Copyright © 2014 by Peter Thiel

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Library of Congress Cataloging-in-Publication Data
Thiel, Peter A.
Zero to one: notes on startups, or how to build the future / Peter Thiel with Blake Masters.
pages cm
1. New business enterprises. 2. New products. 3. Entrepreneurship. 4. Diffusion of innovations. I. Title.
HD62.5.T525 2014
685.11—dc23 2014006653
Hardcover ISBN: 978-0-8041-3929-8
eBook ISBN: 978-0-8041-3930-4
Book design by Ralph Fowler / rlfdesign
Graphics by Rodrigo Corral Design
Illustrations by Matt Buck
Cover design by Michael Nagin
Additional credits appear on this page, which constitutes a continuation of this copyright page.
v3.1
 Contents
Preface: Zero to One
1 The Challenge of the Future
2 Party Like It’s 1999
3 All Happy Companies Are Different
4 The Ideology of Competition
5 Last Mover Advantage
6 You Are Not a Lottery Ticket
7 Follow the Money
8 Secrets
9 Foundations
10 The Mechanics of Mafia
11 If You Build It, Will They Come?
12 Man and Machine
13 Seeing Green
14 The Founder’s Paradox
Conclusion: Stagnation or Singularity?

Acknowledgments
Illustration Credits
Index
About the Authors
 Preface
ZERO TO ONE
E happens only once. The next Bill Gates will not build an operating
VERY MOMENT IN BUSINESS

system. The next Larry Page or Sergey Brin won’t make a search engine. And the next
Mark Zuckerberg won’t create a social network. If you are copying these guys, you
aren’t learning from them.
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.
Unless they invest in the difficult task of creating new things, American companies
will fail in the future no matter how big their profits remain today. What happens when
we’ve gained everything to be had from fine-tuning the old lines of business that we’ve
inherited? Unlikely as it sounds, the answer threatens to be far worse than the crisis of
2008. Today’s “best practices” lead to dead ends; the best paths are new and untried.
In a world of gigantic administrative bureaucracies both public and private, searching
for a new path might seem like hoping for a miracle. Actually, if American business is
going to succeed, we are going to need hundreds, or even thousands, of miracles. This
would be depressing but for one crucial fact: humans are distinguished from other
species by our ability to work miracles. We call these miracles technology.
Technology is miraculous because it allows us to do more with less, ratcheting up our
fundamental capabilities to a higher level. Other animals are instinctively driven to build
things like dams or honeycombs, but we are the only ones that can invent new things and
better ways of making them. Humans don’t decide what to build by making choices from
some cosmic catalog of options given in advance; instead, by creating new technologies,
we rewrite the plan of the world. These are the kind of elementary truths we teach to
second graders, but they are easy to forget in a world where so much of what we do is
repeat what has been done before.
Zero to One is about how to build companies that create new things. It draws on
everything I’ve learned directly as a co-founder of PayPal and Palantir and then an
investor in hundreds of startups, including Facebook and SpaceX. But while I have
noticed many patterns, and I relate them here, this book offers no formula for success.
The paradox of teaching entrepreneurship is that such a formula necessarily cannot exist;
because every innovation is new and unique, no authority can prescribe in concrete terms
how to be innovative. 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.
This book stems from a course about startups that I taught at Stanford in 2012. College
students can become extremely skilled at a few specialties, but many never learn what to
do with those skills in the wider world. My primary goal in teaching the class was to help
my students see beyond the tracks laid down by academic specialties to the broader
future that is theirs to create. One of those students, Blake Masters, took detailed class
notes, which circulated far beyond the campus, and in Zero to One I have worked with
him to revise the notes for a wider audience. There’s no reason why the future should
happen only at Stanford, or in college, or in Silicon Valley.
1
 THE CHALLENGE OF THE FUTURE
W I
HENEVER someone for a job, I like to ask this question: “What important truth do
INTERVIEW

very few people agree with you on?”

This question sounds easy because it’s straightforward. Actually, it’s very hard to
answer. It’s intellectually difficult because the knowledge that everyone is taught in
school is by definition agreed upon. And it’s psychologically difficult because anyone
trying to answer must say something she knows to be unpopular. Brilliant thinking is
rare, but courage is in even shorter supply than genius.
Most commonly, I hear answers like the following:

“Our educational system is broken and urgently needs to be fixed.”

“America is exceptional.”

“There is no God.”
Those are bad answers. The first and the second statements might be true, but many
people already agree with them. The third statement simply takes one side in a familiar
debate. A good answer takes the following form: “Most people believe in x, but the truth
is the opposite of x.” I’ll give my own answer later in this chapter.
What does this contrarian question have to do with the future? In the most minimal
sense, the future is simply the set of all moments yet to come. But what makes the future
distinctive and important isn’t that it hasn’t happened yet, but rather that it will be a time
when the world looks different from today. In this sense, if nothing about our society
changes for the next 100 years, then the future is over 100 years away. If things change
radically in the next decade, then the future is nearly at hand. 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.
 ZERO TO ONE: THE FUTURE OF PROGRESS
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. China is the
paradigmatic example of globalization; its 20-year plan is to become like the United
States is today. The Chinese have been straightforwardly copying everything that has
worked in the developed world: 19th-century railroads, 20th-century air conditioning,
and even entire cities. They might skip a few steps along the way—going straight to
wireless without installing landlines, for instance—but they’re copying all the same.
The single word for vertical, 0 to 1 progress is technology. The rapid progress of
information technology in recent decades has made Silicon Valley the capital of
“technology” in general. But there is no reason why technology should be limited to
computers. Properly understood, any new and better way of doing things is technology.
 Because globalization and technology are different modes of progress, it’s possible to
have both, either, or neither at the same time. For example, 1815 to 1914 was a period of
both rapid technological development and rapid globalization. Between the First World
War and Kissinger’s trip to reopen relations with China in 1971, there was rapid
technological development but not much globalization. Since 1971, we have seen rapid
globalization along with limited technological development, mostly confined to IT.
This age of globalization has made it easy to imagine that the decades ahead will bring
more convergence and more sameness. Even our everyday language suggests we believe
in a kind of technological end of history: the division of the world into the so-called
developed and developing nations implies that the “developed” world has already
achieved the achievable, and that poorer nations just need to catch up.
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.
New technology has never been an automatic feature of history. Our ancestors lived in
static, zero-sum societies where success meant seizing things from others. They created
new sources of wealth only rarely, and in the long run they could never create enough to
save the average person from an extremely hard life. Then, after 10,000 years of fitful
advance from primitive agriculture to medieval windmills and 16th-century astrolabes,
the modern world suddenly experienced relentless technological progress from the
advent of the steam engine in the 1760s all the way up to about 1970. As a result, we
have inherited a richer society than any previous generation would have been able to
imagine.
 Any generation excepting our parents’ and grandparents’, that is: in the late 1960s,
they expected this progress to continue. They looked forward to a four-day workweek,
energy too cheap to meter, and vacations on the moon. But it didn’t happen. The
smartphones that distract us from our surroundings also distract us from the fact that our
surroundings are strangely old: only computers and communications have improved
dramatically since midcentury. That doesn’t mean our parents were wrong to imagine a
better future—they were only wrong to expect it as something automatic. 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.
 STARTUP THINKING
New technology tends to come from new ventures—startups. From the Founding Fathers
in politics to the Royal Society in science to Fairchild Semiconductor’s “traitorous
eight” in business, small groups of people bound together by a sense of mission have
changed the world for the better. The easiest explanation for this is negative: it’s hard to
develop new things in big organizations, and it’s even harder to do it by yourself.
Bureaucratic hierarchies move slowly, and entrenched interests shy away from risk. 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). At the other extreme, a lone genius might create a
classic work of art or literature, but he could never create an entire industry. 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. This book is
about the questions you must ask and answer to succeed in the business of doing new
things: what follows is not a manual or a record of knowledge but an exercise in
thinking. Because that is what a startup has to do: question received ideas and rethink
business from scratch.
2
 PARTY LIKE IT’S 1999
O —What important truth do very few people agree with you on?—is
UR CONTRARIAN QUESTION

difficult to answer directly. It may be easier to start with a preliminary: what does
everybody agree on? “Madness is rare in individuals—but in groups, parties, nations, and
ages it is the rule,” Nietzsche wrote (before he went mad). If you can identify a
delusional popular belief, you can find what lies hidden behind it: the contrarian truth.
Consider an elementary proposition: companies exist to make money, not to lose it.
This should be obvious to any thinking person. But it wasn’t so obvious to many in the
late 1990s, when no loss was too big to be described as an investment in an even bigger,
brighter future. The conventional wisdom of the “New Economy” accepted page views as
a more authoritative, forward-looking financial metric than something as pedestrian as
profit.
Conventional beliefs only ever come to appear arbitrary and wrong in retrospect;
whenever one collapses, we call the old belief a bubble. But the distortions caused by
bubbles don’t disappear when they pop. The internet craze of the ’90s was the biggest
bubble since the crash of 1929, and the lessons learned afterward define and distort
almost all thinking about technology today. The first step to thinking clearly is to
question what we think we know about the past.
 A QUICK HISTORY OF THE ’90S
The 1990s have a good image. We tend to remember them as a prosperous, optimistic
decade that happened to end with the internet boom and bust. But many of those years
were not as cheerful as our nostalgia holds. We’ve long since forgotten the global
context for the 18 months of dot-com mania at decade’s end.
The ’90s started with a burst of euphoria when the Berlin Wall came down in
November ’89. It was short-lived. By mid-1990, the United States was in recession.
Technically the downturn ended in March ’91, but recovery was slow and unemployment
continued to rise until July ’92. Manufacturing never fully rebounded. The shift to a
service economy was protracted and painful.
1992 through the end of 1994 was a time of general malaise. Images of dead American
soldiers in Mogadishu looped on cable news. Anxiety about globalization and U.S.
competitiveness intensified as jobs flowed to Mexico. This pessimistic undercurrent
drove then-president Bush 41 out of office and won Ross Perot nearly 20% of the popular
vote in ’92—the best showing for a third-party candidate since Theodore Roosevelt in
1912. And whatever the cultural fascination with Nirvana, grunge, and heroin reflected,
it wasn’t hope or confidence.
Silicon Valley felt sluggish, too. Japan seemed to be winning the semiconductor war.
The internet had yet to take off, partly because its commercial use was restricted until
late 1992 and partly due to the lack of user-friendly web browsers. It’s telling that when I
arrived at Stanford in 1985, economics, not computer science, was the most popular
major. To most people on campus, the tech sector seemed idiosyncratic or even
provincial.
The internet changed all this. The Mosaic browser was officially released in
November 1993, giving regular people a way to get online. Mosaic became Netscape,
which released its Navigator browser in late 1994. Navigator’s adoption grew so quickly
—from about 20% of the browser market in January 1995 to almost 80% less than 12
months later—that Netscape was able to IPO in August ’95 even though it wasn’t yet
profitable. Within five months, Netscape stock had shot up from $28 to $174 per share.
Other tech companies were booming, too. Yahoo! went public in April ’96 with an $848
million valuation. Amazon followed suit in May ’97 at $438 million. By spring of ’98,
each company’s stock had more than quadrupled. Skeptics questioned earnings and
revenue multiples higher than those for any non-internet company. It was easy to
conclude that the market had gone crazy.
This conclusion was understandable but misplaced. In December ’96—more than three
years before the bubble actually burst—Fed chairman Alan Greenspan warned that
“irrational exuberance” might have “unduly escalated asset values.” Tech investors were
exuberant, but it’s not clear that they were so irrational. It is too easy to forget that
things weren’t going very well in the rest of the world at the time.
The East Asian financial crises hit in July 1997. Crony capitalism and massive foreign
debt brought the Thai, Indonesian, and South Korean economies to their knees. The ruble
crisis followed in August ’98 when Russia, hamstrung by chronic fiscal deficits,
devalued its currency and defaulted on its debt. American investors grew nervous about a
nation with 10,000 nukes and no money; the Dow Jones Industrial Average plunged more
than 10% in a matter of days.
People were right to worry. The ruble crisis set off a chain reaction that brought down
Long-Term Capital Management, a highly leveraged U.S. hedge fund. LTCM managed to
lose $4.6 billion in the latter half of 1998, and still had over $100 billion in liabilities
when the Fed intervened with a massive bailout and slashed interest rates in order to
prevent systemic disaster. Europe wasn’t doing that much better. The euro launched in
January 1999 to great skepticism and apathy. It rose to $1.19 on its first day of trading
but sank to $0.83 within two years. In mid-2000, G7 central bankers had to prop it up
with a multibillion-dollar intervention.
So the backdrop for the short-lived dot-com mania that started in September 1998 was
a world in which nothing else seemed to be working. The Old Economy couldn’t handle
the challenges of globalization. Something needed to work—and work in a big way—if
the future was going to be better at all. By indirect proof, the New Economy of the
internet was the only way forward.
 MANIA: SEPTEMBER 1998–MARCH 2000
Dot-com mania was intense but short—18 months of insanity from September 1998 to
March 2000. It was a Silicon Valley gold rush: there was money everywhere, and no
shortage of exuberant, often sketchy people to chase it. Every week, dozens of new
startups competed to throw the most lavish launch party. (Landing parties were much
more rare.) Paper millionaires would rack up thousand-dollar dinner bills and try to pay
with shares of their startup’s stock—sometimes it even worked. Legions of people
decamped from their well-paying jobs to found or join startups. One 40-something grad
student that I knew was running six different companies in 1999. (Usually, it’s
considered weird to be a 40-year-old graduate student. Usually, it’s considered insane to
start a half-dozen companies at once. But in the late ’90s, people could believe that was a
winning combination.) Everybody should have known that the mania was unsustainable;
the most “successful” companies seemed to embrace a sort of anti-business model where
they lost money as they grew. But it’s hard to blame people for dancing when the music
was playing; irrationality was rational given that appending “.com” to your name could
double your value overnight.
 PAYPAL MANIA
When I was running PayPal in late 1999, I was scared out of my wits—not because I
didn’t believe in our company, but because it seemed like everyone else in the Valley
was ready to believe anything at all. Everywhere I looked, people were starting and
flipping companies with alarming casualness. One acquaintance told me how he had
planned an IPO from his living room before he’d even incorporated his company—and
he didn’t think that was weird. In this kind of environment, acting sanely began to seem
eccentric.
At least PayPal had a suitably grand mission—the kind that post-bubble skeptics
would later describe as grandiose: we wanted to create a new internet currency to replace
the U.S. dollar. Our first product let people beam money from one PalmPilot to another.
However, nobody had any use for that product except the journalists who voted it one of
the 10 worst business ideas of 1999. PalmPilots were still too exotic then, but email was
already commonplace, so we decided to create a way to send and receive payments over
email.
By the fall of ’99, our email payment product worked well—anyone could log in to
our website and easily transfer money. But we didn’t have enough customers, growth
was slow, and expenses mounted. For PayPal to work, we needed to attract a critical
mass of at least a million users. Advertising was too ineffective to justify the cost.
Prospective deals with big banks kept falling through. So we decided to pay people to
sign up.
We gave new customers $10 for joining, and we gave them $10 more every time they
referred a friend. This got us hundreds of thousands of new customers and an exponential
growth rate. Of course, this customer acquisition strategy was unsustainable on its own
—when you pay people to be your customers, exponential growth means an
exponentially growing cost structure. Crazy costs were typical at that time in the Valley.
But we thought our huge costs were sane: given a large user base, PayPal had a clear path
to profitability by taking a small fee on customers’ transactions.
We knew we’d need more funding to reach that goal. We also knew that the boom was
going to end. Since we didn’t expect investors’ faith in our mission to survive the
coming crash, we moved fast to raise funds while we could. On February 16, 2000, the
Wall Street Journal ran a story lauding our viral growth and suggesting that PayPal was
worth $500 million. When we raised $100 million the next month, our lead investor took
the Journal’s back-of-the-envelope valuation as authoritative. (Other investors were in
even more of a hurry. A South Korean firm wired us $5 million without first negotiating
a deal or signing any documents. When I tried to return the money, they wouldn’t tell me
where to send it.) That March 2000 financing round bought us the time we needed to
make PayPal a success. Just as we closed the deal, the bubble popped.
 LESSONS LEARNED
’Cause they say 2,000 zero zero party over, oops! Out of time!
So tonight I’m gonna party like it’s 1999!
—P RINCE

The NASDAQ reached 5,048 at its peak in the middle of March 2000 and then crashed to
3,321 in the middle of April. By the time it bottomed out at 1,114 in October 2002, the
country had long since interpreted the market’s collapse as a kind of divine judgment
against the technological optimism of the ’90s. The era of cornucopian hope was
relabeled as an era of crazed greed and declared to be definitely over.
Everyone learned to treat the future as fundamentally indefinite, and to dismiss as an
extremist anyone with plans big enough to be measured in years instead of quarters.
Globalization replaced technology as the hope for the future. Since the ’90s migration
“from bricks to clicks” didn’t work as hoped, investors went back to bricks (housing) and
BRICs (globalization). The result was another bubble, this time in real estate.

The entrepreneurs who stuck with Silicon Valley learned four big lessons from the
dot-com crash that still guide business thinking today:

1. Make incremental advances

Grand visions inflated the bubble, so they should not be indulged. Anyone who
 claims to be able to do something great is suspect, and anyone who wants to change
the world should be more humble. Small, incremental steps are the only safe path
forward.

2. Stay lean and flexible

All companies must be “lean,” which is code for “unplanned.” You should not know
what your business will do; planning is arrogant and inflexible. Instead you should
try things out, “iterate,” and treat entrepreneurship as agnostic experimentation.

3. Improve on the competition

Don’t try to create a new market prematurely. The only way to know you have a real
business is to start with an already existing customer, so you should build your
company by improving on recognizable products already offered by successful
competitors.

4. Focus on product, not sales

If your product requires advertising or salespeople to sell it, it’s not good enough:
technology is primarily about product development, not distribution. Bubble-era
advertising was obviously wasteful, so the only sustainable growth is viral growth.
These lessons have become dogma in the startup world; those who would ignore them
are presumed to invite the justified doom visited upon technology in the great crash of
2000. And yet 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.

It’s true that there was a bubble in technology. The late ’90s was a time of hubris:
people believed in going from 0 to 1. Too few startups were actually getting there, and
many never went beyond talking about it. But people understood that we had no choice
but to find ways to do more with less. The market high of March 2000 was obviously a
peak of insanity; less obvious but more important, it was also a peak of clarity. People
looked far into the future, saw how much valuable new technology we would need to get
there safely, and judged themselves capable of creating it.
We still need new technology, and we may even need some 1999-style hubris and
exuberance to get it. To build the next generation of companies, we must abandon the
dogmas created after the crash. That doesn’t mean the opposite ideas are automatically
true: you can’t escape the madness of crowds by dogmatically rejecting them. Instead
ask yourself: 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.
3
ALL HAPPY COMPANIES ARE DIFFERENT
T of our contrarian question is: what valuable company is nobody building?
HE BUSINESS VERSION

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.
This means that even very big businesses can be bad businesses. For example, U.S.
airline companies serve millions of passengers and create hundreds of billions of dollars
of value each year. But in 2012, when the average airfare each way was $178, the airlines
made only 37 cents per passenger trip. Compare them to Google, which creates less
value but captures far more. Google brought in $50 billion in 2012 (versus $160 billion
for the airlines), but it kept 21% of those revenues as profits—more than 100 times the
airline industry’s profit margin that year. Google makes so much money that it’s now
worth three times more than every U.S. airline combined.
The airlines compete with each other, but Google stands alone. Economists use two
simplified models to explain the difference: perfect competition and monopoly.
“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.
To an economist, every monopoly looks the same, whether it deviously eliminates
rivals, secures a license from the state, or innovates its way to the top. In this book,
we’re not interested in illegal bullies or government favorites: 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. Google is a good example of a company that went from 0 to 1: it hasn’t
competed in search since the early 2000s, when it definitively distanced itself from
Microsoft and Yahoo!
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.
 LIES PEOPLE TELL
How much of the world is actually monopolistic? How much is truly competitive? It’s
hard to say, because our common conversation about these matters is so confused. To the
outside observer, all businesses can seem reasonably alike, so it’s easy to perceive only
small differences between them.

But the reality is much more binary than that. There’s an enormous difference between
perfect competition and monopoly, and most businesses are much closer to one extreme
than we commonly realize.

The confusion comes from a universal bias for describing market conditions in self-
serving ways: both monopolists and competitors are incentivized to bend the truth.
Monopoly Lies
Monopolists lie to protect themselves. They know that bragging about their great
monopoly invites being audited, scrutinized, and attacked. Since they very much want
their monopoly profits to continue unmolested, they tend to do whatever they can to
conceal their monopoly—usually by exaggerating the power of their (nonexistent)
competition.
Think about how Google talks about its business. It certainly doesn’t claim to be a
monopoly. But is it one? Well, it depends: a monopoly in what? Let’s say that Google is
primarily a search engine. As of May 2014, it owns about 68% of the search market. (Its
closest competitors, Microsoft and Yahoo!, have about 19% and 10%, respectively.) If
that doesn’t seem dominant enough, consider the fact that the word “google” is now an
official entry in the Oxford English Dictionary—as a verb. Don’t hold your breath
waiting for that to happen to Bing.
But suppose we say that Google is primarily an advertising company. That changes
things. The U.S. search engine advertising market is $17 billion annually. Online
advertising is $37 billion annually. The entire U.S. advertising market is $150 billion.
A n d global advertising is a $495 billion market. So even if Google completely
monopolized U.S. search engine advertising, it would own just 3.4% of the global
advertising market. From this angle, Google looks like a small player in a competitive
world.

What if we frame Google as a multifaceted technology company instead? This seems

reasonable enough; in addition to its search engine, Google makes dozens of other
software products, not to mention robotic cars, Android phones, and wearable computers.
But 95% of Google’s revenue comes from search advertising; its other products
generated just $2.35 billion in 2012, and its consumer tech products a mere fraction of
that. Since consumer tech is a $964 billion market globally, Google owns less than
0.24% of it—a far cry from relevance, let alone monopoly. Framing itself as just another
tech company allows Google to escape all sorts of unwanted attention.
Competitive Lies
Non-monopolists tell the opposite lie: “we’re in a league of our own.” Entrepreneurs are
always biased to understate the scale of competition, but that is the biggest mistake a
startup can make. The fatal temptation is to describe your market extremely narrowly so
that you dominate it by definition.
Suppose you want to start a restaurant that serves British food in Palo Alto. “No one
else is doing it,” you might reason. “We’ll own the entire market.” But that’s only true if
the relevant market is the market for British food specifically. What if the actual market
is the Palo Alto restaurant market in general? And what if all the restaurants in nearby
towns are part of the relevant market as well?
These are hard questions, but the bigger problem is that you have an incentive not to
ask them at all. When you hear that most new restaurants fail within one or two years,
your instinct will be to come up with a story about how yours is different. You’ll spend
time trying to convince people that you are exceptional instead of seriously considering
whether that’s true. It would be better to pause and consider whether there are people in
Palo Alto who would rather eat British food above all else. It’s very possible they don’t
exist.
In 2001, my co-workers at PayPal and I would often get lunch on Castro Street in
Mountain View. We had our pick of restaurants, starting with obvious categories like
Indian, sushi, and burgers. There were more options once we settled on a type: North
Indian or South Indian, cheaper or fancier, and so on. In contrast to the competitive local
restaurant market, PayPal was at that time the only email-based payments company in
the world. We employed fewer people than the restaurants on Castro Street did, but our
business was much more valuable than all of those restaurants combined. Starting a new
South Indian restaurant is a really hard way to make money. If you lose sight of
competitive reality and focus on trivial differentiating factors—maybe you think your
naan is superior because of your great-grandmother’s recipe—your business is unlikely
to survive.
Creative industries work this way, too. No screenwriter wants to admit that her new
movie script simply rehashes what has already been done before. Rather, the pitch is:
“This film will combine various exciting elements in entirely new ways.” It could even
be true. Suppose her idea is to have Jay-Z star in a cross between Hackers and Jaws: rap
star joins elite group of hackers to catch the shark that killed his friend. That has
definitely never been done before. But, like the lack of British restaurants in Palo Alto,
maybe that’s a good thing.

Non-monopolists exaggerate their distinction by defining their market as the

intersection of various smaller markets:

British food ∩ restaurant ∩ Palo Alto

Rap star ∩ hackers ∩ sharks

Monopolists, by contrast, disguise their monopoly by framing their market as the
union of several large markets:

search engine ∪ mobile phones ∪ wearable computers ∪ self-driving cars

What does a monopolist’s union story look like in practice? Consider a statement from
Google chairman Eric Schmidt’s testimony at a 2011 congressional hearing:

We face an extremely competitive landscape in which consumers have a multitude

of options to access information.
Or, translated from PR-speak to plain English:

Google is a small fish in a big pond. We could be swallowed whole at any time. We
are not the monopoly that the government is looking for.
 RUTHLESS PEOPLE
The problem with a competitive business goes beyond lack of profits. Imagine you’re
running one of those restaurants in Mountain View. You’re not that different from
dozens of your competitors, so you’ve got to fight hard to survive. If you offer affordable
food with low margins, you can probably pay employees only minimum wage. And
you’ll need to squeeze out every efficiency: that’s why small restaurants put Grandma to
work at the register and make the kids wash dishes in the back. Restaurants aren’t much
better even at the very highest rungs, where reviews and ratings like Michelin’s star
system enforce a culture of intense competition that can drive chefs crazy. (French chef
and winner of three Michelin stars Bernard Loiseau was quoted as saying, “If I lose a
star, I will commit suicide.” Michelin maintained his rating, but Loiseau killed himself
anyway in 2003 when a competing French dining guide downgraded his restaurant.) The
competitive ecosystem pushes people toward ruthlessness or death.
A monopoly like Google is different. Since it doesn’t have to worry about competing
with anyone, it has wider latitude to care about its workers, its products, and its impact
on the wider world. Google’s motto—“Don’t be evil”—is in part a branding ploy, but it’s
also characteristic of a kind of business that’s successful enough to take ethics seriously
without jeopardizing its own existence. 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.
 MONOPOLY CAPITALISM
So, a monopoly is good for everyone on the inside, but what about everyone on the
outside? Do outsized profits come at the expense of the rest of society? Actually, yes:
profits come out of customers’ wallets, and monopolies deserve their bad reputation
—but only in a world where nothing changes.
In a static world, a monopolist is just a rent collector. If you corner the market for
something, you can jack up the price; others will have no choice but to buy from you.
Think of the famous board game: deeds are shuffled around from player to player, but
the board never changes. There’s no way to win by inventing a better kind of real estate
development. The relative values of the properties are fixed for all time, so all you can
do is try to buy them up.
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.
Even the government knows this: that’s why one of its departments works hard to
create monopolies (by granting patents to new inventions) even though another part
hunts them down (by prosecuting antitrust cases). It’s possible to question whether
anyone should really be awarded a legally enforceable monopoly simply for having been
the first to think of something like a mobile software design. 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.
The dynamism of new monopolies itself explains why old monopolies don’t strangle
innovation. With Apple’s iOS at the forefront, the rise of mobile computing has
dramatically reduced Microsoft’s decades-long operating system dominance. Before
that, IBM’s hardware monopoly of the ’60s and ’70s was overtaken by Microsoft’s
software monopoly. AT&T had a monopoly on telephone service for most of the 20th
century, but now anyone can get a cheap cell phone plan from any number of providers.
If the tendency of monopoly businesses were to hold back progress, they would be
dangerous and we’d be right to oppose them. But the history of progress is a history of
better monopoly businesses replacing incumbents.
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.
So why are economists obsessed with competition as an ideal state? It’s a relic of
history. Economists copied their mathematics from the work of 19th-century physicists:
they see individuals and businesses as interchangeable atoms, not as unique creators.
Their theories describe an equilibrium state of perfect competition because that’s what’s
easy to model, not because it represents the best of business. But it’s worth recalling that
the long-run equilibrium predicted by 19th-century physics was a state in which all
energy is evenly distributed and everything comes to rest—also known as the heat death
of the universe. Whatever your views on thermodynamics, it’s a powerful metaphor: 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.
Perfect equilibrium may describe the void that is most of the universe. It may even
characterize many businesses. But every new creation takes place far from equilibrium.
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.
Tolstoy opens Anna Karenina by observing: “All happy families are alike; each
unhappy family is unhappy in its own way.” Business is the opposite. 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.
4
 THE IDEOLOGY OF COMPETITION
C means new products that benefit everybody and sustainable profits for the
REATIVE MONOPOLY

creator. Competition means no profits for anybody, no meaningful differentiation, and a

struggle for survival. So why do people believe that competition is healthy? The answer
is that competition is not just an economic concept or a simple inconvenience that
individuals and companies must deal with in the marketplace. More than anything else,
competition is an ideology—the ideology—that pervades our society and distorts our
thinking. We preach competition, internalize its necessity, and enact its commandments;
and as a result, we trap ourselves within it—even though the more we compete, the less
we gain.
This is a simple truth, but we’ve all been trained to ignore it. Our educational system
both drives and reflects our obsession with competition. Grades themselves allow precise
measurement of each student’s competitiveness; pupils with the highest marks receive
status and credentials. We teach every young person the same subjects in mostly the
same ways, irrespective of individual talents and preferences. Students who don’t learn
best by sitting still at a desk are made to feel somehow inferior, while children who excel
on conventional measures like tests and assignments end up defining their identities in
terms of this weirdly contrived academic parallel reality.
And it gets worse as students ascend to higher levels of the tournament. Elite students
climb confidently until they reach a level of competition sufficiently intense to beat their
dreams out of them. Higher education is the place where people who had big plans in
high school get stuck in fierce rivalries with equally smart peers over conventional
careers like management consulting and investment banking. For the privilege of being
turned into conformists, students (or their families) pay hundreds of thousands of dollars
in skyrocketing tuition that continues to outpace inflation. Why are we doing this to
ourselves?
I wish I had asked myself when I was younger. My path was so tracked that in my 8th-
grade yearbook, one of my friends predicted—accurately—that four years later I would
enter Stanford as a sophomore. And after a conventionally successful undergraduate
career, I enrolled at Stanford Law School, where I competed even harder for the standard
badges of success.
The highest prize in a law student’s world is unambiguous: out of tens of thousands of
graduates each year, only a few dozen get a Supreme Court clerkship. After clerking on a
federal appeals court for a year, I was invited to interview for clerkships with Justices
Kennedy and Scalia. My meetings with the Justices went well. I was so close to winning
this last competition. If only I got the clerkship, I thought, I would be set for life. But I
didn’t. At the time, I was devastated.
In 2004, after I had built and sold PayPal, I ran into an old friend from law school who
had helped me prepare my failed clerkship applications. We hadn’t spoken in nearly a
decade. His first question wasn’t “How are you doing?” or “Can you believe it’s been so
long?” Instead, he grinned and asked: “So, Peter, aren’t you glad you didn’t get that
clerkship?” With the benefit of hindsight, we both knew that winning that ultimate
competition would have changed my life for the worse. Had I actually clerked on the
Supreme Court, I probably would have spent my entire career taking depositions or
drafting other people’s business deals instead of creating anything new. It’s hard to say
how much would be different, but the opportunity costs were enormous. All Rhodes
Scholars had a great future in their past.
 WAR AND PEACE
Professors downplay the cutthroat culture of academia, but managers never tire of
comparing business to war. MBA students carry around copies of Clausewitz and Sun
Tzu. War metaphors invade our everyday business language: we use headhunters to build
up a sales force that will enable us to take a captive market and make a killing. But really
it’s competition, not business, that is like war: allegedly necessary, supposedly valiant,
but ultimately destructive.
Why do people compete with each other? Marx and Shakespeare provide two models
for understanding almost every kind of conflict.
According to Marx, people fight because they are different. The proletariat fights the
bourgeoisie because they have completely different ideas and goals (generated, for Marx,
by their very different material circumstances). The greater the differences, the greater
the conflict.
To Shakespeare, by contrast, all combatants look more or less alike. It’s not at all
clear why they should be fighting, since they have nothing to fight about. Consider the
opening line from Romeo and Juliet: “Two households, both alike in dignity.” The two
houses are alike, yet they hate each other. They grow even more similar as the feud
escalates. Eventually, they lose sight of why they started fighting in the first place.
In the world of business, at least, Shakespeare proves the superior guide. Inside a firm,
people become obsessed with their competitors for career advancement. Then the firms
themselves become obsessed with their competitors in the marketplace. Amid all the
human drama, people lose sight of what matters and focus on their rivals instead.
Let’s test the Shakespearean model in the real world. Imagine a production called
Gates and Schmidt, based on Romeo and Juliet. Montague is Microsoft. Capulet is
Google. Two great families, run by alpha nerds, sure to clash on account of their
sameness.
As with all good tragedy, the conflict seems inevitable only in retrospect. In fact it
was entirely avoidable. These families came from very different places. The House of
Montague built operating systems and office applications. The House of Capulet wrote a
search engine. What was there to fight about?
Lots, apparently. As a startup, each clan had been content to leave the other alone and
prosper independently. But as they grew, they began to focus on each other. Montagues
obsessed about Capulets obsessed about Montagues. The result? Windows vs. Chrome
OS, Bing vs. Google Search, Explorer vs. Chrome, Office vs. Docs, and Surface vs.
Nexus.
Just as war cost the Montagues and Capulets their children, it cost Microsoft and
Google their dominance: Apple came along and overtook them all. In January 2013,
Apple’s market capitalization was $500 billion, while Google and Microsoft combined
were worth $467 billion. Just three years before, Microsoft and Google were each more
valuable than Apple. War is costly business.
Rivalry causes us to overemphasize old opportunities and slavishly copy what has
worked in the past. Consider the recent proliferation of mobile credit card readers. In
October 2010, a startup called Square released a small, white, square-shaped product that
let anyone with an iPhone swipe and accept credit cards. It was the first good payment
processing solution for mobile handsets. Imitators promptly sprang into action. A
Canadian company called NetSecure launched its own card reader in a half-moon shape.
Intuit brought a cylindrical reader to the geometric battle. In March 2012, eBay’s PayPal
unit launched its own copycat card reader. It was shaped like a triangle—a clear jab at
Square, as three sides are simpler than four. One gets the sense that this Shakespearean
saga won’t end until the apes run out of shapes.

The hazards of imitative competition may partially explain why individuals with an
Asperger’s-like social ineptitude seem to be at an advantage in Silicon Valley today. If
you’re less sensitive to social cues, you’re less likely to do the same things as everyone
else around you. If you’re interested in making things or programming computers, you’ll
be less afraid to pursue those activities single-mindedly and thereby become incredibly
good at them. Then when you apply your skills, you’re a little less likely than others to
give up your own convictions: this can save you from getting caught up in crowds
competing for obvious prizes.
Competition can make people hallucinate opportunities where none exist. The crazy
’90s version of this was the fierce battle for the online pet store market. It was Pets.com
vs. PetStore.com vs. Petopia.com vs. what seemed like dozens of others. Each company
was obsessed with defeating its rivals, precisely because there were no substantive
differences to focus on. Amid all the tactical questions—Who could price chewy dog
toys most aggressively? Who could create the best Super Bowl ads?—these companies
totally lost sight of the wider question of whether the online pet supply market was the
right space to be in. Winning is better than losing, but everybody loses when the war
isn’t one worth fighting. When Pets.com folded after the dot-com crash, $300 million of
investment capital disappeared with it.
Other times, rivalry is just weird and distracting. Consider the Shakespearean conflict
between Larry Ellison, co-founder and CEO of Oracle, and Tom Siebel, a top salesman at
Oracle and Ellison’s protégé before he went on to found Siebel Systems in 1993. Ellison
was livid at what he thought was Siebel’s betrayal. Siebel hated being in the shadow of
his former boss. The two men were basically identical—hard-charging Chicagoans who
loved to sell and hated to lose—so their hatred ran deep. Ellison and Siebel spent the
second half of the ’90s trying to sabotage each other. At one point, Ellison sent
truckloads of ice cream sandwiches to Siebel’s headquarters to try to convince Siebel
employees to jump ship. The copy on the wrappers? “Summer is near. Oracle is here. To
brighten your day and your career.”
Strangely, Oracle intentionally accumulated enemies. Ellison’s theory was that it’s
always good to have an enemy, so long as it was large enough to appear threatening (and
thus motivational to employees) but not so large as to actually threaten the company. So
Ellison was probably thrilled when in 1996 a small database company called Informix
put up a billboard near Oracle’s Redwood Shores headquarters that read: .
CAUTION: DINOSAUR CROSSING

Another Informix billboard on northbound Highway 101 read: ’ .

YOU VE JUST PASSED REDWOOD SHORES. SO DID WE

Oracle shot back with a billboard that implied that Informix’s software was slower
than snails. Then Informix CEO Phil White decided to make things personal. When
White learned that Larry Ellison enjoyed Japanese samurai culture, he commissioned a
new billboard depicting the Oracle logo along with a broken samurai sword. The ad
wasn’t even really aimed at Oracle as an entity, let alone the consuming public; it was a
personal attack on Ellison. But perhaps White spent a little too much time worrying
about the competition: while he was busy creating billboards, Informix imploded in a
massive accounting scandal and White soon found himself in federal prison for
securities fraud.
If you can’t beat a rival, it may be better to merge. I started Confinity with my co-
founder Max Levchin in 1998. When we released the PayPal product in late 1999, Elon
Musk’s X.com was right on our heels: our companies’ offices were four blocks apart on
University Avenue in Palo Alto, and X’s product mirrored ours feature-for-feature. By
late 1999, we were in all-out war. Many of us at PayPal logged 100-hour workweeks. No
doubt that was counterproductive, but the focus wasn’t on objective productivity; the
focus was defeating X.com. One of our engineers actually designed a bomb for this
purpose; when he presented the schematic at a team meeting, calmer heads prevailed and
the proposal was attributed to extreme sleep deprivation.
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. De-escalating the
rivalry post-merger wasn’t easy, but as far as problems go, it was a good one to have. As
a unified team, we were able to ride out the dot-com crash and then build a successful
business.
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.
This advice can be hard to follow because pride and honor can get in the way. Hence
Hamlet:

Exposing what is mortal and unsure

To all that fortune, death, and danger dare,
Even for an eggshell. Rightly to be great
 Is not to stir without great argument,
But greatly to find quarrel in a straw
When honor’s at the stake.
For Hamlet, greatness means willingness to fight for reasons as thin as an eggshell:
anyone would fight for things that matter; true heroes take their personal honor so
seriously they will fight for things that don’t matter. This twisted logic is part of human
nature, but it’s disastrous in business. If you can recognize competition as a destructive
force instead of a sign of value, you’re already more sane than most. The next chapter is
about how to use a clear head to build a monopoly business.
5
 LAST MOVER ADVANTAGE
E will give you a monopoly, but even a monopoly is only a great business if
SCAPING COMPETITION

it can endure in the future. Compare the value of the New York Times Company with
Twitter. Each employs a few thousand people, and each gives millions of people a way to
get news. But when Twitter went public in 2013, it was valued at $24 billion—more than
12 times the Times’s market capitalization—even though the Times earned $133 million
in 2012 while Twitter lost money. What explains the huge premium for Twitter?
The answer is cash flow. This sounds bizarre at first, since the Times was profitable
while Twitter wasn’t. But a great business is defined by its ability to generate cash flows
in the future. Investors expect Twitter will be able to capture monopoly profits over the
next decade, while newspapers’ monopoly days are over.
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.)
Comparing discounted cash flows shows the difference between low-growth
businesses and high-growth startups at its starkest. Most of the value of low-growth
businesses is in the near term. An Old Economy business (like a newspaper) might hold
its value if it can maintain its current cash flows for five or six years. However, any firm
with close substitutes will see its profits competed away. Nightclubs or restaurants are
extreme examples: successful ones might collect healthy amounts today, but their cash
flows will probably dwindle over the next few years when customers move on to newer
and trendier alternatives.
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.
 In March 2001, PayPal had yet to make a profit but our revenues were growing 100%
year-over-year. When I projected our future cash flows, I found that 75% of the
company’s present value would come from profits generated in 2011 and beyond—hard
to believe for a company that had been in business for only 27 months. But even that
turned out to be an underestimation. Today, PayPal continues to grow at about 15%
annually, and the discount rate is lower than a decade ago. It now appears that most of
the company’s value will come from 2020 and beyond.
LinkedIn is another good example of a company whose value exists in the far future.
As of early 2014, its market capitalization was $24.5 billion—very high for a company
with less than $1 billion in revenue and only $21.6 million in net income for 2012. You
might look at these numbers and conclude that investors have gone insane. But this
valuation makes sense when you consider LinkedIn’s projected future cash flows.
 The overwhelming importance of future profits is counterintuitive even in Silicon
Valley. 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. Those who succumb to measurement mania obsess about weekly active
user statistics, monthly revenue targets, and quarterly earnings reports. However, you
can hit those numbers and still overlook deeper, harder-to-measure problems that
threaten the durability of your business.
For example, rapid short-term growth at both Zynga and Groupon distracted managers
and investors from long-term challenges. Zynga scored early wins with games like
Farmville and claimed to have a “psychometric engine” to rigorously gauge the appeal of
new releases. But they ended up with the same problem as every Hollywood studio: how
can you reliably produce a constant stream of popular entertainment for a fickle
audience? (Nobody knows.) Groupon posted fast growth as hundreds of thousands of
local businesses tried their product. But persuading those businesses to become repeat
customers was harder than they thought.
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? Numbers
alone won’t tell you the answer; instead you must think critically about the qualitative
characteristics of your business.
 CHARACTERISTICS OF MONOPOLY
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.
This isn’t a list of boxes to check as you build your business—there’s no shortcut to
monopoly. However, analyzing your business according to these characteristics can help
you think about how to make it durable.
1. Proprietary Technology
Proprietary technology is the most substantive advantage a company can have because it
makes your product difficult or impossible to replicate. Google’s search algorithms, for
example, return results better than anyone else’s. Proprietary technologies for extremely
short page load times and highly accurate query autocompletion add to the core search
product’s robustness and defensibility. It would be very hard for anyone to do to Google
what Google did to all the other search engine companies in the early 2000s.
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.
The clearest way to make a 10x improvement is to invent something completely new.
If you build something valuable where there was nothing before, the increase in value is
theoretically infinite. A drug to safely eliminate the need for sleep, or a cure for
baldness, for example, would certainly support a monopoly business.
Or you can radically improve an existing solution: once you’re 10x better, you escape
competition. PayPal, for instance, made buying and selling on eBay at least 10 times
better. Instead of mailing a check that would take 7 to 10 days to arrive, PayPal let
buyers pay as soon as an auction ended. Sellers received their proceeds right away, and
unlike with a check, they knew the funds were good.
Amazon made its first 10x improvement in a particularly visible way: they offered at
least 10 times as many books as any other bookstore. When it launched in 1995, Amazon
could claim to be “Earth’s largest bookstore” because, unlike a retail bookstore that
might stock 100,000 books, Amazon didn’t need to physically store any inventory—it
simply requested the title from its supplier whenever a customer made an order. This
quantum improvement was so effective that a very unhappy Barnes & Noble filed a
lawsuit three days before Amazon’s IPO, claiming that Amazon was unfairly calling
itself a “bookstore” when really it was a “book broker.”
You can also make a 10x improvement through superior integrated design. Before
2010, tablet computing was so poor that for all practical purposes the market didn’t even
exist. “Microsoft Windows XP Tablet PC Edition” products first shipped in 2002, and
Nokia released its own “Internet Tablet” in 2005, but they were a pain to use. Then Apple
released the iPad. Design improvements are hard to measure, but it seems clear that
Apple improved on anything that had come before by at least an order of magnitude:
tablets went from unusable to useful.
2. Network Effects
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. For example, in
1960 a quixotic company called Xanadu set out to build a two-way communication
network between all computers—a sort of early, synchronous version of the World Wide
Web. After more than three decades of futile effort, Xanadu folded just as the web was
becoming commonplace. Their technology probably would have worked at scale, but it
could have worked only at scale: it required every computer to join the network at the
same time, and that was never going to happen.
Paradoxically, then, network effects businesses must start with especially small
markets. Facebook started with just Harvard students—Mark Zuckerberg’s first product
was designed to get all his classmates signed up, not to attract all people of Earth. 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.
3. Economies of Scale
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.
Many businesses gain only limited advantages as they grow to large scale. Service
businesses especially are difficult to make monopolies. If you own a yoga studio, for
example, you’ll only be able to serve a certain number of customers. You can hire more
instructors and expand to more locations, but your margins will remain fairly low and
you’ll never reach a point where a core group of talented people can provide something
of value to millions of separate clients, as software engineers are able to do.
A good startup should have the potential for great scale built into its first design.
Twitter already has more than 250 million users today. It doesn’t need to add too many
customized features in order to acquire more, and there’s no inherent reason why it
should ever stop growing.
4. Branding
A company has a monopoly on its own brand by definition, so creating a strong brand is
a powerful way to claim a monopoly. Today’s strongest tech brand is Apple: the
attractive looks and carefully chosen materials of products like the iPhone and MacBook,
the Apple Stores’ sleek minimalist design and close control over the consumer
experience, the omnipresent advertising campaigns, the price positioning as a maker of
premium goods, and the lingering nimbus of Steve Jobs’s personal charisma all
contribute to a perception that Apple offers products so good as to constitute a category
of their own.
Many have tried to learn from Apple’s success: paid advertising, branded stores,
luxurious materials, playful keynote speeches, high prices, and even minimalist design
are all susceptible to imitation. But these techniques for polishing the surface don’t work
without a strong underlying substance. Apple has a complex suite of proprietary
technologies, both in hardware (like superior touchscreen materials) and software (like
touchscreen interfaces purpose-designed for specific materials). It manufactures
products at a scale large enough to dominate pricing for the materials it buys. And it
enjoys strong network effects from its content ecosystem: thousands of developers write
software for Apple devices because that’s where hundreds of millions of users are, and
those users stay on the platform because it’s where the apps are. These other
monopolistic advantages are less obvious than Apple’s sparkling brand, but they are the
fundamentals that let the branding effectively reinforce Apple’s monopoly.
Beginning with brand rather than substance is dangerous. Ever since Marissa Mayer
became CEO of Yahoo! in mid-2012, she has worked to revive the once-popular internet
giant by making it cool again. In a single tweet, Yahoo! summarized Mayer’s plan as a
chain reaction of “people then products then traffic then revenue.” The people are
supposed to come for the coolness: Yahoo! demonstrated design awareness by
overhauling its logo, it asserted youthful relevance by acquiring hot startups like Tumblr,
and it has gained media attention for Mayer’s own star power. But the big question is
what products Yahoo! will actually create. When Steve Jobs returned to Apple, he didn’t
just make Apple a cool place to work; he slashed product lines to focus on the handful of
opportunities for 10x improvements. No technology company can be built on branding
alone.
 BUILDING A MONOPOLY
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.
Start Small and Monopolize
Every startup is small at the start. Every monopoly dominates a large share of its market.
Therefore, every startup should start with a very small market . Always err on the side of
starting too small. The reason is simple: it’s easier to dominate a small market than a
large one. If you think your initial market might be too big, it almost certainly is.
Small doesn’t mean nonexistent. We made this mistake early on at PayPal. Our first
product let people beam money to each other via PalmPilots. It was interesting
technology and no one else was doing it. However, the world’s millions of PalmPilot
users weren’t concentrated in a particular place, they had little in common, and they used
their devices only episodically. Nobody needed our product, so we had no customers.
With that lesson learned, we set our sights on eBay auctions, where we found our first
success. In late 1999, eBay had a few thousand high-volume “PowerSellers,” and after
only three months of dedicated effort, we were serving 25% of them. 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. This is
why it’s always a red flag when entrepreneurs talk about getting 1% of a $100 billion
market. In practice, a large market will either lack a good starting point or it will be open
to competition, so it’s hard to ever reach that 1%. And even if you do succeed in gaining
a small foothold, you’ll have to be satisfied with keeping the lights on: cutthroat
competition means your profits will be zero.
Scaling Up
Once you create and dominate a niche market, then you should gradually expand into
related and slightly broader markets. Amazon shows how it can be done. Jeff Bezos’s
founding vision was to dominate all of online retail, but he very deliberately started with
books. There were millions of books to catalog, but they all had roughly the same shape,
they were easy to ship, and some of the most rarely sold books—those least profitable
for any retail store to keep in stock—also drew the most enthusiastic customers. Amazon
became the dominant solution for anyone located far from a bookstore or seeking
something unusual. Amazon then had two options: expand the number of people who
read books, or expand to adjacent markets. They chose the latter, starting with the most
similar markets: CDs, videos, and software. Amazon continued to add categories
gradually until it had become the world’s general store. The name itself brilliantly
encapsulated the company’s scaling strategy. The biodiversity of the Amazon rain forest
reflected Amazon’s first goal of cataloging every book in the world, and now it stands
for every kind of thing in the world, period.
 eBay also started by dominating small niche markets. When it launched its auction
marketplace in 1995, it didn’t need the whole world to adopt it at once; the product
worked well for intense interest groups, like Beanie Baby obsessives. Once it
monopolized the Beanie Baby trade, eBay didn’t jump straight to listing sports cars or
industrial surplus: it continued to cater to small-time hobbyists until it became the most
reliable marketplace for people trading online no matter what the item.
Sometimes there are hidden obstacles to scaling—a lesson that eBay has learned in
recent years. Like all marketplaces, the auction marketplace lent itself to natural
monopoly because buyers go where the sellers are and vice versa. But eBay found that
the auction model works best for individually distinctive products like coins and stamps.
It works less well for commodity products: people don’t want to bid on pencils or
Kleenex, so it’s more convenient just to buy them from Amazon. eBay is still a valuable
monopoly; it’s just smaller than people in 2004 expected it to be.
Sequencing markets correctly is underrated, and it takes discipline to expand
gradually. 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.
Don’t Disrupt
Silicon Valley has become obsessed with “ disruption.” Originally, “disruption” was a
term of art to describe how a firm can use new technology to introduce a low-end
product at low prices, improve the product over time, and eventually overtake even the
premium products offered by incumbent companies using older technology. This is
roughly what happened when the advent of PCs disrupted the market for mainframe
computers: at first PCs seemed irrelevant, then they became dominant. Today mobile
devices may be doing the same thing to PCs.
However, disruption has recently transmogrified into a self-congratulatory buzzword
for anything posing as trendy and new. This seemingly trivial fad matters because it
distorts an entrepreneur’s self-understanding in an inherently competitive way. The
concept was coined to describe threats to incumbent companies, so startups’ obsession
with disruption means they see themselves through older firms’ eyes. If you think of
yourself as an insurgent battling dark forces, it’s easy to become unduly fixated on the
obstacles in your path. 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.
Disruption also attracts attention: disruptors are people who look for trouble and find
it. Disruptive kids get sent to the principal’s office. Disruptive companies often pick
fights they can’t win. Think of Napster: the name itself meant trouble. What kinds of
things can one “nap”? Music … Kids … and perhaps not much else. Shawn Fanning and
Sean Parker, Napster’s then-teenage founders, credibly threatened to disrupt the
powerful music recording industry in 1999. The next year, they made the cover of Time
magazine. A year and a half after that, they ended up in bankruptcy court.
PayPal could be seen as disruptive, but we didn’t try to directly challenge any large
competitor. It’s true that we took some business away from Visa when we popularized
internet payments: you might use PayPal to buy something online instead of using your
Visa card to buy it in a store. But since we expanded the market for payments overall, we
gave Visa far more business than we took. The overall dynamic was net positive, unlike
Napster’s negative-sum struggle with the U.S. recording industry. As you craft a plan to
expand to adjacent markets, don’t disrupt: avoid competition as much as possible.
 THE LAST WILL BE FIRST
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.”
6
 YOU ARE NOT A LOTTERY TICKET
T HE MOST CONTENTIOUS question in business is whether success comes from luck or skill.
What do successful people say? Malcolm Gladwell, a successful author who writes
about successful people, declares in Outliers that success results from a “patchwork of
lucky breaks and arbitrary advantages.” Warren Buffett famously considers himself a
“member of the lucky sperm club” and a winner of the “ovarian lottery.” Jeff Bezos
attributes Amazon’s success to an “incredible planetary alignment” and jokes that it was
“half luck, half good timing, and the rest brains.” Bill Gates even goes so far as to claim
that he “was lucky to be born with certain skills,” though it’s not clear whether that’s
actually possible.
Perhaps these guys are being strategically humble. However, the phenomenon of serial
entrepreneurship would seem to call into question our tendency to explain success as the
product of chance. Hundreds of people have started multiple multimillion-dollar
businesses. A few, like Steve Jobs, Jack Dorsey, and Elon Musk, have created several
multibillion-dollar companies. If success were mostly a matter of luck, these kinds of
serial entrepreneurs probably wouldn’t exist.
In January 2013, Jack Dorsey, founder of Twitter and Square, tweeted to his 2 million
followers: “Success is never accidental.”
Most of the replies were unambiguously negative. Referencing the tweet in The
Atlantic, reporter Alexis Madrigal wrote that his instinct was to reply: “ ‘Success is
never accidental,’ said all multimillionaire white men.” It’s true that already successful
people have an easier time doing new things, whether due to their networks, wealth, or
experience. But perhaps we’ve become too quick to dismiss anyone who claims to have
succeeded according to plan.
Is there a way to settle this debate objectively? Unfortunately not, because companies
are not experiments. To get a scientific answer about Facebook, for example, we’d have
to rewind to 2004, create 1,000 copies of the world, and start Facebook in each copy to
see how many times it would succeed. But that experiment is impossible. Every
company starts in unique circumstances, and every company starts only once. Statistics
doesn’t work when the sample size is one.
From the Renaissance and the Enlightenment to the mid-20th century, luck was
something to be mastered, dominated, and controlled; everyone agreed that you should
do what you could, not focus on what you couldn’t. Ralph Waldo Emerson captured this
ethos when he wrote: “Shallow men believe in luck, believe in circumstances.… Strong
men believe in cause and effect.” In 1912, after he became the first explorer to reach the
South Pole, Roald Amundsen wrote: “Victory awaits him who has everything in order—
luck, people call it.” No one pretended that misfortune didn’t exist, but prior generations
believed in making their own luck by working hard.
If you believe your life is mainly a matter of chance, why read this book? Learning
about startups is worthless if you’re just reading stories about people who won the
lottery. Slot Machines for Dummies can purport to tell you which kind of rabbit’s foot to
rub or how to tell which machines are “hot,” but it can’t tell you how to win.
Did Bill Gates simply win the intelligence lottery? Was Sheryl Sandberg born with a
silver spoon, or did she “lean in”? When we debate historical questions like these, luck is
in the past tense. Far more important are questions about the future: is it a matter of
chance or design?
 CAN YOU CONTROL YOUR FUTURE?
You can expect the future to take a definite form or you can treat it as hazily uncertain. 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. This describes Americans today. In
middle school, we’re encouraged to start hoarding “extracurricular activities.” In high
school, ambitious students compete even harder to appear omnicompetent. By the time a
student gets to college, he’s spent a decade curating a bewilderingly diverse résumé to
prepare for a completely unknowable future. Come what may, he’s ready—for nothing in
particular.
A definite view, by contrast, favors firm convictions. Instead of pursuing many-sided
mediocrity and calling it “well-roundedness,” 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. This is not what young people do today, because everyone around them has long
since lost faith in a definite world. No one gets into Stanford by excelling at just one
thing, unless that thing happens to involve throwing or catching a leather ball.

You can also expect the future to be either better or worse than the present. Optimists
welcome the future; pessimists fear it. Combining these possibilities yields four views:
Indefinite Pessimism
Every culture has a myth of decline from some golden age, and almost all peoples
throughout history have been pessimists. Even today pessimism still dominates huge
parts of the world. An indefinite pessimist looks out onto a bleak future, but he has no
idea what to do about it. This describes Europe since the early 1970s, when the continent
succumbed to undirected bureaucratic drift. Today the whole Eurozone is in slow-motion
crisis, and nobody is in charge. The European Central Bank doesn’t stand for anything
but improvisation: the U.S. Treasury prints “In God We Trust” on the dollar; the ECB
might as well print “Kick the Can Down the Road” on the euro. Europeans just react to
events as they happen and hope things don’t get worse. The indefinite pessimist can’t
know whether the inevitable decline will be fast or slow, catastrophic or gradual. All he
can do is wait for it to happen, so he might as well eat, drink, and be merry in the
meantime: hence Europe’s famous vacation mania.
Definite Pessimism
A definite pessimist believes the future can be known, but since it will be bleak, he must
prepare for it. Perhaps surprisingly, China is probably the most definitely pessimistic
place in the world today. When Americans see the Chinese economy grow ferociously
fast (10% per year since 2000), we imagine a confident country mastering its future. But
that’s because Americans are still optimists, and we project our optimism onto China.
From China’s viewpoint, economic growth cannot come fast enough. Every other
country is afraid that China is going to take over the world; China is the only country
afraid that it won’t.
China can grow so fast only because its starting base is so low. The easiest way for
China to grow is to relentlessly copy what has already worked in the West. And that’s
exactly what it’s doing: executing definite plans by burning ever more coal to build ever
more factories and skyscrapers. But with a huge population pushing resource prices
higher, there’s no way Chinese living standards can ever actually catch up to those of the
richest countries, and the Chinese know it.
This is why the Chinese leadership is obsessed with the way in which things threaten
to get worse. Every senior Chinese leader experienced famine as a child, so when the
Politburo looks to the future, disaster is not an abstraction. The Chinese public, too,
knows that winter is coming. Outsiders are fascinated by the great fortunes being made
inside China, but they pay less attention to the wealthy Chinese trying hard to get their
money out of the country. Poorer Chinese just save everything they can and hope it will
be enough. Every class of people in China takes the future deadly seriously.
Definite Optimism
To a definite optimist, the future will be better than the present if he plans and works to
make it better. From the 17th century through the 1950s and ’60s, definite optimists led
the Western world. Scientists, engineers, doctors, and businessmen made the world
richer, healthier, and more long-lived than previously imaginable. As Karl Marx and
Friedrich Engels saw clearly, the 19th-century business class

created more massive and more colossal productive forces than all preceding
generations together. Subjection of Nature’s forces to man, machinery, application
of chemistry to industry and agriculture, steam-navigation, railways, electric
 telegraphs, clearing of whole continents for cultivation, canalisation of rivers,
whole populations conjured out of the ground—what earlier century had even a
presentiment that such productive forces slumbered in the lap of social labor?
Each generation’s inventors and visionaries surpassed their predecessors. In 1843, the
London public was invited to make its first crossing underneath the River Thames by a
newly dug tunnel. In 1869, the Suez Canal saved Eurasian shipping traffic from rounding
the Cape of Good Hope. In 1914 the Panama Canal cut short the route from Atlantic to
Pacific. Even the Great Depression failed to impede relentless progress in the United
States, which has always been home to the world’s most far-seeing definite optimists.
The Empire State Building was started in 1929 and finished in 1931. The Golden Gate
Bridge was started in 1933 and completed in 1937. The Manhattan Project was started in
1941 and had already produced the world’s first nuclear bomb by 1945. Americans
continued to remake the face of the world in peacetime: the Interstate Highway System
began construction in 1956, and the first 20,000 miles of road were open for driving by
1965. Definite planning even went beyond the surface of this planet: NASA’s Apollo
Program began in 1961 and put 12 men on the moon before it finished in 1972.
Bold plans were not reserved just for political leaders or government scientists. In the
late 1940s, a Californian named John Reber set out to reinvent the physical geography of
the whole San Francisco Bay Area. Reber was a schoolteacher, an amateur theater
producer, and a self-taught engineer. Undaunted by his lack of credentials, he publicly
proposed to build two huge dams in the Bay, construct massive freshwater lakes for
drinking water and irrigation, and reclaim 20,000 acres of land for development. Even
though he had no personal authority, people took the Reber Plan seriously. It was
endorsed by newspaper editorial boards across California. The U.S. Congress held
hearings on its feasibility. The Army Corps of Engineers even constructed a 1.5-acre
scale model of the Bay in a cavernous Sausalito warehouse to simulate it. These tests
revealed technical shortcomings, so the plan wasn’t executed.
But would anybody today take such a vision seriously in the first place? In the 1950s,
people welcomed big plans and asked whether they would work. Today a grand plan
coming from a schoolteacher would be dismissed as crankery, and a long-range vision
coming from anyone more powerful would be derided as hubris. You can still visit the
Bay Model in that Sausalito warehouse, but today it’s just a tourist attraction: big plans
for the future have become archaic curiosities.
 In the 1950s, Americans thought big plans for the future were too important to be left to experts.

Indefinite Optimism
After a brief pessimistic phase in the 1970s, indefinite optimism has dominated
American thinking ever since 1982, when a long bull market began and finance eclipsed
engineering as the way to approach the future. To an indefinite optimist, the future will
be better, but he doesn’t know how exactly, so he won’t make any specific plans. He
expects to profit from the future but sees no reason to design it concretely.
Instead of working for years to build a new product, indefinite optimists rearrange
already-invented ones. Bankers make money by rearranging the capital structures of
already existing companies. Lawyers resolve disputes over old things or help other
people structure their affairs. And private equity investors and management consultants
don’t start new businesses; they squeeze extra efficiency from old ones with incessant
procedural optimizations. It’s no surprise that these fields all attract disproportionate
numbers of high-achieving Ivy League optionality chasers; what could be a more
appropriate reward for two decades of résumé-building than a seemingly elite, process-
oriented career that promises to “keep options open”?
Recent graduates’ parents often cheer them on the established path. The strange
history of the Baby Boom produced a generation of indefinite optimists so used to
effortless progress that they feel entitled to it. Whether you were born in 1945 or 1950 or
1955, things got better every year for the first 18 years of your life, and it had nothing to
do with you. Technological advance seemed to accelerate automatically, so the Boomers
grew up with great expectations but few specific plans for how to fulfill them. Then,
when technological progress stalled in the 1970s, increasing income inequality came to
the rescue of the most elite Boomers. Every year of adulthood continued to get
automatically better and better for the rich and successful. The rest of their generation
was left behind, but the wealthy Boomers who shape public opinion today see little
reason to question their naïve optimism. Since tracked careers worked for them, they
can’t imagine that they won’t work for their kids, too.
Malcolm Gladwell says you can’t understand Bill Gates’s success without
understanding his fortunate personal context: he grew up in a good family, went to a
private school equipped with a computer lab, and counted Paul Allen as a childhood
friend. But perhaps you can’t understand Malcolm Gladwell without understanding his
historical context as a Boomer (born in 1963). When Baby Boomers grow up and write
books to explain why one or another individual is successful, they point to the power of a
particular individual’s context as determined by chance. But they miss the even bigger
social context for their own preferred explanations: a whole generation learned from
childhood to overrate the power of chance and underrate the importance of planning.
Gladwell at first appears to be making a contrarian critique of the myth of the self-made
businessman, but actually his own account encapsulates the conventional view of a
generation.
 OUR INDEFINITELY OPTIMISTIC WORLD
Indefinite Finance
While a definitely optimistic future would need engineers to design underwater cities
and settlements in space, an indefinitely optimistic future calls for more bankers and
lawyers. Finance epitomizes indefinite thinking because it’s the only way to make
money when you have no idea how to create wealth. If they don’t go to law school, bright
college graduates head to Wall Street precisely because they have no real plan for their
careers. And once they arrive at Goldman, they find that even inside finance, everything
is indefinite. It’s still optimistic—you wouldn’t play in the markets if you expected to
lose—but the fundamental tenet is that the market is random; you can’t know anything
specific or substantive; diversification becomes supremely important.
The indefiniteness of finance can be bizarre. Think about what happens when
successful entrepreneurs sell their company. What do they do with the money? In a
financialized world, it unfolds like this:

• The founders don’t know what to do with it, so they give it to a large bank.
• The bankers don’t know what to do with it, so they diversify by spreading it across
a portfolio of institutional investors.
• Institutional investors don’t know what to do with their managed capital, so they
diversify by amassing a portfolio of stocks.
• Companies try to increase their share price by generating free cash flows. If they
do, they issue dividends or buy back shares and the cycle repeats.
At no point does anyone in the chain know what to do with money in the real
economy. But in an indefinite world, people actually prefer unlimited optionality; 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.
Indefinite Politics
Politicians have always been officially accountable to the public at election time, but
today they are attuned to what the public thinks at every moment. Modern polling enables
politicians to tailor their image to match preexisting public opinion exactly, so for the
most part, they do. Nate Silver’s election predictions are remarkably accurate, but even
more remarkable is how big a story they become every four years. We are more
fascinated today by statistical predictions of what the country will be thinking in a few
weeks’ time than by visionary predictions of what the country will look like 10 or 20
years from now.
And it’s not just the electoral process—the very character of government has become
indefinite, too. The government used to be able to coordinate complex solutions to
problems like atomic weaponry and lunar exploration. But today, after 40 years of
indefinite creep, the government mainly just provides insurance; our solutions to big
problems are Medicare, Social Security, and a dizzying array of other transfer payment
programs. It’s no surprise that entitlement spending has eclipsed discretionary spending
every year since 1975. To increase discretionary spending we’d need definite plans to
solve specific problems. But according to the indefinite logic of entitlement spending,
we can make things better just by sending out more checks.
Indefinite Philosophy
You can see the shift to an indefinite attitude not just in politics but in the political
philosophers whose ideas underpin both left and right.
The philosophy of the ancient world was pessimistic: Plato, Aristotle, Epicurus, and
Lucretius all accepted strict limits on human potential. The only question was how best
to cope with our tragic fate. Modern philosophers have been mostly optimistic. From
Herbert Spencer on the right and Hegel in the center to Marx on the left, the 19th century
shared a belief in progress. (Remember Marx and Engels’s encomium to the
technological triumphs of capitalism from this page.) These thinkers expected material
advances to fundamentally change human life for the better: they were definite
optimists.
In the late 20th century, indefinite philosophies came to the fore. The two dominant
political thinkers, John Rawls and Robert Nozick, are usually seen as stark opposites: on
the egalitarian left, Rawls was concerned with questions of fairness and distribution; on
the libertarian right, Nozick focused on maximizing individual freedom. They both
believed that people could get along with each other peacefully, so unlike the ancients,
they were optimistic. But unlike Spencer or Marx, Rawls and Nozick were indefinite
optimists: they didn’t have any specific vision of the future.

Their indefiniteness took different forms. Rawls begins A Theory of Justice with the
famous “veil of ignorance”: fair political reasoning is supposed to be impossible for
anyone with knowledge of the world as it concretely exists. Instead of trying to change
our actual world of unique people and real technologies, Rawls fantasized about an
“inherently stable” society with lots of fairness but little dynamism. Nozick opposed
Rawls’s “patterned” concept of justice. To Nozick, any voluntary exchange must be
allowed, and no social pattern could be noble enough to justify maintenance by coercion.
He didn’t have any more concrete ideas about the good society than Rawls: both of them
focused on process. Today, we exaggerate the differences between left-liberal
egalitarianism and libertarian individualism because almost everyone shares their
common indefinite attitude. In philosophy, politics, and business, too, arguing over
process has become a way to endlessly defer making concrete plans for a better future.
Indefinite Life
Our ancestors sought to understand and extend the human lifespan. In the 16th century,
conquistadors searched the jungles of Florida for a Fountain of Youth. Francis Bacon
wrote that “the prolongation of life” should be considered its own branch of medicine—
and the noblest. In the 1660s, Robert Boyle placed life extension (along with “the
Recovery of Youth”) atop his famous wish list for the future of science. Whether through
geographic exploration or laboratory research, the best minds of the Renaissance thought
of death as something to defeat. (Some resisters were killed in action: Bacon caught
pneumonia and died in 1626 while experimenting to see if he could extend a chicken’s
life by freezing it in the snow.)
We haven’t yet uncovered the secrets of life, but insurers and statisticians in the 19th
century successfully revealed a secret about death that still governs our thinking today:
they discovered how to reduce it to a mathematical probability. “Life tables” tell us our
chances of dying in any given year, something previous generations didn’t know.
However, in exchange for better insurance contracts, we seem to have given up the
search for secrets about longevity. Systematic knowledge of the current range of human
lifespans has made that range seem natural. Today our society is permeated by the twin
ideas that death is both inevitable and random.
Meanwhile, probabilistic attitudes have come to shape the agenda of biology itself. In
1928, Scottish scientist Alexander Fleming found that a mysterious antibacterial fungus
had grown on a petri dish he’d forgotten to cover in his laboratory: he discovered
penicillin by accident. Scientists have sought to harness the power of chance ever since.
Modern drug discovery aims to amplify Fleming’s serendipitous circumstances a
millionfold: pharmaceutical companies search through combinations of molecular
compounds at random, hoping to find a hit.
But it’s not working as well as it used to. Despite dramatic advances over the past two
centuries, in recent decades biotechnology hasn’t met the expectations of investors—or
patients. Eroom’s law—that’s Moore’s law backward—observes that the number of new
drugs approved per billion dollars spent on R&D has halved every nine years since 1950.
Since information technology accelerated faster than ever during those same years, the
big question for biotech today is whether it will ever see similar progress. Compare
biotech startups to their counterparts in computer software:
 Biotech startups are an extreme example of indefinite thinking. Researchers
experiment with things that just might work instead of refining definite theories about
how the body’s systems operate. Biologists say they need to work this way because the
underlying biology is hard. According to them, IT startups work because we created
computers ourselves and designed them to reliably obey our commands. Biotech is
difficult because we didn’t design our bodies, and the more we learn about them, the
more complex they turn out to be.
But today it’s possible to wonder whether the genuine difficulty of biology has
become an excuse for biotech startups’ indefinite approach to business in general. Most
of the people involved expect some things to work eventually, but few want to commit to
a specific company with the level of intensity necessary for success. It starts with the
professors who often become part-time consultants instead of full-time employees—
even for the biotech startups that begin from their own research. Then everyone else
imitates the professors’ indefinite attitude. It’s easy for libertarians to claim that heavy
regulation holds biotech back—and it does—but indefinite optimism may pose an even
greater challenge for the future of biotech.
 IS INDEFINITE OPTIMISM EVEN POSSIBLE?
What kind of future will our indefinitely optimistic decisions bring about? If American
households were saving, at least they could expect to have money to spend later. And if
American companies were investing, they could expect to reap the rewards of new
wealth in the future. 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.

The other three views of the future can work. 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?
Actually, most everybody in the modern world has already heard an answer to this
question: progress without planning is what we call “evolution.” Darwin himself wrote
that life tends to “progress” without anybody intending it. Every living thing is just a
random iteration on some other organism, and the best iterations win.
Darwin’s theory explains the origin of trilobites and dinosaurs, but can it be extended
to domains that are far removed? Just as Newtonian physics can’t explain black holes or
the Big Bang, it’s not clear that Darwinian biology should explain how to build a better
society or how to create a new business out of nothing. Yet in recent years Darwinian (or
pseudo-Darwinian) metaphors have become common in business. Journalists analogize
literal survival in competitive ecosystems to corporate survival in competitive markets.
Hence all the headlines like “Digital Darwinism,” “Dot-com Darwinism,” and “Survival
of the Clickiest.”
Even in engineering-driven Silicon Valley, the buzzwords of the moment call for
building a “lean startup” that can “adapt” and “evolve” to an ever-changing environment.
Would-be entrepreneurs are told that nothing can be known in advance: we’re supposed
to listen to what customers say they want, make nothing more than a “minimum viable
product,” and iterate our way to success.
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.
 THE RETURN OF DESIGN
What would it mean to prioritize design over chance? Today, “good design” is an
aesthetic imperative, and everybody from slackers to yuppies carefully “curates” their
outward appearance. It’s true that every great entrepreneur is first and foremost a
designer. Anyone who has held an iDevice or a smoothly machined MacBook has felt the
result of Steve Jobs’s obsession with visual and experiential perfection. But the most
important lesson to learn from Jobs has nothing to do with aesthetics. The greatest thing
Jobs designed was his business. Apple imagined and executed definite multi-year plans
to create new products and distribute them effectively. 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. When the
first iPod was released in October 2001, industry analysts couldn’t see much more than
“a nice feature for Macintosh users” that “doesn’t make any difference” to the rest of the
world. Jobs planned the iPod to be the first of a new generation of portable post-PC
devices, but that secret was invisible to most people. One look at the company’s stock
chart shows the harvest of this multi-year plan:

The power of planning explains the difficulty of valuing private companies. When a
big company makes an offer to acquire a successful startup, it almost always offers too
much or too little: 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.
 YOU ARE NOT A LOTTERY TICKET
We have to find our way back to a definite future, and the Western world needs nothing
short of a cultural revolution to do it.
Where to start? John Rawls will need to be displaced in philosophy departments.
Malcolm Gladwell must be persuaded to change his theories. And pollsters have to be
driven from politics. But the philosophy professors and the Gladwells of the world are
set in their ways, to say nothing of our politicians. It’s extremely hard to make changes
in those crowded fields, even with brains and good intentions.
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.
7
 FOLLOW THE MONEY
M . “For whoever has will be given more, and they will have an abundance.
ONEY MAKES MONEY

Whoever does not have, even what they have will be taken from them” (Matthew 25:29).
Albert Einstein made the same observation when he stated that compound interest was
“the eighth wonder of the world,” “the greatest mathematical discovery of all time,” or
even “the most powerful force in the universe.” Whichever version you prefer, you can’t
miss his message: never underestimate exponential growth. Actually, there’s no evidence
that Einstein ever said any of those things—the quotations are all apocryphal. But this
very misattribution reinforces the message: having invested the principal of a lifetime’s
brilliance, Einstein continues to earn interest on it from beyond the grave by receiving
credit for things he never said.
Most sayings are forgotten. At the other extreme, a select few people like Einstein and
Shakespeare are constantly quoted and ventriloquized. We shouldn’t be surprised, since
small minorities often achieve disproportionate results. In 1906, economist Vilfredo
Pareto discovered what became the “Pareto principle,” or the 80-20 rule, when he noticed
that 20% of the people owned 80% of the land in Italy—a phenomenon that he found just
as natural as the fact that 20% of the peapods in his garden produced 80% of the peas.
This extraordinarily stark pattern, in which a small few radically outstrip all rivals,
surrounds us everywhere in the natural and social world. The most destructive
earthquakes are many times more powerful than all smaller earthquakes combined. The
biggest cities dwarf all mere towns put together. And monopoly businesses capture more
value than millions of undifferentiated competitors. Whatever Einstein did or didn’t say,
t h e power law—so named because exponential equations describe severely unequal
distributions—is the law of the universe. It defines our surroundings so completely that
we usually don’t even see it.
This chapter shows how the power law becomes visible when you follow the money:
i n venture capital, where investors try to profit from exponential growth in early-stage
companies, a few companies attain exponentially greater value than all others. Most
businesses never need to deal with venture capital, but everyone needs to know exactly
one thing that even venture capitalists struggle to understand: we don’t live in a normal
world; we live under a power law.
 THE POWER LAW OF VENTURE CAPITAL
Venture capitalists aim to identify, fund, and profit from promising early-stage
companies. They raise money from institutions and wealthy people, pool it into a fund,
and invest in technology companies that they believe will become more valuable. If they
turn out to be right, they take a cut of the returns—usually 20%. A venture fund makes
money when the companies in its portfolio become more valuable and either go public or
get bought by larger companies. Venture funds usually have a 10-year lifespan since it
takes time for successful companies to grow and “exit.”
But most venture-backed companies don’t IPO or get acquired; most fail, usually soon
after they start. Due to these early failures, a venture fund typically loses money at first.
VCs hope the value of the fund will increase dramatically in a few years’ time, to break-
even and beyond, when the successful portfolio companies hit their exponential growth
spurts and start to scale.
The big question is when this takeoff will happen. For most funds, the answer is never.
Most startups fail, and most funds fail with them. Every VC knows that his task is to find
the companies that will succeed. However, even seasoned investors understand this
phenomenon only superficially. They know companies are different, but they
underestimate the degree of difference.

The error lies in expecting that venture returns will be normally distributed: that is,
bad companies will fail, mediocre ones will stay flat, and good ones will return 2x or
even 4x. Assuming this bland pattern, investors assemble a diversified portfolio and
hope that winners counterbalance losers.
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.
This graph shows the stark reality versus the perceived relative homogeneity:

Our results at Founders Fund illustrate this skewed pattern: Facebook, the best
investment in our 2005 fund, returned more than all the others combined. Palantir, the
second-best investment, is set to return more than the sum of every other investment
aside from Facebook. This highly uneven pattern is not unusual: we see it in all our other
funds as well. 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.
This implies two very strange rules for VCs. First, only invest in companies that have
the potential to return the value of the entire fund. This is a scary rule, because it
eliminates the vast majority of possible investments. (Even quite successful companies
usually succeed on a more humble scale.) This leads to rule number two: because rule
number one is so restrictive, there can’t be any other rules.
Consider what happens when you break the first rule. Andreessen Horowitz invested
$250,000 in Instagram in 2010. When Facebook bought Instagram just two years later for
$1 billion, Andreessen netted $78 million—a 312x return in less than two years. That’s a
phenomenal return, befitting the firm’s reputation as one of the Valley’s best. But in a
weird way it’s not nearly enough, because Andreessen Horowitz has a $1.5 billion fund:
if they only wrote $250,000 checks, they would need to find 19 Instagrams just to break
even. This is why investors typically put a lot more money into any company worth
funding. (And to be fair, Andreessen would have invested more in Instagram’s later
rounds had it not been conflicted out by a previous investment.) VCs must find the
handful of companies that will successfully go from 0 to 1 and then back them with
every resource.
Of course, no one can know with certainty ex ante which companies will succeed, so
even the best VC firms have a “portfolio.” However, every single company in a good
venture portfolio must have the potential to succeed at vast scale. At Founders Fund, we
focus on five to seven companies in a fund, each of which we think could become a
multibillion-dollar business based on its unique fundamentals. Whenever you shift from
the substance of a business to the financial question of whether or not it fits into a
diversified hedging strategy, venture investing starts to look a lot like buying lottery
tickets. And once you think that you’re playing the lottery, you’ve already
psychologically prepared yourself to lose.
 WHY PEOPLE DON’T SEE THE POWER LAW
Why would professional VCs, of all people, fail to see the power law? For one thing, it
only becomes clear over time, and even technology investors too often live in the
present. Imagine a firm invests in 10 companies with the potential to become
monopolies—already an unusually disciplined portfolio. Those companies will look very
similar in the early stages before exponential growth.

Over the next few years, some companies will fail while others begin to succeed;
valuations will diverge, but the difference between exponential growth and linear growth
will be unclear.
 After 10 years, however, the portfolio won’t be divided between winners and losers; it
will be split between one dominant investment and everything else.
But no matter how unambiguous the end result of the power law, it doesn’t reflect
daily experience. Since investors spend most of their time making new investments and
attending to companies in their early stages, most of the companies they work with are
by definition average. Most of the differences that investors and entrepreneurs perceive
every day are between relative levels of success, not between exponential dominance and
failure. And since nobody wants to give up on an investment, VCs usually spend even
more time on the most problematic companies than they do on the most obviously
successful.
 If even investors specializing in exponentially growing startups miss the power law,
it’s not surprising that most everyone else misses it, too. Power law distributions are so
big that they hide in plain sight. For example, when most people outside Silicon Valley
think of venture capital, they might picture a small and quirky coterie—like ABC’s
Shark Tank, only without commercials. 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. Indeed, the dozen
largest tech companies were all venture-backed. Together those 12 companies are worth
more than $2 trillion, more than all other tech companies combined.
 WHAT TO DO WITH THE POWER LAW
The power law is not just important to investors; rather, it’s important to everybody
because everybody is an investor. An entrepreneur makes a major investment just by
spending her time working on a startup. Therefore every entrepreneur must think about
whether her company is going to succeed and become valuable. Every individual is
unavoidably an investor, too. When you choose a career, you act on your belief that the
kind of work you do will be valuable decades from now.
The most common answer to the question of future value is a diversified portfolio:
“Don’t put all your eggs in one basket,” everyone has been told. As we said, even the
best venture investors have a portfolio, but investors who understand the power law
make as few investments as possible. The kind of portfolio thinking embraced by both
folk wisdom and financial convention, by contrast, regards diversified betting as a source
of strength. The more you dabble, the more you are supposed to have hedged against the
uncertainty of the future.
But life is not a portfolio: not for a startup founder, and not for any individual. 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.
Our schools teach the opposite: institutionalized education traffics in a kind of
homogenized, generic knowledge. Everybody who passes through the American school
system learns not to think in power law terms. Every high school course period lasts 45
minutes whatever the subject. Every student proceeds at a similar pace. At college,
model students obsessively hedge their futures by assembling a suite of exotic and minor
skills. Every university believes in “excellence,” and hundred-page course catalogs
arranged alphabetically according to arbitrary departments of knowledge seem designed
to reassure you that “it doesn’t matter what you do, as long as you do it well.” That is
completely false. 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.
For the startup world, this means you should not necessarily start your own company,
even if you are extraordinarily talented. If anything, too many people are starting their
own companies today. People who understand the power law will hesitate more than
others when it comes to founding a new venture: they know how tremendously
successful they could become by joining the very best company while it’s growing fast.
The power law means that differences between companies will dwarf the differences in
roles inside companies. You could have 100% of the equity if you fully fund your own
venture, but if it fails you’ll have 100% of nothing. Owning just 0.01% of Google, by
contrast, is incredibly valuable (more than $35 million as of this writing).
If you do start your own company, you must remember the power law to operate it
well. 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. It might even be secret. But in a power
law world, you can’t afford not to think hard about where your actions will fall on the
curve.
8
 SECRETS
E ’ most famous and familiar ideas was once unknown and unsuspected. The
VERY ONE OF TODAY S

mathematical relationship between a triangle’s sides, for example, was secret for
millennia. Pythagoras had to think hard to discover it. If you wanted in on Pythagoras’s
new discovery, joining his strange vegetarian cult was the best way to learn about it.
Today, his geometry has become a convention—a simple truth we teach to grade
schoolers. A conventional truth can be important—it’s essential to learn elementary
mathematics, for example—but it won’t give you an edge. It’s not a secret.
Remember our contrarian question: what important truth do very few people agree
with you on? If we already understand as much of the natural world as we ever will—if
all of today’s conventional ideas are already enlightened, and if everything has already
been done—then there are no good answers. Contrarian thinking doesn’t make any sense
unless the world still has secrets left to give up.

Of course, there are many things we don’t yet understand, but some of those things
may be impossible to figure out—mysteries rather than secrets. For example, string
theory describes the physics of the universe in terms of vibrating one-dimensional
objects called “strings.” Is string theory true? You can’t really design experiments to test
it. Very few people, if any, could ever understand all its implications. But is that just
because it’s difficult? Or is it an impossible mystery? The difference matters. 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. This chapter will
help you think about secrets and how to find them.
 WHY AREN’T PEOPLE LOOKING FOR SECRETS?
Most people act as if there were no secrets left to find. An extreme representative of this
view is Ted Kaczynski, infamously known as the Unabomber. Kaczynski was a child
prodigy who enrolled at Harvard at 16. He went on to get a PhD in math and become a
professor at UC Berkeley. But you’ve only ever heard of him because of the 17-year
terror campaign he waged with pipe bombs against professors, technologists, and
businesspeople.
In late 1995, the authorities didn’t know who or where the Unabomber was. The
biggest clue was a 35,000-word manifesto that Kaczynski had written and anonymously
mailed to the press. The FBI asked some prominent newspapers to publish it, hoping for
a break in the case. It worked: Kaczynski’s brother recognized his writing style and
turned him in.
You might expect that writing style to have shown obvious signs of insanity, but the
manifesto is eerily cogent. Kaczynski claimed that in order to be happy, every individual
“needs to have goals whose attainment requires effort, and needs to succeed in attaining
at least some of his goals.” He divided human goals into three groups:

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. Kaczynski
argued that modern people are depressed because all the world’s hard problems have
already been solved. What’s left to do is either easy or impossible, and pursuing those
tasks is deeply unsatisfying. What you can do, even a child can do; what you can’t do,
even Einstein couldn’t have done. So Kaczynski’s idea was to destroy existing
institutions, get rid of all technology, and let people start over and work on hard
problems anew.
Kaczynski’s methods were crazy, but his loss of faith in the technological frontier is
all around us. Consider the trivial but revealing hallmarks of urban hipsterdom: faux
vintage photography, the handlebar mustache, and vinyl record players all hark back to
an earlier time when people were still optimistic about the future. If everything worth
doing has already been done, you may as well feign an allergy to achievement and
become a barista.
 Hipster or Unabomber?

A l l 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.
Why has so much of our society come to believe that there are no hard secrets left? It
might start with geography. There are no blank spaces left on the map anymore. If you
grew up in the 18th century, there were still new places to go. After hearing tales of
foreign adventure, you could become an explorer yourself. This was probably true up
through the 19th and early 20th centuries; after that point photography from National
Geographic showed every Westerner what even the most exotic, underexplored places on
earth look like. Today, explorers are found mostly in history books and children’s tales.
Parents don’t expect their kids to become explorers any more than they expect them to
become pirates or sultans. Perhaps there are a few dozen uncontacted tribes somewhere
deep in the Amazon, and we know there remains one last earthly frontier in the depths of
the oceans. But the unknown seems less accessible than ever.
Along with the natural fact that physical frontiers have receded, four social trends
have conspired to root out belief in secrets. First is incrementalism. From an early age,
we are taught that the right way to do things is to proceed one very small step at a time,
day by day, grade by grade. If you overachieve and end up learning something that’s not
on the test, you won’t receive credit for it. But in exchange for doing exactly what’s
asked of you (and for doing it just a bit better than your peers), you’ll get an A. This
process extends all the way up through the tenure track, which is why academics usually
chase large numbers of trivial publications instead of new frontiers.
 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.
Third is complacency. Social elites have the most freedom and ability to explore new
thinking, but they seem to believe in secrets the least. Why search for a new secret if you
can comfortably collect rents on everything that has already been done? Every fall, the
deans at top law schools and business schools welcome the incoming class with the same
implicit message: “You got into this elite institution. Your worries are over. You’re set
for life.” But that’s probably the kind of thing that’s true only if you don’t believe it.
Fourth is “flatness.” As globalization advances, people perceive the world as one
homogeneous, highly competitive marketplace: the world is “flat.” Given that
assumption, anyone who might have had the ambition to look for a secret will first ask
himself: if it were possible to discover something new, wouldn’t someone from the
faceless global talent pool of smarter and more creative people have found it already?
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.
There’s an optimistic way to describe the result of these trends: today, you can’t start
a cult. Forty years ago, people were more open to the idea that not all knowledge was
widely known. From the Communist Party to the Hare Krishnas, large numbers of people
thought they could join some enlightened vanguard that would show them the Way. Very
few people take unorthodox ideas seriously today, and the mainstream sees that as a sign
of progress. 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.
 THE WORLD ACCORDING TO CONVENTION
How must you see the world if you don’t believe in secrets? You’d have to believe we’ve
already solved all great questions. If today’s conventions are correct, we can afford to be
smug and complacent: “God’s in His heaven, All’s right with the world.”
For example, a world without secrets would enjoy a perfect understanding of justice.
Every injustice necessarily involves a moral truth that very few people recognize early
on: in a democratic society, a wrongful practice persists only when most people don’t
perceive it to be unjust. At first, only a small minority of abolitionists knew that slavery
was evil; that view has rightly become conventional, but it was still a secret in the early
19th century. To say that there are no secrets left today would mean that we live in a
society with no hidden injustices.
In economics, disbelief in secrets leads to faith in efficient markets. But the existence
of financial bubbles shows that markets can have extraordinary inefficiencies. (And the
more people believe in efficiency, the bigger the bubbles get.) In 1999, nobody wanted to
believe that the internet was irrationally overvalued. The same was true of housing in
2005: Fed chairman Alan Greenspan had to acknowledge some “signs of froth in local
markets” but stated that “a bubble in home prices for the nation as a whole does not
appear likely.” The market reflected all knowable information and couldn’t be
questioned. Then home prices fell across the country, and the financial crisis of 2008
wiped out trillions. The future turned out to hold many secrets that economists could not
make vanish simply by ignoring them.
What happens when a company stops believing in secrets? The sad decline of Hewlett-
Packard provides a cautionary tale. In 1990, the company was worth $9 billion. Then
came a decade of invention. In 1991, HP released the DeskJet 500C, the world’s first
affordable color printer. In 1993, it launched the OmniBook, one of the first
“superportable” laptops. The next year, HP released the OfficeJet, the world’s first all-
in-one printer/fax/copier. This relentless product expansion paid off: by mid-2000, HP
was worth $135 billion.
But starting in late 1999, when HP introduced a new branding campaign around the
imperative to “invent,” it stopped inventing things. In 2001, the company launched HP
Services, a glorified consulting and support shop. In 2002, HP merged with Compaq,
presumably because it didn’t know what else to do. By 2005, the company’s market cap
had plunged to $70 billion—roughly half of what it had been just five years earlier.
HP’s board was a microcosm of the dysfunction: it split into two factions, only one of
which cared about new technology. That faction was led by Tom Perkins, an engineer
who first came to HP in 1963 to run the company’s research division at the personal
request of Bill Hewlett and Dave Packard. At 73 years old in 2005, Perkins may as well
have been a time-traveling visitor from a bygone age of optimism: he thought the board
should identify the most promising new technologies and then have HP build them. But
Perkins’s faction lost out to its rival, led by chairwoman Patricia Dunn. A banker by
trade, Dunn argued that charting a plan for future technology was beyond the board’s
competence. She thought the board should restrict itself to a night watchman’s role: Was
everything proper in the accounting department? Were people following all the rules?
 Amid this infighting, someone on the board started leaking information to the press.
When it was exposed that Dunn arranged a series of illegal wiretaps to identify the
source, the backlash was worse than the original dissension, and the board was disgraced.
Having abandoned the search for technological secrets, HP obsessed over gossip. As a
result, by late 2012 HP was worth just $23 billion—not much more than it was worth in
1990, adjusting for inflation.
 THE CASE FOR SECRETS
You can’t find secrets without looking for them. Andrew Wiles demonstrated this when
he proved Fermat’s Last Theorem after 358 years of fruitless inquiry by other
mathematicians—the kind of sustained failure that might have suggested an inherently
impossible task. Pierre de Fermat had conjectured in 1637 that no integers a, b, and c
could satisfy the equation a + b = c for any integer n greater than 2. He claimed to have
n n n

a proof, but he died without writing it down, so his conjecture long remained a major
unsolved problem in mathematics. Wiles started working on it in 1986, but he kept it a
secret until 1993, when he knew he was nearing a solution. After nine years of hard work,
Wiles proved the conjecture in 1995. He needed brilliance to succeed, but he also needed
a faith in secrets. 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. There is more to do in science, medicine, engineering, and in
technology of all kinds. We are within reach not just of marginal goals set at the
competitive edge of today’s conventional disciplines, but of ambitions so great that even
the boldest minds of the Scientific Revolution hesitated to announce them directly. We
could cure cancer, dementia, and all the diseases of age and metabolic decay. We can
find new ways to generate energy that free the world from conflict over fossil fuels. We
can invent faster ways to travel from place to place over the surface of the planet; we can
even learn how to escape it entirely and settle new frontiers. 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. Consider the Silicon Valley startups that have
harnessed the spare capacity that is all around us but often ignored. Before Airbnb,
travelers had little choice but to pay high prices for a hotel room, and property owners
couldn’t easily and reliably rent out their unoccupied space. Airbnb saw untapped supply
and unaddressed demand where others saw nothing at all. The same is true of private car
services Lyft and Uber. Few people imagined that it was possible to build a billion-dollar
business by simply connecting people who want to go places with people willing to drive
them there. We already had state-licensed taxicabs and private limousines; 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.
 HOW TO FIND SECRETS
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?
It’s easy to assume that natural secrets are the most important: the people who look
for them can sound intimidatingly authoritative. This is why physics PhDs are
notoriously difficult to work with—because they know the most fundamental truths, they
think they know all truths. But does understanding electromagnetic theory automatically
make you a great marriage counselor? Does a gravity theorist know more about your
business than you do? At PayPal, I once interviewed a physics PhD for an engineering
job. Halfway through my first question, he shouted, “Stop! I already know what you’re
going to ask!” But he was wrong. It was the easiest no-hire decision I’ve ever made.
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?
Sometimes looking for natural secrets and looking for human secrets lead to the same
truth. Consider the monopoly secret again: competition and capitalism are opposites. If
you didn’t already know it, you could discover it the natural, empirical way: do a
quantitative study of corporate profits and you’ll see they’re eliminated by competition.
But you could also take the human approach and ask: what are people running companies
not allowed to say? You would notice that monopolists downplay their monopoly status
to avoid scrutiny, while competitive firms strategically exaggerate their uniqueness. The
differences between firms only seem small on the surface; in fact, they are enormous.
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? Physics, for example, is a real major at all major universities, and
it’s set in its ways. The opposite of physics might be astrology, but astrology doesn’t
matter. What about something like nutrition? Nutrition matters for everybody, but you
can’t major in it at Harvard. Most top scientists go into other fields. 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. There’s plenty more to learn: we know more about the physics of
faraway stars than we know about human nutrition. It won’t be easy, but it’s not
obviously impossible: exactly the kind of field that could yield secrets.
 WHAT TO DO WITH SECRETS
If you find a secret, you face a choice: Do you tell anyone? Or do you keep it to yourself?
It depends on the secret: some are more dangerous than others. As Faust tells Wagner:

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.
As Tolkien wrote in The Lord of the Rings:

The Road goes ever on and on

Down from the door where it began.
Life is a long journey; the road marked out by the steps of previous travelers has no
end in sight. But later on in the tale, another verse appears:

Still round the corner there may wait

A new road or a secret gate,
And though we pass them by today,
Tomorrow we may come this way
And take the hidden paths that run
Towards the Moon or to the Sun.
The road doesn’t have to be infinite after all. Take the hidden paths.
9
 FOUNDATIONS
E is unique, but there are a few things that every business must get right at
VERY GREAT COMPANY

the beginning. I stress this so often that friends have teasingly nicknamed it “Thiel’s
law”: a startup messed up at its foundation cannot be fixed.
Beginnings are special. They are qualitatively different from all that comes afterward.
This was true 13.8 billion years ago, at the founding of our cosmos: in the earliest
microseconds of its existence, the universe expanded by a factor of 10 —a million
30

trillion trillion. As cosmogonic epochs came and went in those first few moments, the
very laws of physics were different from those we know today.
It was also true 227 years ago at the founding of our country: fundamental questions
were open for debate by the Framers during the few months they spent together at the
Constitutional Convention. How much power should the central government have? How
should representation in Congress be apportioned? Whatever your views on the
compromises reached that summer in Philadelphia, they’ve been hard to change ever
since: after ratifying the Bill of Rights in 1791, we’ve amended the Constitution only 17
times. Today, California has the same representation in the Senate as Alaska, even
though it has more than 50 times as many people. Maybe that’s a feature, not a bug. But
we’re probably stuck with it as long as the United States exists. Another constitutional
convention is unlikely; today we debate only smaller questions.
Companies are like countries in this way. Bad decisions made early on—if you choose
the wrong partners or hire the wrong people, for example—are very hard to correct after
they are made. It may take a crisis on the order of bankruptcy before anybody will even
try to correct them. As a founder, your first job is to get the first things right, because
you cannot build a great company on a flawed foundation.
 FOUNDING MATRIMONY
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.
In 1999, Luke Nosek was one of my co-founders at PayPal, and I still work with him
today at Founders Fund. But a year before PayPal, I invested in a company Luke started
with someone else. It was his first startup; it was one of my first investments. Neither of
us realized it then, but the venture was doomed to fail from the beginning because Luke
and his co-founder were a terrible match. Luke is a brilliant and eccentric thinker; his co-
founder was an MBA type who didn’t want to miss out on the ’90s gold rush. They met
at a networking event, talked for a while, and decided to start a company together. That’s
no better than marrying the first person you meet at the slot machines in Vegas: you
might hit the jackpot, but it probably won’t work. Their company blew up and I lost my
money.
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.
 OWNERSHIP, POSSESSION, AND CONTROL
It’s not just founders who need to get along. Everyone in your company needs to work
well together. A Silicon Valley libertarian might say you could solve this problem by
restricting yourself to a sole proprietorship. Freud, Jung, and every other psychologist
has a theory about how every individual mind is divided against itself, but in business at
least, working for yourself guarantees alignment. Unfortunately, it also limits what kind
of company you can build. It’s very hard to go from 0 to 1 without a team.
A Silicon Valley anarchist might say you could achieve perfect alignment as long as
you hire just the right people, who will flourish peacefully without any guiding structure.
Serendipity and even free-form chaos at the workplace are supposed to help “disrupt” all
the old rules made and obeyed by the rest of the world. And indeed, “if men were angels,
no government would be necessary.” But anarchic companies miss what James Madison
saw: men aren’t angels. That’s why executives who manage companies and directors
who govern them have separate roles to play; it’s also why founders’ and investors’
claims on a company are formally defined. 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.
In theory, this division works smoothly. 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. In practice, distributing these functions
among different people makes sense, but it also multiplies opportunities for
misalignment.
To see misalignment at its most extreme, just visit the DMV. Suppose you need a new
driver’s license. Theoretically, it should be easy to get one. The DMV is a government
agency, and we live in a democratic republic. All power resides in “the people,” who
elect representatives to serve them in government. If you’re a citizen, you’re a part
owner of the DMV and your representatives control it, so you should be able to walk in
and get what you need.
Of course, it doesn’t work like that. We the people may “own” the DMV’s resources,
but that ownership is merely fictional. The clerks and petty tyrants who operate the
DMV, however, enjoy very real possession of their small-time powers. Even the
governor and the legislature charged with nominal control over the DMV can’t change
anything. The bureaucracy lurches ever sideways of its own inertia no matter what
actions elected officials take. Accountable to nobody, the DMV is misaligned with
everybody. Bureaucrats can make your licensing experience pleasurable or nightmarish
at their sole discretion. You can try to bring up political theory and remind them that you
are the boss, but that’s unlikely to get you better service.
Big corporations do better than the DMV, but they’re still prone to misalignment,
especially between ownership and possession. The CEO of a huge company like General
Motors, for example, will own some of the company’s stock, but only a trivial portion of
the total. Therefore he’s incentivized to reward himself through the power of possession
rather than the value of ownership. Posting good quarterly results will be enough for him
to keep his high salary and corporate jet. Misalignment can creep in even if he receives
stock compensation in the name of “shareholder value.” If that stock comes as a reward
for short-term performance, he will find it more lucrative and much easier to cut costs
instead of investing in a plan that might create more value for all shareholders far in the
future.
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. The potential for
conflict increases over time as interests diverge: a board member might want to take a
company public as soon as possible to score a win for his venture firm, while the
founders would prefer to stay private and grow the business.
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. However, that
very effectiveness means that a small board can forcefully oppose management in any
conflict. 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. (Government regulations effectively mandate that public
companies have larger boards—the average is nine members.) By far the worst you can
do is to make your board extra large. When unsavvy observers see a nonprofit
organization with dozens of people on its board, they think: “Look how many great
people are committed to this organization! It must be extremely well run.” Actually, a
huge board will exercise no effective oversight at all; it merely provides cover for
whatever microdictator actually runs the organization. If you want that kind of free rein
from your board, blow it up to giant size. If you want an effective board, keep it small.
 ON THE BUS OR OFF THE BUS
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
hi ri ng 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.
 CASH IS NOT KING
For people to be fully committed, they should be properly compensated. Whenever an
entrepreneur asks me to invest in his company, I ask him how much he intends to pay
himself. 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 $150,000 per year in
salary. It doesn’t matter if he got used to making much more than that at Google or if he
has a large mortgage and hefty private school tuition bills. If a CEO collects $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.
Low CEO pay also sets the standard for everyone else. Aaron Levie, the CEO of Box,
was always careful to pay himself less than everyone else in the company—four years
after he started Box, he was still living two blocks away from HQ in a one-bedroom
apartment with no furniture except a mattress. Every employee noticed his obvious
commitment to the company’s mission and emulated it. If a CEO doesn’t set an example
by taking the lowest salary in the company, he can do the same thing by drawing the
highest salary. So long as that figure is still modest, it sets an effective ceiling on cash
compensation.
Cash is attractive. It offers pure optionality: once you get your paycheck, you can do
anything you want with it. 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.
 VESTED INTERESTS
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.
However, for equity to create commitment rather than conflict, you must allocate it
very carefully. Giving everyone equal shares is usually a mistake: every individual has
different talents and responsibilities as well as different opportunity costs, so equal
amounts will seem arbitrary and unfair from the start. On the other hand, granting
different amounts up front is just as sure to seem unfair. Resentment at this stage can kill
a company, but there’s no ownership formula to perfectly avoid it.
This problem becomes even more acute over time as more people join the company.
Early employees usually get the most equity because they take more risk, but some later
employees might be even more crucial to a venture’s success. A secretary who joined
eBay in 1996 might have made 200 times more than her industry-veteran boss who
joined in 1999. The graffiti artist who painted Facebook’s office walls in 2005 got stock
that turned out to be worth $200 million, while a talented engineer who joined in 2010
might have made only $2 million. Since it’s impossible to achieve perfect fairness when
distributing ownership, founders would do well to keep the details secret. Sending out a
company-wide email that lists everyone’s ownership stake would be like dropping a
nuclear bomb on your office.
Most people don’t want equity at all. At PayPal, we once hired a consultant who
promised to help us negotiate lucrative business development deals. The only thing he
ever successfully negotiated was a $5,000 daily cash salary; he refused to accept stock
options as payment. Stories of startup chefs becoming millionaires notwithstanding,
people often find equity unattractive. It’s not liquid like cash. It’s tied to one specific
company. And if that company doesn’t succeed, it’s worthless.
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.
 EXTENDING THE FOUNDING
Bob Dylan has said that he who is not busy being born is busy dying. If he’s right, being
born doesn’t happen at just one moment—you might even continue to do it somehow,
poetically at least. The founding moment of a company, however, really does happen just
once: only at the very start do you have the opportunity to set the rules that will align
people toward the creation of value in the future.
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.
10
 THE MECHANICS OF MAFIA
S : what would the ideal company culture look like? Employees
TART WITH A THOUGHT EXPERIMENT

should love their work. They should enjoy going to the office so much that formal
business hours become obsolete and nobody watches the clock. The workspace should be
open, not cubicled, and workers should feel at home: beanbag chairs and Ping-Pong
tables might outnumber file cabinets. Free massages, on-site sushi chefs, and maybe
even yoga classes would sweeten the scene. Pets should be welcome, too: perhaps
employees’ dogs and cats could come and join the office’s tankful of tropical fish as
unofficial company mascots.
What’s wrong with this picture? It includes some of the absurd perks Silicon Valley
has made famous, but none of the substance—and without substance perks don’t work.
You can’t accomplish anything meaningful by hiring an interior decorator to beautify
your office, a “human resources” consultant to fix your policies, or a branding specialist
to hone your buzzwords. “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.
 BEYOND PROFESSIONALISM
The first team that I built has become known in Silicon Valley as the “ PayPal Mafia”
because so many of my former colleagues have gone on to help each other start and
invest in successful tech companies. We sold PayPal to eBay for $1.5 billion in 2002.
Since then, Elon Musk has founded SpaceX and co-founded Tesla Motors; Reid Hoffman
co-founded LinkedIn; Steve Chen, Chad Hurley, and Jawed Karim together founded
YouTube; Jeremy Stoppelman and Russel Simmons founded Yelp; David Sacks co-
founded Yammer; and I co-founded Palantir. Today all seven of those companies are
worth more than $1 billion each. PayPal’s office amenities never got much press, but the
team has done extraordinarily well, both together and individually: the culture was
strong enough to transcend the original company.
We didn’t assemble a mafia by sorting through résumés and simply hiring the most
talented people. I had seen the mixed results of that approach firsthand when I worked at
a New York law firm. The lawyers I worked with ran a valuable business, and they were
impressive individuals one by one. But the relationships between them were oddly thin.
They spent all day together, but few of them seemed to have much to say to each other
outside the office. 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. Since time is your most
valuable asset, it’s odd to spend it working with people who don’t envision any long-
term future together. If you can’t count durable relationships among the fruits of your
time at work, you haven’t invested your time well—even in purely financial terms.
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 CONSPIRATORS
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. The first four or five might be attracted by large equity stakes or high-
profile responsibilities. More important than those obvious offerings is your answer to
this question: Why should the 20th employee join your company?
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?
Here are some bad answers: “Your stock options will be worth more here than
elsewhere.” “You’ll get to work with the smartest people in the world.” “You can help
solve the world’s most challenging problems.” What’s wrong with valuable stock, smart
people, or pressing problems? Nothing—but every company makes these same claims,
so they won’t help you stand out. 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. At PayPal, if you were excited by the idea of creating a new
digital currency to replace the U.S. dollar, we wanted to talk to you; if not, you weren’t
the right fit.
However, even a great mission is not enough. The kind of recruit who would be most
engaged as an employee will also wonder: “Are these the kind of people I want to work
with?” You should be able to explain why your company is a unique match for him
personally. And if you can’t do that, he’s probably not the right match.
Above all, don’t fight the perk war. Anybody who would be more powerfully swayed
by free laundry pickup or pet day care would be a bad addition to your team. Just cover
the basics like health insurance and then promise what no others can: the opportunity to
do irreplaceable work on a unique problem alongside great people. You probably can’t
be the Google of 2014 in terms of compensation or perks, but you can be like the Google
of 1999 if you already have good answers about your mission and team.
 WHAT’S UNDER SILICON VALLEY’S HOODIES
From the outside, everyone in your company should be different in the same way.
Unlike people on the East Coast, who all wear the same skinny jeans or pinstripe suits
depending on their industry, young people in Mountain View and Palo Alto go to work
wearing T-shirts. It’s a cliché that tech workers don’t care about what they wear, but if
you look closely at those T-shirts, you’ll see the logos of the wearers’ companies—and
tech workers care about those very much. 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.
Max Levchin, my co-founder at PayPal, says that startups should make their early
staff as personally similar as possible. Startups have limited resources and small teams.
They must work quickly and efficiently in order to survive, and that’s easier to do when
everyone shares an understanding of the world. The early PayPal team worked well
together because we were all the same kind of nerd. We all loved science fiction:
Cryptonomicon was required reading, and we preferred the capitalist Star Wars to the
communist Star Trek. Most important, we were all obsessed with creating a digital
currency that would be controlled by individuals instead of governments. For the
company to work, it didn’t matter what people looked like or which country they came
from, but we needed every new hire to be equally obsessed.
 DO ONE THING
On the inside, every individual should be sharply distinguished by her work.
When assigning responsibilities to employees in a startup, you could start by treating
it as a simple optimization problem to efficiently match talents with tasks. But even if
you could somehow get this perfectly right, any given solution would quickly break
down. Partly that’s because startups have to move fast, so individual roles can’t remain
static for long. But it’s also because job assignments aren’t just about the relationships
between workers and tasks; they’re also about relationships between employees.
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. Startups face an especially high risk of this since job roles
are fluid at the early stages. Eliminating competition makes it easier for everyone to
build the kinds of long-term relationships that transcend mere professionalism. More
than that, internal peace is what enables a startup to survive at all. When a startup fails,
we often imagine it succumbing to predatory rivals in a competitive ecosystem. But
every company is also its own ecosystem, and factional strife makes it vulnerable to
outside threats. Internal conflict is like an autoimmune disease: the technical cause of
death may be pneumonia, but the real cause remains hidden from plain view.
 OF CULTS AND CONSULTANTS
In the most intense kind of organization, members hang out only with other members.
They ignore their families and abandon the outside world. In exchange, they experience
strong feelings of belonging, and maybe get access to esoteric “truths” denied to
ordinary people. We have a word for such organizations: cults. Cultures of total
dedication look crazy from the outside, partly because the most notorious cults were
homicidal: Jim Jones and Charles Manson did not make good exits.
But entrepreneurs should take cultures of extreme dedication seriously. Is a lukewarm
attitude to one’s work a sign of mental health? Is a merely professional attitude the only
sane approach? The extreme opposite of a cult is a consulting firm like Accenture: not
only does it lack a distinctive mission of its own, but individual consultants are regularly
dropping in and out of companies to which they have no long-term connection
whatsoever.
Every company culture can be plotted on a linear spectrum:

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.
11
 IF YOU BUILD IT, WILL THEY COME?
E VEN THOUGHis everywhere, most people underrate its importance. Silicon Valley
SALES

underrates it more than most. The geek classic The Hitchhiker’s Guide to the Galaxy
even explains the founding of our planet as a reaction against salesmen. When an
imminent catastrophe requires the evacuation of humanity’s original home, the
population escapes on three giant ships. The thinkers, leaders, and achievers take the A
Ship; the salespeople and consultants get the B Ship; and the workers and artisans take
the C Ship. The B Ship leaves first, and all its passengers rejoice vainly. But the
salespeople don’t realize they are caught in a ruse: the A Ship and C Ship people had
always thought that the B Ship people were useless, so they conspired to get rid of them.
And it was the B Ship that landed on Earth.
Distribution may not matter in fictional worlds, but it matters in ours. We
underestimate the importance of distribution—a catchall term for everything it takes to
sell a product—because we share the same bias the A Ship and C Ship people had:
salespeople and other “middlemen” supposedly get in the way, and distribution should
flow magically from the creation of a good product. 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.
 NERDS VS. SALESMEN
The U.S. advertising industry collects annual revenues of $150 billion and employs more
than 600,000 people. At $450 billion annually, the U.S. sales industry is even bigger.
When they hear that 3.2 million Americans work in sales, seasoned executives will
suspect the number is low, but engineers may sigh in bewilderment. What could that
many salespeople possibly be doing?
In Silicon Valley, nerds are skeptical of advertising, marketing, and sales because they
seem superficial and irrational. But advertising matters because it works. It works on
nerds, and it works on you. You may think that you’re an exception; that your
preferences are authentic, and advertising only works on other people. It’s easy to resist
the most obvious sales pitches, so we entertain a false confidence in our own
independence of mind. But advertising doesn’t exist to make you buy a product right
away; it exists to embed subtle impressions that will drive sales later. Anyone who can’t
acknowledge its likely effect on himself is doubly deceived.
Nerds are used to transparency. They add value by becoming expert at a technical skill
like computer programming. 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. They know their own jobs are hard, so when they look at
salespeople laughing on the phone with a customer or going to two-hour lunches, they
suspect that no real work is being done. If anything, people overestimate the relative
difficulty of science and engineering, because the challenges of those fields are obvious.
What nerds miss is that it takes hard work to make sales look easy.
 SALES IS HIDDEN
All salesmen are actors: their priority is persuasion, not sincerity. That’s why the word
“salesman” can be a slur and the used car dealer is our archetype of shadiness. But we
only react negatively to awkward, obvious salesmen—that is, the bad ones. There’s a
wide range of sales ability: there are many gradations between novices, experts, and
masters. There are even sales grandmasters. If you don’t know any grandmasters, it’s not
because you haven’t encountered them, but rather because their art is hidden in plain
sight. Tom Sawyer managed to persuade his neighborhood friends to whitewash the
fence for him—a masterful move. But convincing them to actually pay him for the
privilege of doing his chores was the move of a grandmaster, and his friends were none
the wiser. Not much has changed since Twain wrote in 1876.
Like acting, sales works best when hidden. This explains why almost everyone whose
job involves distribution—whether they’re in sales, marketing, or advertising—has a job
title that has nothing to do with those things. People who sell advertising are called
“account executives.” People who sell customers work in “business development.”
People who sell companies are “investment bankers.” And people who sell themselves
are called “politicians.” There’s a reason for these redescriptions: none of us wants to be
reminded when we’re being sold.
Whatever the career, sales ability distinguishes superstars from also-rans. On Wall
Street, a new hire starts as an “analyst” wielding technical expertise, but his goal is to
become a dealmaker. A lawyer prides himself on professional credentials, but law firms
are led by the rainmakers who bring in big clients. Even university professors, who claim
authority from scholarly achievement, are envious of the self-promoters who define their
fields. Academic ideas about history or English don’t just sell themselves on their
intellectual merits. Even the agenda of fundamental physics and the future path of cancer
research are results of persuasion. The most fundamental reason that even
businesspeople underestimate the importance of sales is the systematic effort to hide it at
every level of every field in a world secretly driven by it.
The engineer’s grail is a product great enough that “it sells itself.” But anyone who
would actually say this about a real product must be lying: either he’s delusional (lying
t o himself) or he’s selling something (and thereby contradicting himself). The polar
opposite business cliché warns that “the best product doesn’t always win.” Economists
attribute this to “path dependence”: specific historical circumstances independent of
objective quality can determine which products enjoy widespread adoption. That’s true,
but it doesn’t mean the operating systems we use today and the keyboard layouts on
which we type were imposed by mere chance. 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.
 HOW TO SELL A 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). In general, the higher the price of your product,
the more you have to spend to make a sale—and the more it makes sense to spend it.
Distribution methods can be plotted on a continuum:

Complex Sales
If your average sale is seven figures or more, every detail of every deal requires close
personal attention. It might take months to develop the right relationships. You might
make a sale only once every year or two. Then you’ll usually have to follow up during
installation and service the product long after the deal is done. It’s hard to do, but this
kind of “complex sales” is the only way to sell some of the most valuable products.
SpaceX shows that it can be done. Within just a few years of launching his rocket
startup, Elon Musk persuaded NASA to sign billion-dollar contracts to replace the
decommissioned space shuttle with a newly designed vessel from SpaceX. Politics
matters in big deals just as much as technological ingenuity, so this wasn’t easy. SpaceX
employs more than 3,000 people, mostly in California. The traditional U.S. aerospace
industry employs more than 500,000 people, spread throughout all 50 states.
Unsurprisingly, members of Congress don’t want to give up federal funds going to their
home districts. But since complex sales requires making just a few deals each year, a
sales grandmaster like Elon Musk can use that time to focus on the most crucial people
—and even to overcome political inertia.
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 $1 million to $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. This will seem slow to any entrepreneur
dreaming of viral growth. You might expect revenue to increase 10x as soon as
customers learn about an obviously superior product, but that almost never happens.
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.
Personal Sales
Most sales are not particularly complex: average deal sizes might range between $10,000
and $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.
In 2008, Box had a good way for companies to store their data safely and accessibly in
the cloud. But people didn’t know they needed such a thing—cloud computing hadn’t
caught on yet. That summer, Blake was hired as Box’s third salesperson to help change
that. Starting with small groups of users who had the most acute file sharing problems,
Box’s sales reps built relationships with more and more users in each client company. In
2009, Blake sold a small Box account to the Stanford Sleep Clinic, where researchers
needed an easy, secure way to store experimental data logs. Today the university offers a
Stanford-branded Box account to every one of its students and faculty members, and
Stanford Hospital runs on Box. If it had started off by trying to sell the president of the
university on an enterprise-wide solution, Box would have sold nothing. A complex sales
approach would have made Box a forgotten startup failure; instead, personal sales made
it a multibillion-dollar business.
Sometimes the product itself is a kind of distribution. ZocDoc is a Founders Fund
portfolio company that helps people find and book medical appointments online. The
company charges doctors a few hundred dollars per month to be included in its network.
With an average deal size of just a few thousand dollars, ZocDoc needs lots of
salespeople—so many that they have an internal recruiting team to do nothing but hire
more. But making personal sales to doctors doesn’t just bring in revenue; by adding
doctors to the network, salespeople make the product more valuable to consumers (and
more consumer users increases its appeal to doctors). More than 5 million people already
use the service each month, and if it can continue to scale its network to include a
majority of practitioners, it will become a fundamental utility for the U.S. health care
industry.
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, there might be no good distribution channel to reach the small
businesses that might buy it. Even if you have a clear value proposition, how do you get
people to hear it? Advertising would either be too broad (there’s no TV channel that only
convenience store owners watch) or too inefficient (on its own, an ad in Convenience
Store News probably won’t convince any owner to part with $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
Marketing and advertising work for relatively low-priced products that have mass appeal
but lack any method of viral distribution. Procter & Gamble can’t afford to pay
salespeople to go door-to-door selling laundry detergent. (P&G does employ salespeople
to talk to grocery chains and large retail outlets, since one detergent sale made to these
buyers might mean 100,000 one-gallon bottles.) To reach its end user, a packaged goods
company has to produce television commercials, print coupons in newspapers, and
design its product boxes to attract attention.
Advertising can work for startups, too, but only when your customer acquisition costs
and customer lifetime value make every other distribution channel uneconomical.
Consider e-commerce startup Warby Parker, which designs and sells fashionable
prescription eyeglasses online instead of contracting sales out to retail eyewear
distributors. Each pair starts at around $100, so assuming the average customer buys a
few pairs in her lifetime, the company’s CLV is a few hundred dollars. That’s too little
to justify personal attention on every transaction, but at the other extreme, hundred-
dollar physical products don’t exactly go viral. By running advertisements and creating
quirky TV commercials, Warby is able to get its better, less expensive offerings in front
of millions of eyeglass-wearing customers. The company states plainly on its website
that “TV is a great big megaphone,” and when you can only afford to spend dozens of
dollars acquiring a new customer, you need the biggest megaphone you can find.
Every entrepreneur envies a recognizable ad campaign, but startups should resist the
temptation to compete with bigger companies in the endless contest to put on the most
memorable TV spots or the most elaborate PR stunts. I know this from experience. At
PayPal we hired James Doohan, who played Scotty on Star Trek, to be our official
spokesman. When we released our first software for the PalmPilot, we invited journalists
to an event where they could hear James recite this immortal line: “I’ve been beaming
people up my whole career, but this is the first time I’ve ever been able to beam money!”
It flopped—the few who actually came to cover the event weren’t impressed. We were
all nerds, so we had thought Scotty the Chief Engineer could speak with more authority
than, say, Captain Kirk. (Just like a salesman, Kirk was always showboating out in some
exotic locale and leaving it up to the engineers to bail him out of his own mistakes.) We
were wrong: when Priceline.com cast William Shatner (the actor who played Kirk) in a
famous series of TV spots, it worked for them. But by then Priceline was a major player.
No early-stage startup can match big companies’ advertising budgets. Captain Kirk truly
is in a league of his own.
Viral Marketing
A product is viral if its core functionality encourages users to invite their friends to
become users too. This is how Facebook and PayPal both grew quickly: every time
someone shares with a friend or makes a payment, they naturally invite more and more
people into the network. This isn’t just cheap—it’s fast, too. If every new user leads to
more than one additional user, you can achieve a chain reaction of exponential growth.
The ideal viral loop should be as quick and frictionless as possible. Funny YouTube
videos or internet memes get millions of views very quickly because they have
extremely short cycle times: people see the kitten, feel warm inside, and forward it to
their friends in a matter of seconds.
A t PayPal, our initial user base was 24 people, all of whom worked at PayPal.
Acquiring customers through banner advertising proved too expensive. However, by
directly paying people to sign up and then paying them more to refer friends, we
achieved extraordinary growth. This strategy cost us $20 per customer, but it also led to
7% daily growth, which meant that our user base nearly doubled every 10 days. After
four or five months, we had hundreds of thousands of users and a viable opportunity to
build a great company by servicing money transfers for small fees that ended up greatly
exceeding our customer acquisition cost.
Whoever is first to dominate the most important segment of a market with viral
potential will be the last mover in the whole market. At PayPal we didn’t want to acquire
more users at random; we wanted to get the most valuable users first. The most obvious
market segment in email-based payments was the millions of emigrants still using
Western Union to wire money to their families back home. Our product made that
effortless, but the transactions were too infrequent. We needed a smaller niche market
segment with a higher velocity of money—a segment we found in eBay “PowerSellers,”
the professional vendors who sold goods online through eBay’s auction marketplace.
There were 20,000 of them. Most had multiple auctions ending each day, and they
bought almost as much as they sold, which meant a constant stream of payments. And
because eBay’s own solution to the payment problem was terrible, these merchants were
extremely enthusiastic early adopters. Once PayPal dominated this segment and became
the payments platform for eBay, there was no catching up—on eBay or anywhere else.
The Power Law of Distribution
One of these methods is likely to be far more powerful than every other for any given
business: distribution follows a power law of its own. This is counterintuitive for most
entrepreneurs, who assume that more is more. 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.
Selling to Non-Customers
Your company needs to sell more than its product. You must also sell your company to
employees and investors. There is a “human resources” version of the lie that great
products sell themselves: “This company is so good that people will be clamoring to join
it.” And there’s a fundraising version too: “This company is so great that investors will
be banging down our door to invest.” Clamor and frenzy are very real, but they rarely
happen without calculated recruiting and pitching beneath the surface.
Selling your company to the media is a necessary part of selling it to everyone else.
Nerds who instinctively mistrust the media often make the mistake of trying to ignore it.
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. Even if your particular product
doesn’t need media exposure to acquire customers because you have a viral distribution
strategy, the press can help attract investors and employees. Any prospective employee
worth hiring will do his own diligence; what he finds or doesn’t find when he googles
you will be critical to the success of your company.
 EVERYBODY SELLS
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.
12
 MAN AND MACHINE
A stagnate, information technology has advanced so rapidly that it has now
S MATURE INDUSTRIES

become synonymous with “technology” itself. Today, more than 1.5 billion people enjoy
instant access to the world’s knowledge using pocket-sized devices. Every one of today’s
smartphones has thousands of times more processing power than the computers that
guided astronauts to the moon. And if Moore’s law continues apace, tomorrow’s
computers will be even more powerful.
Computers already have enough power to outperform people in activities we used to
think of as distinctively human. In 1997, IBM’s Deep Blue defeated world chess
champion Garry Kasparov. Jeopardy!’s best-ever contestant, Ken Jennings, succumbed
to IBM’s Watson in 2011. And Google’s self-driving cars are already on California roads
today. Dale Earnhardt Jr. needn’t feel threatened by them, but the Guardian worries (on
behalf of the millions of chauffeurs and cabbies in the world) that self-driving cars
“could drive the next wave of unemployment.”
Everyone expects computers to do more in the future—so much more that some
wonder: 30 years from now, will there be anything left for people to do? “Software is
eating the world,” venture capitalist Marc Andreessen has announced with a tone of
inevitability. VC Andy Kessler sounds almost gleeful when he explains that the best way
to create productivity is “to get rid of people.” Forbes captured a more anxious attitude
when it asked readers: Will a machine replace you?
Futurists can seem like they hope the answer is yes. Luddites are so worried about
being replaced that they would rather we stop building new technology altogether.
Neither side questions the premise that better computers will necessarily replace human
workers. 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.
 SUBSTITUTION VS. COMPLEMENTARITY
Fifteen years ago, American workers were worried about competition from cheaper
Mexican substitutes. And that made sense, because humans really can substitute for each
other. Today people think they can hear Ross Perot’s “giant sucking sound” once more,
but they trace it back to server farms somewhere in Texas instead of cut-rate factories in
Tijuana. 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.
Globalization Means Substitution
When Perot warned about foreign competition, both George H. W. Bush and Bill Clinton
preached the gospel of free trade: since every person has a relative strength at some
particular job, in theory the economy maximizes wealth when people specialize
according to their advantages and then trade with each other. In practice, it’s not
unambiguously clear how well free trade has worked, for many workers at least. Gains
from trade are greatest when there’s a big discrepancy in comparative advantage, but the
global supply of workers willing to do repetitive tasks for an extremely small wage is
extremely large.
People don’t just compete to supply labor; they also demand the same resources.
While American consumers have benefited from access to cheap toys and textiles from
China, they’ve had to pay higher prices for the gasoline newly desired by millions of
Chinese motorists. Whether people eat shark fins in Shanghai or fish tacos in San Diego,
they all need food and they all need shelter. And desire doesn’t stop at subsistence—
people will demand ever more as globalization continues. Now that millions of Chinese
peasants can finally enjoy a secure supply of basic calories, they want more of them to
come from pork instead of just grain. The convergence of desire is even more obvious at
the top: all oligarchs have the same taste in Cristal, from Petersburg to Pyongyang.
Technology Means Complementarity
Now think about the prospect of competition from computers instead of competition
from human workers. 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.
To understand the scale of this variance, consider another of Google’s computer-for-
human substitution projects. In 2012, one of their supercomputers made headlines when,
after scanning 10 million thumbnails of YouTube videos, it learned to identify a cat with
75% accuracy. That seems impressive—until you remember that an average four-year-
old can do it flawlessly. When a cheap laptop beats the smartest mathematicians at some
tasks but even a supercomputer with 16,000 CPUs can’t beat a child at others, you can
tell that humans and computers are not just more or less powerful than each other—
they’re categorically different.

The stark differences between man and machine mean that gains from working with
computers are much higher than gains from trade with other people. We don’t trade with
computers any more than we trade with livestock or lamps. And that’s the point:
computers are tools, not rivals.
The differences are even deeper on the demand side. Unlike people in industrializing
countries, computers don’t yearn for more luxurious foods or beachfront villas in Cap
Ferrat; all they require is a nominal amount of electricity, which they’re not even smart
enough to want. When we design new computer technology to help solve problems, we
get all the efficiency gains of a hyperspecialized trading partner without having to
compete with it for resources. 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.
 COMPLEMENTARY BUSINESSES
Complementarity between computers and humans isn’t just a macro-scale fact. It’s also
the path to building a great business. I came to understand this from my experience at
PayPal. In mid-2000, we had survived the dot-com crash and we were growing fast, but
we faced one huge problem: we were losing upwards of $10 million to credit card fraud
every month. Since we were processing hundreds or even thousands of transactions per
minute, we couldn’t possibly review each one—no human quality control team could
work that fast.
So we did what any group of engineers would do: we tried to automate a solution.
First, Max Levchin assembled an elite team of mathematicians to study the fraudulent
transfers in detail. Then we took what we learned and wrote software to automatically
identify and cancel bogus transactions in real time. But it quickly became clear that this
approach wouldn’t work either: after an hour or two, the thieves would catch on and
change their tactics. We were dealing with an adaptive enemy, and our software couldn’t
adapt in response.
The fraudsters’ adaptive evasions fooled our automatic detection algorithms, but we
found that they didn’t fool our human analysts as easily. So Max and his engineers
rewrote the software to take a hybrid approach: 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. Thanks to this hybrid system—we named
it “Igor,” after the Russian fraudster who bragged that we’d never be able to stop him—
we turned our first quarterly profit in the first quarter of 2002 (as opposed to a quarterly
loss of $29.3 million one year before). The FBI asked us if we’d let them use Igor to help
detect financial crime. And Max was able to boast, grandiosely but truthfully, that he
was “the Sherlock Holmes of the Internet Underground.”
This kind of man-machine symbiosis enabled PayPal to stay in business, which in turn
enabled hundreds of thousands of small businesses to accept the payments they needed to
thrive on the internet. None of it would have been possible without the man-machine
solution—even though most people would never see it or even hear about it.
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? The next year, I pitched
Alex Karp, an old Stanford classmate, and Stephen Cohen, a software engineer, on a new
startup idea: we would use the human-computer hybrid approach from PayPal’s security
system to identify terrorist networks and financial fraud. We already knew the FBI was
interested, and in 2004 we founded Palantir, a software company that helps people
extract insight from divergent sources of information. The company is on track to book
sales of $1 billion in 2014, and Forbes has called Palantir’s software the “killer app” for
its rumored role in helping the government locate Osama bin Laden.
We have no details to share from that operation, but we can say that neither human
intelligence by itself nor computers alone will be able to make us safe. America’s two
biggest spy agencies take opposite approaches: The Central Intelligence Agency is run
by spies who privilege humans. The National Security Agency is run by generals who
prioritize computers. CIA analysts have to wade through so much noise that it’s very
difficult to identify the most serious threats. NSA computers can process huge quantities
of data, but machines alone cannot authoritatively determine whether someone is
plotting a terrorist act. Palantir aims to transcend these opposing biases: its software
analyzes the data the government feeds it—phone records of radical clerics in Yemen or
bank accounts linked to terror cell activity, for instance—and flags suspicious activities
for a trained analyst to review.
In addition to helping find terrorists, analysts using Palantir’s software have been able
to predict where insurgents plant IEDs in Afghanistan; prosecute high-profile insider
trading cases; take down the largest child pornography ring in the world; support the
Centers for Disease Control and Prevention in fighting foodborne disease outbreaks; and
save both commercial banks and the government hundreds of millions of dollars
annually through advanced fraud detection.
Advanced software made this possible, but even more important were the human
analysts, prosecutors, scientists, and financial professionals without whose active
engagement the software would have been useless.
Think of what professionals do in their jobs today. Lawyers must be able to articulate
solutions to thorny problems in several different ways—the pitch changes depending on
whether you’re talking to a client, opposing counsel, or a judge. Doctors need to marry
clinical understanding with an ability to communicate it to non-expert patients. And
good teachers aren’t just experts in their disciplines: they must also understand how to
tailor their instruction to different individuals’ interests and learning styles. Computers
might be able to do some of these tasks, but they can’t combine them effectively. Better
technology in law, medicine, and education won’t replace professionals; it will allow
them to do even more.
LinkedIn has done exactly this for recruiters. When LinkedIn was founded in 2003,
they didn’t poll recruiters to find discrete pain points in need of relief. And they didn’t
try to write software that would replace recruiters outright. Recruiting is part detective
work and part sales: you have to scrutinize applicants’ history, assess their motives and
compatibility, and persuade the most promising ones to join you. Effectively replacing
all those functions with a computer would be impossible. Instead, LinkedIn set out to
transform how recruiters did their jobs. Today, more than 97% of recruiters use LinkedIn
and its powerful search and filtering functionality to source job candidates, and the
network also creates value for the hundreds of millions of professionals who use it to
manage their personal brands. If LinkedIn had tried to simply replace recruiters with
technology, they wouldn’t have a business today.
The Ideology of Computer Science
Why do so many people miss the power of complementarity? It starts in school.
Software engineers tend to work on projects that replace human efforts because that’s
what they’re trained to do. Academics make their reputations through specialized
research; their primary goal is to publish papers, and publication means respecting the
limits of a particular discipline. For computer scientists, that means reducing human
capabilities into specialized tasks that computers can be trained to conquer one by one.
 Just look at the trendiest fields in computer science today. The very term “machine
learning” evokes imagery of replacement, and its boosters seem to believe that
computers can be taught to perform almost any task, so long as we feed them enough
training data. Any user of Netflix or Amazon has experienced the results of machine
learning firsthand: both companies use algorithms to recommend products based on your
viewing and purchase history. Feed them more data and the recommendations get ever
better. Google Translate works the same way, providing rough but serviceable
translations into any of the 80 languages it supports—not because the software
understands human language, but because it has extracted patterns through statistical
analysis of a huge corpus of text.
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).
We have let ourselves become enchanted by big data only because we exoticize
technology. We’re impressed with small feats accomplished by computers alone, but we
ignore big achievements from complementarity because the human contribution makes
them less uncanny. Watson, Deep Blue, and ever-better machine learning algorithms are
cool. 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?
 EVER-SMARTER COMPUTERS: FRIEND OR FOE?
The future of computing is necessarily full of unknowns. It’s become conventional to see
ever-smarter anthropomorphized robot intelligences like Siri and Watson as harbingers
of things to come; once computers can answer all our questions, perhaps they’ll ask why
they should remain subservient to us at all.
The logical endpoint to this substitutionist thinking is called “strong AI”: computers
that eclipse humans on every important dimension. Of course, the Luddites are terrified
by the possibility. It even makes the futurists a little uneasy; it’s not clear whether strong
AI would save humanity or doom it. Technology is supposed to increase our mastery
over nature and reduce the role of chance in our lives; building smarter-than-human
computers could actually bring chance back with a vengeance. Strong AI is like a cosmic
lottery ticket: if we win, we get utopia; if we lose, Skynet substitutes us out of existence.
But even if strong AI is a real possibility rather than an imponderable mystery, it
won’t happen anytime soon: replacement by computers is a worry for the 22nd century.
Indefinite fears about the far future shouldn’t stop us from making definite plans today.
Luddites claim that we shouldn’t build the computers that might replace people
someday; crazed futurists argue that we should. These two positions are mutually
exclusive but they are not exhaustive: there is room in between for sane people to build a
vastly better world in the decades ahead. 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.
13
 SEEING GREEN
A of the 21st century, everyone agreed that the next big thing was clean
T THE START

technology. It had to be: in Beijing, the smog had gotten so bad that people couldn’t see
from building to building—even breathing was a health risk. Bangladesh, with its
arsenic-laden water wells, was suffering what the New York Times called “the biggest
mass poisoning in history.” In the U.S., Hurricanes Ivan and Katrina were said to be
harbingers of the coming devastation from global warming. Al Gore implored us to
attack these problems “with the urgency and resolve that has previously been seen only
when nations mobilized for war.” People got busy: entrepreneurs started thousands of
cleantech companies, and investors poured more than $50 billion into them. So began the
quest to cleanse the world.
It didn’t work. Instead of a healthier planet, we got a massive cleantech bubble.
Solyndra is the most famous green ghost, but most cleantech companies met similarly
disastrous ends—more than 40 solar manufacturers went out of business or filed for
bankruptcy in 2012 alone. The leading index of alternative energy companies shows the
bubble’s dramatic deflation:

Why did cleantech fail? Conservatives think they already know the answer: as soon as
green energy became a priority for the government, it was poisoned. But there really
were (and there still are) good reasons for making energy a priority. And the truth about
cleantech is more complex and more important than government failure. 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?
We’ve discussed these elements before. Whatever your industry, any great business
plan must address every one of them. If you don’t have good answers to these questions,
you’ll run into lots of “bad luck” and your business will fail. If you nail all seven, you’ll
master fortune and succeed. Even getting five or six correct might work. But the striking
thing about the cleantech bubble was that people were starting companies with zero good
answers—and that meant hoping for a miracle.
It’s hard to know exactly why any particular cleantech company failed, since almost
all of them made several serious mistakes. But since any one of those mistakes is enough
to doom your company, it’s worth reviewing cleantech’s losing scorecard in more detail.
 THE ENGINEERING QUESTION
A great technology company should have proprietary technology an order of magnitude
better than its nearest substitute. But cleantech companies rarely produced 2x, let alone
10x, improvements. Sometimes their offerings were actually worse than the products
they sought to replace. Solyndra developed novel, cylindrical solar cells, but to a first
approximation, cylindrical cells are only / as efficient as flat ones—they simply don’t
1
π

receive as much direct sunlight. The company tried to correct for this deficiency by
using mirrors to reflect more sunlight to hit the bottoms of the panels, but 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. Suppose you develop a new wind
turbine that’s 20% more efficient than any existing technology—when you test it in the
laboratory. That sounds good at first, but the lab result won’t begin to compensate for the
expenses and risks faced by any new product in the real world. And even if your system
really is 20% better on net for the customer who buys it, people are so used to
exaggerated claims that you’ll be met with skepticism when you try to sell it. Only when
your product is 10x better can you offer the customer transparent superiority.
 THE TIMING QUESTION
Cleantech entrepreneurs worked hard to convince themselves that their appointed hour
had arrived. When he announced his new company in 2008, SpectraWatt CEO Andrew
Wilson stated that “[t]he solar industry is akin to where the microprocessor industry was
in the late 1970s. There is a lot to be figured out and improved.” The second part was
right, but the microprocessor analogy was way off. Ever since the first microprocessor
was built in 1970, computing advanced not just rapidly but exponentially. Look at Intel’s
early product release history:

The first silicon solar cell, by contrast, was created by Bell Labs in 1954—more than a
half century before Wilson’s press release. Photovoltaic efficiency improved in the
intervening decades, but slowly and linearly: Bell’s first solar cell had about 6%
efficiency; neither today’s crystalline silicon cells nor modern thin-film cells have
exceeded 25% efficiency in the field. There were few engineering developments in the
mid-2000s to suggest impending liftoff. Entering a slow-moving market can be a good
strategy, but only if you have a definite and realistic plan to take it over. The failed
cleantech companies had none.
 THE MONOPOLY QUESTION
In 2006, billionaire technology investor John Doerr announced that “green is the new
red, white and blue.” He could have stopped at “red.” As Doerr himself said, “Internet-
sized markets are in the billions of dollars; the energy markets are in the trillions.” What
he didn’t say is that huge, trillion-dollar markets mean ruthless, bloody competition.
Others echoed Doerr over and over: in the 2000s, I listened to dozens of cleantech
entrepreneurs begin fantastically rosy PowerPoint presentations with all-too-true tales of
trillion-dollar markets—as if that were a good thing.
Cleantech executives emphasized the bounty of an energy market big enough for all
comers, but each one typically believed that his own company had an edge. In 2006,
Dave Pearce, CEO of solar manufacturer MiaSolé, admitted to a congressional panel that
his company was just one of several “very strong” startups working on one particular
kind of thin-film solar cell development. Minutes later, Pearce predicted that MiaSolé
would become “the largest producer of thin-film solar cells in the world” within a year’s
time. That didn’t happen, but it might not have helped them anyway: thin-film is just one
of more than a dozen kinds of solar cells. Customers won’t care about any particular
technology unless it solves a particular problem in a superior way. And if you can’t
monopolize a unique solution for a small market, you’ll be stuck with vicious
competition. That’s what happened to MiaSolé, which was acquired in 2013 for hundreds
of millions of dollars less than its investors had put into the company.
Exaggerating your own uniqueness is an easy way to botch the monopoly question.
Suppose you’re running a solar company that’s successfully installed hundreds of solar
panel systems with a combined power generation capacity of 100 megawatts. Since total
U.S. solar energy production capacity is 950 megawatts, you own 10.53% of the market.
Congratulations, you tell yourself: you’re a player.

But what if the U.S. solar energy market isn’t the relevant market? What if the
relevant market is the global solar market, with a production capacity of 18 gigawatts?
Your 100 megawatts now makes you a very small fish indeed: suddenly you own less
than 1% of the market.
 And what if the appropriate measure isn’t global solar, but rather renewable energy in
general? Annual production capacity from renewables is 420 gigawatts globally; you just
shrank to 0.02% of the market. And compared to the total global power generation
capacity of 15,000 gigawatts, your 100 megawatts is just a drop in the ocean.

Cleantech entrepreneurs’ thinking about markets was hopelessly confused. They

would rhetorically shrink their market in order to seem differentiated, only to turn
around and ask to be valued based on huge, supposedly lucrative markets. But you can’t
dominate a submarket if it’s fictional, and huge markets are highly competitive, not
highly attainable. Most cleantech founders would have been better off opening a new
British restaurant in downtown Palo Alto.
 THE PEOPLE QUESTION
Energy problems are engineering problems, so you would expect to find nerds running
cleantech companies. You’d be wrong: the ones that failed were run by shockingly
nontechnical teams. These salesman-executives were good at raising capital and securing
government subsidies, but they were less good at building products that customers
wanted to buy.
At Founders Fund, we saw this coming. 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. Maybe we still would have
avoided these bad investments if we had taken the time to evaluate each company’s
technology in detail. 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.

Solyndra CEO Brian Harrison; Tesla Motors CEO Elon Musk

 THE DISTRIBUTION QUESTION
Cleantech companies effectively courted government and investors, but they often forgot
about customers. They learned the hard way that the world is not a laboratory: selling
and delivering a product is at least as important as the product itself.
Just ask Israeli electric vehicle startup Better Place, which from 2007 to 2012 raised
and spent more than $800 million to build swappable battery packs and charging stations
for electric cars. The company sought to “create a green alternative that would lessen our
dependence on highly polluting transportation technologies.” And it did just that—at
least by 1,000 cars, the number it sold before filing for bankruptcy. Even selling that
many was an achievement, because each of those cars was very hard for customers to
buy.
For starters, it was never clear what you were actually buying. Better Place bought
sedans from Renault and refitted them with electric batteries and electric motors. So,
were you buying an electric Renault, or were you buying a Better Place? In any case, if
you decided to buy one, you had to jump through a series of hoops. First, you needed to
seek approval from Better Place. To get that, you had to prove that you lived close
enough to a Better Place battery swapping station and promise to follow predictable
routes. If you passed that test, you had to sign up for a fueling subscription in order to
recharge your car. Only then could you get started learning the new behavior of stopping
to swap out battery packs on the road.
Better Place thought its technology spoke for itself, so they didn’t bother to market it
clearly. Reflecting on the company’s failure, one frustrated customer asked, “Why
wasn’t there a billboard in Tel Aviv showing a picture of a Toyota Prius for 160,000
shekels and a picture of this car, for 160,000 plus fuel for four years?” He still bought
one of the cars, but unlike most people, he was a hobbyist who “would do anything to
keep driving it.” Unfortunately, he can’t: as the Better Place board of directors stated
upon selling the company’s assets for a meager $12 million in 2013, “The technical
challenges we overcame successfully, but the other obstacles we were not able to
overcome.”
 THE DURABILITY QUESTION
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?
Few cleantech companies had a good answer. As a result, all their obituaries resemble
each other. A few months before it filed for bankruptcy in 2011, Evergreen Solar
explained its decision to close one of its U.S. factories:

Solar manufacturers in China have received considerable government and financial

support.… Although [our] production costs … are now below originally planned
levels and lower than most western manufacturers, they are still much higher than
those of our low cost competitors in China.
But it wasn’t until 2012 that the “blame China” chorus really exploded. Discussing its
bankruptcy filing, U.S. Department of Energy–backed Abound Solar blamed “aggressive
pricing actions from Chinese solar panel companies” that “made it very difficult for an
early stage startup company … to scale in current market conditions.” When solar panel
maker Energy Conversion Devices failed in February 2012, it went beyond blaming
China in a press release and filed a $950 million lawsuit against three prominent Chinese
solar manufacturers—the same companies that Solyndra’s trustees in bankruptcy sued
later that year on the grounds of attempted monopolization, conspiracy, and predatory
pricing. But was competition from Chinese manufacturers really impossible to predict?
Cleantech entrepreneurs would have done well to rephrase the durability question and
ask: what will stop China from wiping out my business? Without an answer, the result
shouldn’t have come as a surprise.
Beyond the failure to anticipate competition in manufacturing the same green
products, cleantech embraced misguided assumptions about the energy market as a
whole. An industry premised on the supposed twilight of fossil fuels was blindsided by
the rise of fracking. In 2000, just 1.7% of America’s natural gas came from fracked
shale. Five years later, that figure had climbed to 4.1%. Nevertheless, nobody in
cleantech took this trend seriously: renewables were the only way forward; fossil fuels
couldn’t possibly get cheaper or cleaner in the future. But they did. By 2013, shale gas
accounted for 34% of America’s natural gas, and gas prices had fallen more than 70%
since 2008, devastating most renewable energy business models. Fracking may not be a
durable energy solution, either, but it was enough to doom cleantech companies that
didn’t see it coming.
 THE SECRET QUESTION
Every cleantech company justified itself with conventional truths about the need for a
cleaner world. They deluded themselves into believing that an overwhelming social need
for alternative energy solutions implied an overwhelming business opportunity for
cleantech companies of all kinds. Consider how conventional it had become by 2006 to
be bullish on solar. That year, President George W. Bush heralded a future of “solar
roofs that will enable the American family to be able to generate their own electricity.”
Investor and cleantech executive Bill Gross declared that the “potential for solar is
enormous.” Suvi Sharma, then-CEO of solar manufacturer Solaria, admitted that while
“there is a gold rush feeling” to solar, “there’s also real gold here—or, in our case,
sunshine.” But rushing to embrace the convention sent scores of solar panel companies
—Q-Cells, Evergreen Solar, SpectraWatt, and even Gross’s own Energy Innovations, to
name just a few—from promising beginnings to bankruptcy court very quickly. Each of
the casualties had described their bright futures using broad conventions on which
everybody agreed. Great companies have secrets: specific reasons for success that other
people don’t see.
 THE MYTH OF SOCIAL ENTREPRENEURSHIP
Cleantech entrepreneurs aimed for more than just success as most businesses define it.
The cleantech bubble was the biggest phenomenon—and the biggest flop—in the history
of “social entrepreneurship.” This philanthropic approach to business starts with the idea
that corporations and nonprofits have until now been polar opposites: corporations have
great power, but they’re shackled to the profit motive; nonprofits pursue the public
interest, but they’re weak players in the wider economy. Social entrepreneurs aim to
combine the best of both worlds and “do well by doing good.” Usually they end up doing
neither.
The ambiguity between social and financial goals doesn’t help. But the ambiguity in
the word “social” is even more of a problem: if something is “socially good,” is it good
for society, or merely seen as good by society? Whatever is good enough to receive
applause from all audiences can only be conventional, like the general idea of green
energy.
Progress isn’t held back by some difference between corporate greed and nonprofit
goodness; instead, we’re held back by the sameness of both. Just as corporations tend to
copy each other, nonprofits all tend to push the same priorities. Cleantech shows the
result: hundreds of undifferentiated products all in the name of one overbroad goal.
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.
 TESLA: 7 FOR 7
Tesla is one of the few cleantech companies started last decade to be thriving today.
They rode the social buzz of cleantech better than anyone, but they got the seven
questions right, so their success is instructive:

Tesla’s technology is so good that other car companies rely on it: Daimler
TECHNOLOGY.

uses Tesla’s battery packs; Mercedes-Benz uses a Tesla powertrain; Toyota uses a
Tesla motor. General Motors has even created a task force to track Tesla’s next
moves. But Tesla’s greatest technological achievement isn’t any single part or
component, but rather its ability to integrate many components into one superior
product. The Tesla Model S sedan, elegantly designed from end to end, is more than
the sum of its parts: Consumer Reports rated it higher than any other car ever
reviewed, and both Motor Trend and Automobile magazines named it their 2013 Car
of the Year.

In 2009, it was easy to think that the government would continue to support
TIMING.

cleantech: “green jobs” were a political priority, federal funds were already
earmarked, and Congress even seemed likely to pass cap-and-trade legislation. But
where others saw generous subsidies that could flow indefinitely, Tesla CEO Elon
Musk rightly saw a one-time-only opportunity. In January 2010—about a year and a
half before Solyndra imploded under the Obama administration and politicized the
subsidy question—Tesla secured a $465 million loan from the U.S. Department of
Energy. A half-billion-dollar subsidy was unthinkable in the mid-2000s. It’s
unthinkable today. There was only one moment where that was possible, and Tesla
played it perfectly.

Tesla started with a tiny submarket that it could dominate: the market for
MONOPOLY.

high-end electric sports cars. Since the first Roadster rolled off the production line
in 2008, Tesla’s sold only about 3,000 of them, but at $109,000 apiece that’s not
trivial. Starting small allowed Tesla to undertake the necessary R&D to build the
slightly less expensive Model S, and now Tesla owns the luxury electric sedan
market, too. They sold more than 20,000 sedans in 2013 and now Tesla is in prime
position to expand to broader markets in the future.

Tesla’s CEO is the consummate engineer and salesman, so it’s not surprising
TEAM.

that he’s assembled a team that’s very good at both. Elon describes his staff this
way: “If you’re at Tesla, you’re choosing to be at the equivalent of Special Forces.
There’s the regular army, and that’s fine, but if you are working at Tesla, you’re
choosing to step up your game.”

Most companies underestimate distribution, but Tesla took it so seriously

DISTRIBUTION.

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. The
up-front costs of Tesla’s approach are much higher than traditional dealership
distribution, but it affords control over the customer experience, strengthens Tesla’s
brand, and saves the company money in the long run.

Tesla has a head start and it’s moving faster than anyone else—and that
DURABILITY.

combination means its lead is set to widen in the years ahead. A coveted brand is
the clearest sign of Tesla’s breakthrough: a car is one of the biggest purchasing
decisions that people ever make, and consumers’ trust in that category is hard to
win. And unlike every other car company, at Tesla the founder is still in charge, so
it’s not going to ease off anytime soon.

Tesla knew that fashion drove interest in cleantech. Rich people especially
SECRETS.

wanted to appear “green,” even if it meant driving a boxy Prius or clunky Honda
Insight. Those cars only made drivers look cool by association with the famous eco-
conscious movie stars who owned them as well. So Tesla decided to build cars that
made drivers look cool, period—Leonardo DiCaprio even ditched his Prius for an
expensive (and expensive-looking) Tesla Roadster. While generic cleantech
companies struggled to differentiate themselves, Tesla built a unique brand around
the secret that cleantech was even more of a social phenomenon than an
environmental imperative.
 ENERGY 2.0
Tesla’s success proves that there was nothing inherently wrong with cleantech. The
biggest idea behind it is right: the world really will need new sources of energy. Energy
is the master resource: it’s how we feed ourselves, build shelter, and make everything we
need to live comfortably. Most of the world dreams of living as comfortably as
Americans do today, and globalization will cause increasingly severe energy challenges
unless we build new technology. There simply aren’t enough resources in the world to
replicate old approaches or redistribute our way to prosperity.
Cleantech gave people a way to be optimistic about the future of energy. But when
indefinitely optimistic investors betting on the general idea of green energy funded
cleantech companies that lacked specific business plans, the result was a bubble. Plot the
valuation of alternative energy firms in the 2000s alongside the NASDAQ’s rise and fall
a decade before, and you see the same shape:

The 1990s had one big idea: the internet is going to be big. But too many internet
companies had exactly that same idea and no others. An entrepreneur can’t benefit from
macro-scale insight unless his own plans begin at the micro-scale. Cleantech companies
faced the same problem: no matter how much the world needs energy, only a firm that
offers a superior solution for a specific energy problem can make money. No sector will
ever be so important that merely participating in it will be enough to build a great
company.
The tech bubble was far bigger than cleantech and the crash even more painful. But the
dream of the ’90s turned out to be right: skeptics who doubted that the internet would
fundamentally change publishing or retail sales or everyday social life looked prescient
in 2001, but they seem comically foolish today. Could successful energy startups be
founded after the cleantech crash just as Web 2.0 startups successfully launched amid the
debris of the dot-coms? The macro need for energy solutions is still real. But a valuable
business must start by finding a niche and dominating a small market. Facebook started
as a service for just one university campus before it spread to other schools and then the
entire world. Finding small markets for energy solutions will be tricky—you could aim
to replace diesel as a power source for remote islands, or maybe build modular reactors
for quick deployment at military installations in hostile territories. Paradoxically, the
challenge for the entrepreneurs who will create Energy 2.0 is to think small.
14
 THE FOUNDER’S PARADOX
O F THE SIX PEOPLE who started PayPal, four had built bombs in high school.
Five were just 23 years old—or younger. Four of us had been born outside the United
States. Three had escaped here from communist countries: Yu Pan from China, Luke
Nosek from Poland, and Max Levchin from Soviet Ukraine. Building bombs was not
what kids normally did in those countries at that time.
The six of us could have been seen as eccentric. My first-ever conversation with Luke
was about how he’d just signed up for cryonics, to be frozen upon death in hope of
medical resurrection. Max claimed to be without a country and proud of it: his family
was put into diplomatic limbo when the USSR collapsed while they were escaping to the
U.S. Russ Simmons had escaped from a trailer park to the top math and science magnet
school in Illinois. Only Ken Howery fit the stereotype of a privileged American
childhood: he was PayPal’s sole Eagle Scout. But Kenny’s peers thought he was crazy to
join the rest of us and make just one-third of the salary he had been offered by a big
bank. So even he wasn’t entirely normal.

The PayPal Team in 1999

Are all founders unusual people? Or do we just tend to remember and exaggerate
whatever is most unusual about them? More important, which personal traits actually
matter in a founder? This chapter is about why it’s more powerful but at the same time
more dangerous for a company to be led by a distinctive individual instead of an
interchangeable manager.
 THE DIFFERENCE ENGINE
Some people are strong, some are weak, some are geniuses, some are dullards—but most
people are in the middle. Plot where everyone falls and you’ll see a bell curve:

Since so many founders seem to have extreme traits, you might guess that a plot
showing only founders’ traits would have fatter tails with more people at either end.
 But that doesn’t capture the strangest thing about founders. 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. When you plot
them out, founders’ traits appear to follow an inverse normal distribution:

Where does this strange and extreme combination of traits come from? They could be
present from birth (nature) or acquired from an individual’s environment (nurture). But
perhaps founders aren’t really as extreme as they appear. Might they strategically
exaggerate certain qualities? Or is it possible that everyone else exaggerates them? All
of these effects can be present at the same time, and whenever present they powerfully
reinforce each other. The cycle usually starts with unusual people and ends with them
acting and seeming even more unusual:
 As an example, take Sir Richard Branson, the billionaire founder of the Virgin Group.
He could be described as a natural entrepreneur: Branson started his first business at age
16, and at just 22 he founded Virgin Records. But other aspects of his renown—the
trademark lion’s mane hairstyle, for example—are less natural: one suspects he wasn’t
born with that exact look. As Branson has cultivated his other extreme traits (Is
kiteboarding with naked supermodels a PR stunt? Just a guy having fun? Both?), the
media has eagerly enthroned him: Branson is “The Virgin King,” “The Undisputed King
of PR,” “The King of Branding,” and “The King of the Desert and Space.” When Virgin
Atlantic Airways began serving passengers drinks with ice cubes shaped like Branson’s
face, he became “The Ice King.”
Is Branson just a normal businessman who happens to be lionized by the media with
the help of a good PR team? Or is he himself a born branding genius rightly singled out
by the journalists he is so good at manipulating? It’s hard to tell—maybe he’s both.
 Another example is Sean Parker, who started out with the ultimate outsider status:
criminal. Sean was a careful hacker in high school. But his father decided that Sean was
spending too much time on the computer for a 16-year-old, so one day he took away
Sean’s keyboard mid-hack. Sean couldn’t log out; the FBI noticed; soon federal agents
were placing him under arrest.
Sean got off easy since he was a minor; if anything, the episode emboldened him.
Three years later, he co-founded Napster. The peer-to-peer file sharing service amassed
10 million users in its first year, making it one of the fastest-growing businesses of all
time. But the record companies sued and a federal judge ordered it shut down 20 months
after opening. After a whirlwind period at the center, Sean was back to being an outsider
again.
Then came Facebook. Sean met Mark Zuckerberg in 2004, helped negotiate
Facebook’s first funding, and became the company’s founding president. He had to step
down in 2005 amid allegations of drug use, but this only enhanced his notoriety. Ever
since Justin Timberlake portrayed him in The Social Network, Sean has been perceived
as one of the coolest people in America. JT is still more famous, but when he visits
Silicon Valley, people ask if he’s Sean Parker.
 The most famous people in the world are founders, too: instead of a company, every
celebrity founds and cultivates a personal brand. Lady Gaga, for example, became one of
the most influential living people. But is she even a real person? Her real name isn’t a
secret, but almost no one knows or cares what it is. She wears costumes so bizarre as to
put any other wearer at risk of an involuntary psychiatric hold. Gaga would have you
believe that she was “born this way”—the title of both her second album and its lead
track. But no one is born looking like a zombie with horns coming out of her head: Gaga
must therefore be a self-manufactured myth. Then again, what kind of person would do
this to herself? Certainly nobody normal. So perhaps Gaga really was born that way.
 WHERE KINGS COME FROM
Extreme founder figures are not new in human affairs. Classical mythology is full of
them. Oedipus is the paradigmatic insider/outsider: he was abandoned as an infant and
ended up in a foreign land, but he was a brilliant king and smart enough to solve the
riddle of the Sphinx.
Romulus and Remus were born of royal blood and abandoned as orphans. When they
discovered their pedigree, they decided to found a city. But they couldn’t agree on where
to put it. When Remus crossed the boundary that Romulus had decided was the edge of
Rome, Romulus killed him, declaring: “So perish every one that shall hereafter leap over
my wall.” Law-maker and law-breaker, criminal outlaw and king who defined Rome,
Romulus was a self-contradictory insider/outsider.
Normal people aren’t like Oedipus or Romulus. Whatever those individuals were
actually like in life, the mythologized versions of them remember only the extremes. But
why was it so important for archaic cultures to remember extraordinary people?
The famous and infamous have always served as vessels for public sentiment: they’re
praised amid prosperity and blamed for misfortune. Primitive societies faced one
fundamental problem above all: they would be torn apart by conflict if they didn’t have a
way to stop it. So whenever plagues, disasters, or violent rivalries threatened the peace, it
was beneficial for the society to place the entire blame on a single person, someone
everybody could agree on: a scapegoat.
Who makes an effective scapegoat? Like founders, scapegoats are extreme and
contradictory figures. On the one hand, a scapegoat is necessarily weak; he is powerless
to stop his own victimization. On the other hand, as the one who can defuse conflict by
taking the blame, he is the most powerful member of the community.
Before execution, scapegoats were often worshipped like deities. The Aztecs
considered their victims to be earthly forms of the gods to whom they were sacrificed.
You would be dressed in fine clothes and feast royally until your brief reign ended and
they cut your heart out. These are the roots of monarchy: every king was a living god,
and every god a murdered king. Perhaps every modern king is just a scapegoat who has
managed to delay his own execution.
 AMERICAN ROYALTY
Celebrities are supposedly “American royalty.” We even grant titles to our favorite
performers: Elvis Presley was the king of rock. Michael Jackson was the king of pop.
Britney Spears was the pop princess.

Until they weren’t. Elvis self-destructed in the ’70s and died alone, overweight, sitting
on his toilet. Today, his impersonators are fat and sketchy, not lean and cool. Michael
Jackson went from beloved child star to an erratic, physically repulsive, drug-addicted
shell of his former self; the world reveled in the details of his trials. Britney’s story is
the most dramatic of all. We created her from nothing, elevating her to superstardom as
a teenager. But then everything fell off the tracks: witness the shaved head, the over- and
under-eating scandals, and the highly publicized court case to take away her children.
Was she always a little bit crazy? Did the publicity just get to her? Or did she do it all to
get more?

For some fallen stars, death brings resurrection. So many popular musicians have died
at age 27—Janis Joplin, Jimi Hendrix, Jim Morrison, and Kurt Cobain, for example—
that this set has become immortalized as the “27 Club.” 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.
 We alternately worship and despise technology founders just as we do celebrities.
Howard Hughes’s arc from fame to pity is the most dramatic of any 20th-century tech
founder. He was born wealthy, but he was always more interested in engineering than
luxury. He built Houston’s first radio transmitter at the age of 11. The year after that he
built the city’s first motorcycle. By age 30 he’d made nine commercially successful
movies at a time when Hollywood was on the technological frontier. But Hughes was
even more famous for his parallel career in aviation. He designed planes, produced them,
and piloted them himself. Hughes set world records for top airspeed, fastest
transcontinental flight, and fastest flight around the world.
Hughes was obsessed with flying higher than everyone else. He liked to remind people
that he was a mere mortal, not a Greek god—something that mortals say only when they
want to invite comparisons to gods. Hughes was “a man to whom you cannot apply the
same standards as you can to you and me,” his lawyer once argued in federal court.
Hughes paid the lawyer to say that, but according to the New York Times there was “no
dispute on this point from judge or jury.” When Hughes was awarded the Congressional
Gold Medal in 1939 for his achievements in aviation, he didn’t even show up to claim it
—years later President Truman found it in the White House and mailed it to him.
The beginning of Hughes’s end came in 1946, when he suffered his third and worst
plane crash. Had he died then, he would have been remembered forever as one of the
most dashing and successful Americans of all time. But he survived—barely. He became
obsessive-compulsive, addicted to painkillers, and withdrew from the public to spend the
last 30 years of his life in self-imposed solitary confinement. Hughes had always acted a
little crazy, on the theory that fewer people would want to bother a crazy person. But
when his crazy act turned into a crazy life, he became an object of pity as much as awe.
 More recently, Bill Gates has shown how highly visible success can attract highly
focused attacks. Gates embodied the founder archetype: he was simultaneously an
awkward and nerdy college-dropout outsider and the world’s wealthiest insider. Did he
choose his geeky eyeglasses strategically, to build up a distinctive persona? Or, in his
incurable nerdiness, did his geek glasses choose him? It’s hard to know. But his
dominance was undeniable: Microsoft’s Windows claimed a 90% share of the market for
operating systems in 2000. That year Peter Jennings could plausibly ask, “Who is more
important in the world today: Bill Clinton or Bill Gates? I don’t know. It’s a good
question.”
The U.S. Department of Justice didn’t limit itself to rhetorical questions; they opened
an investigation and sued Microsoft for “anticompetitive conduct.” In June 2000 a court
ordered that Microsoft be broken apart. Gates had stepped down as CEO of Microsoft six
months earlier, having been forced to spend most of his time responding to legal threats
instead of building new technology. A court of appeals later overturned the breakup
order, and Microsoft reached a settlement with the government in 2001. But by then
Gates’s enemies had already deprived his company of the full engagement of its founder,
and Microsoft entered an era of relative stagnation. Today Gates is better known as a
philanthropist than a technologist.
 THE RETURN OF THE KING
Just as the legal attack on Microsoft was ending Bill Gates’s dominance, Steve Jobs’s
return to Apple demonstrated the irreplaceable value of a company’s founder. In some
ways, Steve Jobs and Bill Gates were opposites. Jobs was an artist, preferred closed
systems, and spent his time thinking about great products above all else; Gates was a
businessman, kept his products open, and wanted to run the world. But both were
insider/outsiders, and both pushed the companies they started to achievements that
nobody else would have been able to match.

A college dropout who walked around barefoot and refused to shower, Jobs was also
the insider of his own personality cult. He could act charismatic or crazy, perhaps
according to his mood or perhaps according to his calculations; it’s hard to believe that
such weird practices as apple-only diets weren’t part of a larger strategy. But all this
eccentricity backfired on him in 1985: Apple’s board effectively kicked Jobs out of his
own company when he clashed with the professional CEO brought in to provide adult
supervision.
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.
When he was hired as interim CEO of Apple in 1997, the impeccably credentialed
executives who preceded him had steered the company nearly to bankruptcy. That year
Michael Dell famously said of Apple, “What would I do? I’d shut it down and give the
money back to the shareholders.” Instead Jobs introduced the iPod (2001), the iPhone
(2007), and the iPad (2010) before he had to resign in 2011 because of poor health. By
the following year Apple was the single most valuable company in the world.
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.
The lesson for founders is that individual prominence and adulation can never be
enjoyed except on the condition that it may be exchanged for individual notoriety and
demonization at any moment—so be careful.
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.
 Conclusion
STAGNATION OR SINGULARITY?
I founders cannot plan beyond the next 20 to 30 years, is there anything
F EVEN THE MOST FARSIGHTED

to say about the very distant future? We don’t know anything specific, but we can make
out the broad contours. Philosopher Nick Bostrom describes four possible patterns for
the future of humanity.
The ancients saw all of history as a neverending alternation between prosperity and
ruin. Only recently have people dared to hope that we might permanently escape
misfortune, and it’s still possible to wonder whether the stability we take for granted will
last.

However, we usually suppress our doubts. Conventional wisdom seems to assume

instead that the whole world will converge toward a plateau of development similar to
the life of the richest countries today. In this scenario, the future will look a lot like the
present.
 Given the interconnected geography of the contemporary world and the unprecedented
destructive power of modern weaponry, it’s hard not to ask whether a large-scale social
disaster could be contained were it to occur. This is what fuels our fears of the third
possible scenario: a collapse so devastating that we won’t survive it.

The last of the four possibilities is the hardest one to imagine: accelerating takeoff
toward a much better future. The end result of such a breakthrough could take a number
of forms, but any one of them would be so different from the present as to defy
description.
 Which of the four will it be?
Recurrent collapse seems unlikely: the knowledge underlying civilization is so
widespread today that complete annihilation would be more probable than a long period
of darkness followed by recovery. However, in case of extinction, there is no human
future of any kind to consider.
If we define the future as a time that looks different from the present, then most
people aren’t expecting any future at all; instead, they expect coming decades to bring
more globalization, convergence, and sameness. In this scenario, poorer countries will
catch up to richer countries, and the world as a whole will reach an economic plateau.
But even if a truly globalized plateau were possible, could it last? In the best case,
economic competition would be more intense than ever before for every single person
and firm on the planet.
However, when you add competition to consume scarce resources, it’s hard to see how
a global plateau could last indefinitely. Without new technology to relieve competitive
pressures, stagnation is likely to erupt into conflict. In case of conflict on a global scale,
stagnation collapses into extinction.
That leaves the fourth scenario, in which we create new technology to make a much
better future. The most dramatic version of this outcome is called the Singularity, an
attempt to name the imagined result of new technologies so powerful as to transcend the
current limits of our understanding. Ray Kurzweil, the best-known Singularitarian, starts
from Moore’s law and traces exponential growth trends in dozens of fields, confidently
projecting a future of superhuman artificial intelligence. According to Kurzweil, “the
Singularity is near,” it’s inevitable, and all we have to do is prepare ourselves to accept
it.
But no matter how many trends can be traced, the future won’t happen on its own.
What the Singularity would look like matters less than the stark choice we face today
between the two most likely scenarios: nothing or something. It’s up to us. 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.
Our task today is to find singular ways to create the new things that will make the
future not just different, but better—to go from 0 to 1. 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.
 Acknowledgments
Jimmy Kaltreider for helping to think this book through.
Rob Morrow, Scott Nolan, and Michael Solana for co-creating the Stanford class from
which we started.
Chris Parris-Lamb, Tina Constable, David Drake, Talia Krohn, and Jeremiah Hall for
skillfully guiding us to publication.
Everyone at Thiel Capital, Founders Fund, Mithril, and the Thiel Foundation for working
hard and smart.
Onward.
 Illustration Credits
The illustrations in this book were drawn by Matt Buck, based on the following images:

8.1: Unabomber, Jeanne Boylan/FBI composite sketch

8.1: Hipster, Matt Buck
13.1: Brian Harrison, Business Wire
13.1: Elon Musk, Sebastian Blanco and Bloomberg/Getty Images
14.1: Richard Branson, Ethan Miller/Getty Images
14.2: Sean Parker, Aaron Fulkerson, flickr user Roebot, used under CC BY-SA
14.3: Elvis Presley, Michael Ochs Archives/Getty Images
14.3: Michael Jackson, Frank Edwards/Getty Images
14.3: Britney Spears, Kevin Mazur Archive 1/WireImage
14.4: Elvis Presley, Tom Wargacki/WireImage
14.4: Michael Jackson, David LEFRANC/Gamma-Rapho via Getty Images
14.4: Britney Spears, New York Daily News Archive via Getty Images
14.5: Janis Joplin, Albert B. Grossman and David Gahr/Getty Images
14.5: Jim Morrison, Elektra Records and CBS via Getty Images
14.5: Kurt Cobain, Frank Micelotta/Stringer/Getty Images
14.5: Amy Winehouse, flickr user teakwood, used under CC BY-SA
14.6: Howard Hughes, Bettmann/CORBIS
14.6: magazine cover, TIME, a division of Time Inc.
14.7: Bill Gates, Doug Wilson/CORBIS
14.7: magazine cover, Newsweek
14.8: Steve Jobs, 1984, Norman Seeff
14.8: Steve Jobs, 2004, Contour by Getty Images
 Index
Page numbers in italics refer to illustrations.

Abound Solar
Accenture
advertising, 3.1, 11.1, 11.2, 11.3
Afghanistan
Airbnb
airline industry
Allen, Paul
Amazon, 2.1, 5.1, 5.2, 6.1, 12.1
Amundsen, Roald
Andreessen, Horowitz
Andreessen, Marc
Anna Karenina (Tolstoy)
antitrust
Apollo Program
Apple, 4.1, 5.1, 5.2, 6.1, 14.1
branding of
monopoly profits of
Aristotle
Army Corps of Engineers
AT&T
Aztecs
Baby Boomers
Bacon, Francis
Bangladesh
Barnes & Noble
Beijing
Bell Labs
Berlin Wall
Better Place
Bezos, Jeff, 5.1, 6.1
big data
Bill of Rights, U.S.
bin Laden, Osama
biotechnology
biotech startups, 6.1, 6.2
board of directors
Bostrom, Nick
Box, 9.1, 11.1
Boyle, Robert
branding
Branson, Richard
Brin, Sergey
bubbles
financial, 2.1, 8.1
see also specific bubbles
Buffett, Warren
bureaucracy, prf.1, 1.1, 9.1
Bush, George H. W., 2.1, 12.1
Bush, George W.
business:
Darwinian metaphors in
value of
war metaphors in
Capablanca, José Raúl
cap-and-trade legislation
capitalism, and competition, 3.1, 8.1
cash flows, 5.1, 5.2, 5.3
celebrities
Centers for Disease Control and Prevention
Central Intelligence Agency (CIA)
CEO compensation
Chen, Steve
China, 1.1, 6.1, 12.1, 13.1
globalization and
cleantech
distribution question for
durability question for
engineering question for
monopoly question for
people question for
secret question for
social entrepreneurship and
timing question for
cleantech bubble, 13.1, 13.2, 13.3
clean technology
Clinton, Bill
cloud computing
Cobain, Kurt
Cohen, Stephen
companies:
value created by
valuing of
company culture
Compaq
compensation
competition, 3.1, 5.1, 13.1, bm1.1
and capitalism, 3.1, 8.1
ideology of
imitative
lies of
as relic of history
ruthlessness in
as war
complacency
complementarity
substitution vs.
technology and
compound interest
computers, 12.1, 12.2
competition from
humans and
computer science, ideology of
Confinity
Congress, U.S., 6.1, 11.1, 13.1
Constitutional Convention
consultants
consulting
contrarian thinking
control
conventional truths, 8.1, 8.2
courage
credit card fraud
cults, 8.1, 10.1
Customer Acquisition Cost (CAC), 11.1, 11.2
Customer Lifetime Value (CLV), 11.1, 11.2
Daimler
Darwin, Charles
Deep Blue
definite optimism, 6.1, 6.2
definite pessimism, 6.1, 6.2
Dell, Michael
Department of Motor Vehicles (DMV)
design
DeskJet 500C
DiCaprio, Leonardo
disruption
distribution, 11.1, 11.2, 11.3, 11.4
power law of
at Tesla
Doerr, John
Doohan, James
Dorsey, Jack
dot-com crash, 4.1, 4.2
dot-com mania, 2.1, 2.2
lessons learned from
Dow Jones Industrial Average
Dunn, Patricia
Dylan, Bob
Earnhardt, Dale, Jr.
East Asian financial crises
eBay, 4.1, 5.1, 5.2, 5.3, 9.1, 10.1, 11.1
economies of scale
educational system
efficient markets
Einstein, Albert
electric cars, 13.1, 13.2
Ellison, Larry
email
Emerson, Ralph Waldo
Empire State Building
Energy Conversion Devices
Energy Department, U.S.
Energy Innovations
Engels, Friedrich
entitlement spending
entrepreneurs, 3.1, 5.1, 6.1, 6.2, 7.1, 10.1
 short-term growth focus of
entrepreneurship, serial
Epicurus
equity compensation
Eroom’s law
ethics
euro
Europe, 2.1, 6.1
European Central Bank
Evergreen Solar, 13.1, 13.2
evolution
exploration
extinction, bm1.1, bm1.2
Facebook, prf.1, 5.1, 6.1, 6.2, 7.1, 11.1, 14.1
Fairchild Semiconductor
Fanning, Shawn
Faust
Federal Bureau of Investigation (FBI), 8.1, 12.1, 14.1
Fermat, Pierre de
Fermat’s Last Theorem
finance, indefinite
financial bubbles, 2.1, 8.1
first mover advantage
flatness
Fleming, Alexander
Forbes, 12.1, 12.2
Ford
fossil fuels
foundations
co-founders
compensation structure
equity
ownership, possession and control
startups
founders, 14.1, bm1.1
origins of
traits of
Founders Fund, 7.1, 7.2, 9.1, 11.1, 13.1
Fountain of Youth
fracking
fraud detection
free marketeers
free trade
fundamentalists
future:
challenge of
controlling of
four possible patterns for
Gaga, Lady, 14.1, 14.2
Gates, Bill, prf.1, 6.1, 6.2, 6.3, 14.1
General Motors, 9.1, 13.1
genius
Gladwell, Malcolm, 6.1, 6.2, 6.3
globalization, 1.1, 1.2, 2.1, 2.2, 2.3, 8.1, 12.1, bm1.1
substitution as
technology and
global warming
goals
Golden Gate Bridge
Google, 3.1, 3.2, 3.3, 4.1, 5.1, 7.1, 10.1, 12.1, 12.2
as monopoly, 3.1, 3.2
motto of
Google Translate
Gore, Al
government, indefinite
Great Depression
Greenspan, Alan, 2.1, 8.1
Gross, Bill
Groupon
Guardian, 12.1
Hamlet
Harrison, Brian, 13.1
Hegel, Georg Wilhelm Friedrich
Hendrix, Jimi
Hewlett, Bill
Hewlett-Packard
hipsterdom
Hitchhiker’s Guide to the Galaxy, The
Hoffman, Reid
horizontal progress
housing bubble, 2.1, 8.1
Howery, Ken
HP Services
Hughes, Howard
Hurley, Chad
Hyundai
IBM, 3.1, 12.1
Igor
incentive pay
income inequality
incrementalism, 8.1, 14.1
indefinite finance
indefinite life
indefinite optimism, 6.1, 6.2
indefinite pessimism, 6.1, 6.2
India
Indonesia
information technology, 1.1, 6.1, 12.1
Informix
innovation, prf.1, 3.1
insider trading
Instagram
Intel
internet, 2.1, 2.2
internet bubble, 2.1, 2.2, 2.3, 8.1, 13.1
Interstate Highway System
Intuit
investment
iPad, 5.1, 14.1
iPhone, 3.1, 4.1, 5.1, 14.1
iPod, 6.1, 14.1
irrational exuberance
Italy
IT startups
Ivan, Hurricane
Jackson, Michael
Japan
Jennings, Ken
Jennings, Peter
Jeopardy!
Jobs, Steve, 5.1, 5.2, 6.1, 6.2, 14.1
Jones, Jim
Joplin, Janis
justice
Justice Department, U.S.
Kaczynski, Ted
Karim, Jawed
Karp, Alex, 11.1, 12.1
Kasparov, Garry
Katrina, Hurricane
Kennedy, Anthony
Kesey, Ken
Kessler, Andy
Kurzweil, Ray
last mover, 11.1, 13.1
last mover advantage
lean startup, 2.1, 6.1, 6.2
Levchin, Max, 4.1, 10.1, 12.1, 14.1
Levie, Aaron
lifespan
life tables
LinkedIn, 5.1, 10.1, 12.1
Loiseau, Bernard
Long-Term Capital Management (LTCM)
Lord of the Rings (Tolkien)
luck, 6.1, 6.2, 6.3, 6.4
Lucretius
Lyft
MacBook
machine learning
Madison, James
Madrigal, Alexis
Manhattan Project
Manson, Charles
manufacturing
marginal cost
marketing
Marx, Karl, 4.1, 6.1, 6.2, 6.3
Masters, Blake, prf.1, 11.1
Mayer, Marissa
Medicare
Mercedes-Benz
MiaSolé, 13.1, 13.2
Michelin
Microsoft, 3.1, 3.2, 3.3, 4.1, 5.1, 14.1
mobile computing
mobile credit card readers
Mogadishu
monopoly, monopolies, 3.1, 3.2, 3.3, 5.1, 7.1, 8.1
building of
characteristics of
in cleantech
creative
dynamism of new
lies of
profits of
progress and
sales and
of Tesla
Morrison, Jim
Mosaic browser
music recording industry
Musk, Elon, 4.1, 6.1, 11.1, 13.1, 13.2, 13.3
Napster, 5.1, 14.1
NASA, 6.1, 11.1
NASDAQ, 2.1, 13.1
National Security Agency (NSA)
natural gas
natural secrets
Navigator browser
Netflix
Netscape
NetSecure
network effects, 5.1, 5.2
New Economy, 2.1, 2.2
New York Times, 13.1, 14.1
New York Times
Nietzsche, Friedrich
Nokia
nonprofits, 13.1, 13.2
Nosek, Luke, 9.1, 14.1
Nozick, Robert
nutrition
Oedipus, 14.1, 14.2
OfficeJet
OmniBook
online pet store market
Oracle
Outliers (Gladwell)
ownership
Packard, Dave
Page, Larry
Palantir, prf.1, 7.1, 10.1, 11.1, 12.1
PalmPilots, 2.1, 5.1, 11.1
Pan, Yu
Panama Canal
Pareto, Vilfredo
Pareto principle
Parker, Sean, 5.1, 14.1
Part-time employees
patents
path dependence
PayPal, prf.1, 2.1, 3.1, 4.1, 4.2, 4.3, 5.1, 5.2, 5.3, 8.1, 9.1, 9.2, 10.1, 10.2, 10.3, 10.4, 11.1, 11.2, 12.1, 12.2, 14.1
founders of, 14.1
future cash flows of
investors in
“PayPal Mafia”
PCs
Pearce, Dave
penicillin
perfect competition, 3.1, 3.2
equilibrium of
Perkins, Tom
perk war
Perot, Ross, 2.1, 12.1, 12.2
pessimism
Petopia.com
Pets.com, 4.1, 4.2
PetStore.com
pharmaceutical companies
philanthropy
philosophy, indefinite
physics
planning, 2.1, 6.1, 6.2
progress without
Plato
politics, 6.1, 11.1
indefinite
polling
pollsters
pollution
portfolio, diversified
possession
power law, 7.1, 7.2, 7.3
of distribution
of venture capital
Power Sellers (eBay)
Presley, Elvis
Priceline.com
Prince
Procter & Gamble
profits, 2.1, 3.1, 3.2, 3.3
progress, 6.1, 6.2
future of
without planning
proprietary technology, 5.1, 5.2, 13.1
public opinion
public relations
Pythagoras
Q-Cells
Rand, Ayn
Rawls, John, 6.1, 6.2
Reber, John
recession, of mid-1990
recruiting, 10.1, 12.1
recurrent collapse, bm1.1, bm1.2
renewable energy industrial index
research and development
resources, 12.1, bm1.1
restaurants, 3.1, 3.2, 5.1
risk
risk aversion
Romeo and Juliet (Shakespeare)
Romulus and Remus
Roosevelt, Theodore
Royal Society
Russia
Sacks, David
sales, 2.1, 11.1, 13.1
complex
as hidden
to non-customers
personal
Sandberg, Sheryl
San Francisco Bay Area
savings
scale, economies of
Scalia, Antonin
scaling up
scapegoats
Schmidt, Eric
search engines, prf.1, 3.1, 5.1
secrets, 8.1, 13.1
about people
case for
finding of
looking for
using
self-driving cars
service businesses
service economy
Shakespeare, William, 4.1, 7.1
Shark Tank
Sharma, Suvi
Shatner, William
Siebel, Tom
Siebel Systems
Silicon Valley, 1.1, 2.1, 2.2, 2.3, 5.1, 5.2, 6.1, 7.1, 10.1, 11.1
Silver, Nate
Simmons, Russel, 10.1, 14.1
singularity
smartphones, 1.1, 12.1
social entrepreneurship
Social Network, The
social networks, prf.1, 5.1
Social Security
software engineers
software startups, 5.1, 6.1
solar energy, 13.1, 13.2, 13.3, 13.4
Solaria
Solyndra, 13.1, 13.2, 13.3, 13.4, 13.5
South Korea
space shuttle
SpaceX, prf.1, 10.1, 11.1
Spears, Britney
SpectraWatt, 13.1, 13.2
Spencer, Herbert, 6.1, 6.2
Square, 4.1, 6.1
Stanford Sleep Clinic
startups, prf.1, 1.1, 5.1, 6.1, 6.2, 7.1
assigning responsibilities in
cash flow at
as cults
disruption by
during dot-com mania
economies of scale and
foundations of
founder’s paradox in
lessons of dot-com mania for
power law in
public relations in
sales and
staff of
target market for
uniform of
venture capital and
steam engine
Stoppelman, Jeremy
string theory
strong AI
substitution, complementarity vs.
Suez Canal
tablet computing
technological advance
technology, prf.1, 1.1, 1.2, 2.1, 2.2, 2.3
American fear of
complementarity and
globalization and
proprietary
technology companies
terrorism
Tesla Motors, 10.1, 13.1, 13.2
Thailand
Theory of Justice, A (Rawls)
Timberlake, Justin
Time magazine
Tolkien, J.R.R.
Tolstoy, Leo
Tom Sawyer (char.)
Toyota
Tumblr
27 Club
Twitter, 5.1, 6.1
Uber
Unabomber
VCs, rules of
“veil of ignorance”
venture capital
power law in
venture fund, J-curve of successful, 7.1
vertical progress
viral marketing
Virgin Atlantic Airways
Virgin Group
Virgin Records
Wagner
Wall Street Journal
Warby Parker
Watson
web browsers
Western Union
White, Phil
Wiles, Andrew
Wilson, Andrew
Winehouse, Amy
World Wide Web
Xanadu
X.com
Yahoo!, 2.1, 3.1, 3.2, 5.1, 6.1
Yammer
Yelp
YouTube, 10.1, 12.1
ZocDoc
Zuckerberg, Mark, prf.1, 5.1, 6.1, 14.1
Zynga
 About the Authors
is an entrepreneur and investor. He started PayPal in 1998, led it as CEO, and took
Peter Thiel

it public in 2002, defining a new era of fast and secure online commerce. In 2004 he
made the first outside investment in Facebook, where he serves as a director. The same
year he launched Palantir Technologies, a software company that harnesses computers to
empower human analysts in fields like national security and global finance. He has
provided early funding for LinkedIn, Yelp, and dozens of successful technology startups,
many run by former colleagues who have been dubbed the “PayPal Mafia.” He is a
partner at Founders Fund, a Silicon Valley venture capital firm that has funded
companies like SpaceX and Airbnb. He started the Thiel Fellowship, which ignited a
national debate by encouraging young people to put learning before schooling, and he
leads the Thiel Foundation, which works to advance technological progress and long-
term thinking about the future.
was a student at Stanford Law School in 2012 when his detailed notes on Peter’s
Blake Masters

class “Computer Science 183: Startup” became an internet sensation. He went on to co-
found Judicata, a legal research technology startup.