Power Law and Concentrated Bets
Scope: The power-law argument in Zero to One and its prescription: concentrate on the few outcomes that can dominate, in venture portfolios and in personal careers. The one-line “power law” quotations are in Peter Thiel’s profile; this article covers the reasoning around them.
The Argument
Venture returns do not follow a bell curve. Thiel writes that “venture returns don’t follow a normal distribution overall. Rather, they follow a power law: a small handful of companies radically outperform all others.”
Why Diversification Fails Here
The “spray and pray” strategy is the target:
“But this “spray and pray” approach usually produces an entire portfolio of flops, with no hits at all.”
His reasoning is that diversification guarantees missing the rare outliers: “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 prescription for investors: “VCs must find the handful of companies that will successfully go from 0 to 1 and then back them with every resource.”
Extension to Founders and Individuals
Thiel applies the same logic to the person:
“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.”
This links to his portrait of the definite person who becomes “a monopoly of one” (see Definite Optimism and Planning), and to the contrarian prompt that anchors the book: “what important truth do very few people agree with you on?”
The Compounding Companion
The power law rests on growth that compounds, hence “never underestimate exponential growth.” A monopoly business also “gets stronger as it gets bigger,” because fixed costs spread over more sales (see Monopoly and Competition Avoidance and Scalability).
Same shape, different scale
Concentration appears at three levels in the highlights: the fund (back the few winners), the founder (one company, not dozens), and the individual (one career, not a reserve of options). The common error Thiel names is treating optionality as safety when it is really indefiniteness.
Related Concepts
- definite-optimism-and-planning — why concentration needs a concrete plan
- monopoly-and-competition-avoidance — what the winners in a power-law distribution tend to be
- scalability — the economics that produce extreme outcomes