not telling you?

Secrets about people are relatively underappreciated. Maybe that’s because you don’t need a dozen years of higher education to ask the questions that uncover them: What are people not allowed to talk about? What is forbidden or taboo?

The best place to look for secrets is where no one else is looking. Most people think only in terms of what they’ve been taught; schooling itself aims to impart conventional wisdom. So you might ask: are there any fields that matter but haven’t been standardized and institutionalized?

Most of the big studies were done 30 or 40 years ago, and most are seriously flawed. The food pyramid that told us to eat low fat and enormous amounts of grains was probably more a product of lobbying by Big Food than real science; its chief impact has been to aggravate our obesity epidemic.

The few who knew what might be learned, Foolish enough to put their whole heart on show, And reveal their feelings to the crowd below, Mankind has always crucified and burned.

Unless you have perfectly conventional beliefs, it’s rarely a good idea to tell everybody everything that you know. So who do you tell? Whoever you need to, and no more. In practice, there’s always a golden mean between telling nobody and telling everybody—and that’s a company. The best entrepreneurs know this: every great business is built around a secret that’s hidden from the outside. A great company is a conspiracy to change the world; when you share your secret, the recipient becomes a fellow conspirator.

The best entrepreneurs know this: every great business is built around a secret that’s hidden from the outside. A great company is a conspiracy to change the world; when you share your secret, the recipient becomes a fellow conspirator.

The road doesn’t have to be infinite after all. Take the hidden paths.

“Thiel’s law”: a startup messed up at its foundation cannot be fixed

As a founder, your first job is to get the first things right, because you cannot build a great company on a flawed foundation.

When you start something, the first and most crucial decision you make is whom to start it with. Choosing a co-founder is like getting married, and founder conflict is just as ugly as divorce. Optimism abounds at the start of every relationship. It’s unromantic to think soberly about what could go wrong, so people don’t. But if the founders develop irreconcilable differences, the company becomes the victim.

Now when I consider investing in a startup, I study the founding teams. Technical abilities and complementary skill sets matter, but how well the founders know each other and how well they work together matter just as much. Founders should share a prehistory before they start a company together—otherwise they’re just rolling dice.

And indeed, “if men were angels, no government would be necessary.”

You need good people who get along, but you also need a structure to help keep everyone aligned for the long term.

To anticipate likely sources of misalignment in any company, it’s useful to distinguish between three concepts: • Ownership: who legally owns a company’s equity? • Possession: who actually runs the company on a day-to-day basis? • Control: who formally governs the company’s affairs?

A typical startup allocates ownership among founders, employees, and investors. The managers and employees who operate the company enjoy possession. And a board of directors, usually comprising founders and investors, exercises control.

Financial upside from part ownership attracts and rewards investors and workers. Effective possession motivates and empowers founders and employees—it means they can get stuff done. Oversight from the board places managers’ plans in a broader perspective.

Unlike corporate giants, early-stage startups are small enough that founders usually have both ownership and possession. Most conflicts in a startup erupt between ownership and control—that is, between founders and investors on the board.

In the boardroom, less is more. The smaller the board, the easier it is for the directors to communicate, to reach consensus, and to exercise effective oversight.

This is why it’s crucial to choose wisely: every single member of your board matters. Even one problem director will cause you pain, and may even jeopardize your company’s future.

A board of three is ideal. Your board should never exceed five people, unless your company is publicly held.

If you want an effective board, keep it small.

As a general rule, everyone you involve with your company should be involved full-time. Sometimes you’ll have to break this rule; it usually makes sense to hire outside lawyers and accountants, for example. However, anyone who doesn’t own stock options or draw a regular salary from your company is fundamentally misaligned. At the margin, they’ll be biased to claim value in the near term, not help you create more in the future. That’s why hiring consultants doesn’t work. Part-time employees don’t work. Even working remotely should be avoided, because misalignment can creep in whenever colleagues aren’t together full-time, in the same place, every day. If you’re deciding whether to bring someone on board, the decision is binary. Ken Kesey was right: you’re either on the bus or off the bus.

That’s why hiring consultants doesn’t work. Part-time employees don’t work. Even working remotely should be avoided, because misalignment can creep in whenever colleagues aren’t together full-time, in the same place, every day. If you’re deciding whether to bring someone on board, the decision is binary. Ken Kesey was right: you’re either on the bus or off the bus.

• @sergeiw

A company does better the less it pays the CEO—that’s one of the single clearest patterns I’ve noticed from investing in hundreds of startups. In no case should a CEO of an early-stage, venture-backed startup receive more than $150,000peryearinsalary.Itdoesn’tmatterifhegotusedtomakingmuchmorethanthatatGoogleorifhehasalargemortgageandheftyprivateschooltuitionbills.IfaCEOcollects$300,000 per year, he risks becoming more like a politician than a founder. High pay incentivizes him to defend the status quo along with his salary, not to work with everyone else to surface problems and fix them aggressively. A cash-poor executive, by contrast, will focus on increasing the value of the company as a whole.

In no case should a CEO of an early-stage, venture-backed startup receive more than $150,000peryearinsalary.Itdoesn’tmatterifhegotusedtomakingmuchmorethanthatatGoogleorifhehasalargemortgageandheftyprivateschooltuitionbills.IfaCEOcollects$300,000 per year, he risks becoming more like a politician than a founder. High pay incentivizes him to defend the status quo along with his salary, not to work with everyone else to surface problems and fix them aggressively. A cash-poor executive, by contrast, will focus on increasing the value of the company as a whole.

However, high cash compensation teaches workers to claim value from the company as it already exists instead of investing their time to create new value in the future. A cash bonus is slightly better than a cash salary—at least it’s contingent on a job well done. But even so-called incentive pay encourages short-term thinking and value grabbing. Any kind of cash is more about the present than the future.

Startups don’t need to pay high salaries because they can offer something better: part ownership of the company itself. Equity is the one form of compensation that can effectively orient people toward creating value in the future.

Equity is a powerful tool precisely because of these limitations. Anyone who prefers owning a part of your company to being paid in cash reveals a preference for the long term and a commitment to increasing your company’s value in the future. Equity can’t create perfect incentives, but it’s the best way for a founder to keep everyone in the company broadly aligned.

The most valuable kind of company maintains an openness to invention that is most characteristic of beginnings. This leads to a second, less obvious understanding of the founding: it lasts as long as a company is creating new things, and it ends when creation stops. If you get the founding moment right, you can do more than create a valuable company: you can steer its distant future toward the creation of new things instead of the stewardship of inherited success. You might even extend its founding indefinitely.

“Company culture” doesn’t exist apart from the company itself: no company has a culture; every company is a culture. A startup is a team of people on a mission, and a good culture is just what that looks like on the inside.

Why work with a group of people who don’t even like each other? Many seem to think it’s a sacrifice necessary for making money. But taking a merely professional view of the workplace, in which free agents check in and out on a transactional basis, is worse than cold: it’s not even rational.

From the start, I wanted PayPal to be tightly knit instead of transactional. I thought stronger relationships would make us not just happier and better at work but also more successful in our careers even beyond PayPal. So we set out to hire people who would actually enjoy working together. They had to be talented, but even more than that they had to be excited about working specifically with us. That was the start of the PayPal Mafia.

Recruiting is a core competency for any company. It should never be outsourced. You need people who are not just skilled on paper but who will work together cohesively after they’re hired.

Talented people don’t need to work for you; they have plenty of options. You should ask yourself a more pointed version of the question: Why would someone join your company as its 20th engineer when she could go work at Google for more money and more prestige?

General and undifferentiated pitches don’t say anything about why a recruit should join your company instead of many others. The only good answers are specific to your company, so you won’t find them in this book. But there are two general kinds of good answers: answers about your mission and answers about your team. You’ll attract the employees you need if you can explain why your mission is compelling: not why it’s important in general, but why you’re doing something important that no one else is going to get done. That’s the only thing that can make its importance unique.

From the outside, everyone in your company should be different in the same way.

What makes a startup employee instantly distinguishable to outsiders is the branded T-shirt or hoodie that makes him look the same as his co-workers. The startup uniform encapsulates a simple but essential principle: everyone at your company should be different in the same way—a tribe of like-minded people fiercely devoted to the company’s mission.

On the inside, every individual should be sharply distinguished by her work.

The best thing I did as a manager at PayPal was to make every person in the company responsible for doing just one thing. Every employee’s one thing was unique, and everyone knew I would evaluate him only on that one thing. I had started doing this just to simplify the task of managing people. But then I noticed a deeper result: defining roles reduced conflict. Most fights inside a company happen when colleagues compete for the same responsibilities.

defining roles reduced conflict. Most fights inside a company happen when colleagues compete for the same responsibilities.

Internal conflict is like an autoimmune disease: the technical cause of death may be pneumonia, but the real cause remains hidden from plain view.

The best startups might be considered slightly less extreme kinds of cults. The biggest difference is that cults tend to be fanatically wrong about something important. People at a successful startup are fanatically right about something those outside it have missed. You’re not going to learn those kinds of secrets from consultants, and you don’t need to worry if your company doesn’t make sense to conventional professionals. Better to be called a cult—or even a mafia.

The Field of Dreams conceit is especially popular in Silicon Valley, where engineers are biased toward building cool stuff rather than selling it. But customers will not come just because you build it. You have to make that happen, and it’s harder than it looks.

• @gabrielhdm

But advertising doesn’t exist to make you buy a product right away; it exists to embed subtle impressions that will drive sales later.

In engineering disciplines, a solution either works or it fails. You can evaluate someone else’s work with relative ease, as surface appearances don’t matter much. Sales is the opposite: an orchestrated campaign to change surface appearances without changing the underlying reality. This strikes engineers as trivial if not fundamentally dishonest.

What nerds miss is that it takes hard work to make sales look easy.

none of us wants to be reminded when we’re being sold.

It’s better to think of distribution as something essential to the design of your product. If you’ve invented something new but you haven’t invented an effective way to sell it, you have a bad business—no matter how good the product.

Superior sales and distribution by itself can create a monopoly, even with no product differentiation. The converse is not true. No matter how strong your product—even if it easily fits into already established habits and anybody who tries it likes it immediately—you must still support it with a strong distribution plan.

Two metrics set the limits for effective distribution. The total net profit that you earn on average over the course of your relationship with a customer (Customer Lifetime Value, or CLV) must exceed the amount you spend on average to acquire a new customer (Customer Acquisition Cost, or CAC).

Complex sales works best when you don’t have “salesmen” at all. Palantir, the data analytics company I co-founded with my law school classmate Alex Karp, doesn’t employ anyone separately tasked with selling its product. Instead, Alex, who is Palantir’s CEO, spends 25 days a month on the road, meeting with clients and potential clients. Our deal sizes range from $1millionto$100 million. At that price point, buyers want to talk to the CEO, not the VP of Sales.

Businesses with complex sales models succeed if they achieve 50% to 100% year-over-year growth over the course of a decade.

Good enterprise sales strategy starts small, as it must: a new customer might agree to become your biggest customer, but they’ll rarely be comfortable signing a deal completely out of scale with what you’ve sold before. Once you have a pool of reference customers who are successfully using your product, then you can begin the long and methodical work of hustling toward ever bigger deals.

Most sales are not particularly complex: average deal sizes might range between $10,000and$100,000, and usually the CEO won’t have to do all the selling himself. The challenge here isn’t about how to make any particular sale, but how to establish a process by which a sales team of modest size can move the product to a wide audience.

Distribution Doldrums In between personal sales (salespeople obviously required) and traditional advertising (no salespeople required) there is a dead zone. Suppose you create a software service that helps convenience store owners track their inventory and manage ordering. For a product priced around $1,000,theremightbenogooddistributionchanneltoreachthesmallbusinessesthatmightbuyit.Evenifyouhaveaclearvalueproposition,howdoyougetpeopletohearit?Advertisingwouldeitherbetoobroad(there’snoTVchannelthatonlyconveniencestoreownerswatch)ortooinefficient(onitsown,anadinConvenienceStoreNewsprobablywon’tconvinceanyownertopartwith$1,000 a year). The product needs a personal sales effort, but at that price point, you simply don’t have the resources to send an actual person to talk to every prospective customer. This is why so many small and medium-sized businesses don’t use tools that bigger firms take for granted. It’s not that small business proprietors are unusually backward or that good tools don’t exist: distribution is the hidden bottleneck.

Marketing and advertising work for relatively low-priced products that have mass appeal but lack any method of viral distribution.

Advertising can work for startups, too, but only when your customer acquisition costs and customer lifetime value make every other distribution channel uneconomical.

No early-stage startup can match big companies’ advertising budgets. Captain Kirk truly is in a league of his own.

A product is viral if its core functionality encourages users to invite their friends to become users too.

Whoever is first to dominate the most important segment of a market with viral potential will be the last mover in the whole market.

But the kitchen sink approach—employ a few salespeople, place some magazine ads, and try to add some kind of viral functionality to the product as an afterthought—doesn’t work. Most businesses get zero distribution channels to work: poor sales rather than bad product is the most common cause of failure. If you can get just one distribution channel to work, you have a great business. If you try for several but don’t nail one, you’re finished.

Your company needs to sell more than its product. You must also sell your company to employees and investors.

But just as you can never expect people to buy a superior product merely on its obvious merits without any distribution strategy, you should never assume that people will admire your company without a public relations strategy.

Nerds might wish that distribution could be ignored and salesmen banished to another planet. All of us want to believe that we make up our own minds, that sales doesn’t work on us. But it’s not true. Everybody has a product to sell—no matter whether you’re an employee, a founder, or an investor. It’s true even if your company consists of just you and your computer. Look around. If you don’t see any salespeople, you’re the salesperson.

But that premise is wrong: computers are complements for humans, not substitutes. The most valuable businesses of coming decades will be built by entrepreneurs who seek to empower people rather than try to make them obsolete.

Americans fear technology in the near future because they see it as a replay of the globalization of the near past. But the situations are very different: people compete for jobs and for resources; computers compete for neither.

people compete for jobs and for resources; computers compete for neither.

People don’t just compete to supply labor; they also demand the same resources.

On the supply side, computers are far more different from people than any two people are different from each other: men and machines are good at fundamentally different things. People have intentionality—we form plans and make decisions in complicated situations. We’re less good at making sense of enormous amounts of data. Computers are exactly the opposite: they excel at efficient data processing, but they struggle to make basic judgments that would be simple for any human.

And that’s the point: computers are tools, not rivals.

Properly understood, technology is the one way for us to escape competition in a globalizing world. As computers become more and more powerful, they won’t be substitutes for humans: they’ll be complements.

the computer would flag the most suspicious transactions on a well-designed user interface, and human operators would make the final judgment as to their legitimacy.

I continued to think about this after we sold PayPal in 2002: if humans and computers together could achieve dramatically better results than either could attain alone, what other valuable businesses could be built on this core principle?

Better technology in law, medicine, and education won’t replace professionals; it will allow them to do even more.

The other buzzword that epitomizes a bias toward substitution is “big data.” Today’s companies have an insatiable appetite for data, mistakenly believing that more data always creates more value. But big data is usually dumb data. Computers can find patterns that elude humans, but they don’t know how to compare patterns from different sources or how to interpret complex behaviors. Actionable insights can only come from a human analyst (or the kind of generalized artificial intelligence that exists only in science fiction).

• @gabrielhdm @sergeiw

But the most valuable companies in the future won’t ask what problems can be solved with computers alone. Instead, they’ll ask: how can computers help humans solve hard problems?

As we find new ways to use computers, they won’t just get better at the kinds of things people already do; they’ll help us to do what was previously unimaginable.

Most cleantech companies crashed because they neglected one or more of the seven questions that every business must answer: 1. The Engineering Question Can you create breakthrough technology instead of incremental improvements? 2. The Timing Question Is now the right time to start your particular business? 3. The Monopoly Question Are you starting with a big share of a small market? 4. The People Question Do you have the right team? 5. The Distribution Question Do you have a way to not just create but deliver your product? 6. The Durability Question Will your market position be defensible 10 and 20 years into the future? 7. The Secret Question Have you identified a unique opportunity that others don’t see?

A great technology company should have proprietary technology an order of magnitude better than its nearest substitute.

it’s hard to recover from a radically inferior starting point.

Companies must strive for 10x better because merely incremental improvements often end up meaning no improvement at all for the end user.

Only when your product is 10x better can you offer the customer transparent superiority.

Entering a slow-moving market can be a good strategy, but only if you have a definite and realistic plan to take it over.

Customers won’t care about any particular technology unless it solves a particular problem in a superior way.

Exaggerating your own uniqueness is an easy way to botch the monopoly question.

But you can’t dominate a submarket if it’s fictional, and huge markets are highly competitive, not highly attainable.

But the ambiguity in the word “social” is even more of a problem: if something is

The most obvious clue was sartorial: cleantech executives were running around wearing suits and ties. This was a huge red flag, because real technologists wear T-shirts and jeans. So we instituted a blanket rule: pass on any company whose founders dressed up for pitch meetings.

But the team insight—never invest in a tech CEO that wears a suit—got us to the truth a lot faster. The best sales is hidden. There’s nothing wrong with a CEO who can sell, but if he actually looks like a salesman, he’s probably bad at sales and worse at tech.

selling and delivering a product is at least as important as the product itself.

Every entrepreneur should plan to be the last mover in her particular market. That starts with asking yourself: what will the world look like 10 and 20 years from now, and how will my business fit in?

Great companies have secrets: specific reasons for success that other people don’t see.

Whatever is good enough to receive applause from all audiences can only be conventional, like the general idea of green energy.

Doing something different is what’s truly good for society—and it’s also what allows a business to profit by monopolizing a new market. The best projects are likely to be overlooked, not trumpeted by a crowd; the best problems to work on are often the ones nobody else even tries to solve.

Most companies underestimate distribution, but Tesla took it so seriously that it decided to own the entire distribution chain. Other car companies are beholden to independent dealerships: Ford and Hyundai make cars, but they rely on other people to sell them. Tesla sells and services its vehicles in its own stores.

An entrepreneur can’t benefit from macro-scale insight unless his own plans begin at the micro-scale.

No sector will ever be so important that merely participating in it will be enough to build a great company.

Normally we expect opposite traits to be mutually exclusive: a normal person can’t be both rich and poor at the same time, for instance. But it happens all the time to founders: startup CEOs can be cash poor but millionaires on paper. They may oscillate between sullen jerkiness and appealing charisma. Almost all successful entrepreneurs are simultaneously insiders and outsiders. And when they do succeed, they attract both fame and infamy.

Before she joined the club in 2011, Amy Winehouse sang: “They tried to make me go to rehab, but I said, ‘No, no, no.’ ” Maybe rehab seemed so unattractive because it blocked the path to immortality. Perhaps the only way to be a rock god forever is to die an early death.

Jobs’s return to Apple 12 years later shows how the most important task in business—the creation of new value—cannot be reduced to a formula and applied by professionals.

Apple’s value crucially depended on the singular vision of a particular person. This hints at the strange way in which the companies that create new technology often resemble feudal monarchies rather than organizations that are supposedly more “modern.” A unique founder can make authoritative decisions, inspire strong personal loyalty, and plan ahead for decades. Paradoxically, impersonal bureaucracies staffed by trained professionals can last longer than any lifetime, but they usually act with short time horizons.

The lesson for business is that we need founders. If anything, we should be more tolerant of founders who seem strange or extreme; we need unusual individuals to lead companies beyond mere incrementalism.

Above all, don’t overestimate your own power as an individual. Founders are important not because they are the only ones whose work has value, but rather because a great founder can bring out the best work from everybody at his company. That we need individual founders in all their peculiarity does not mean that we are called to worship Ayn Randian “prime movers” who claim to be independent of everybody around them. In this respect Rand was a merely half-great writer: her villains were real, but her heroes were fake. There is no Galt’s Gulch. There is no secession from society. To believe yourself invested with divine self-sufficiency is not the mark of a strong individual, but of a person who has mistaken the crowd’s worship—or jeering—for the truth. The single greatest danger for a founder is to become so certain of his own myth that he loses his mind. But an equally insidious danger for every business is to lose all sense of myth and mistake disenchantment for wisdom.

We cannot take for granted that the future will be better, and that means we need to work to create it today.

Whether we achieve the Singularity on a cosmic scale is perhaps less important than whether we seize the unique opportunities we have to do new things in our own working lives. Everything important to us—the universe, the planet, the country, your company, your life, and this very moment—is singular.

The essential first step is to think for yourself. Only by seeing our world anew, as fresh and strange as it was to the ancients who saw it first, can we both re-create it and preserve it for the future.