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SME book club: The joys of building a business monopoly (for making money, that is)

One of the world’s most successful startup investors and part of the brains behind PayPal on why “competition is for losers”.

Peter Thiel at this year's Web Summit in Dublin Peter Thiel at this year's Web Summit in Dublin Source: Clodagh Kilcoyne/PA Wire/Press Association Images

YOU MAY NOT have heard of Peter Thiel, but you probably know the name of one company he co-founded – PayPal. That little startup began life in 1998 and 4 years later was sold to eBay for $1.5 billion.

Thiel is also one of the brains behind the lesser-known Palantir, a “big data” analytics firm with a current valuation of about $9 billion that counts the FBI and CIA as clients. He was also one of the first, major backers for Facebook and this year he was ranked number 4 on Forbes’ Midas list of top technology investors.

With a CV like that, the 47-year-old knows a few things about what makes a few startups wildly successful – while most are consigned to the scrapheap of technology history. In his book from this year, Zero to One: Notes on Startups or How to Build the Future, the lawyer-turned entrepreneur and investor sets out those thoughts in what reads almost like a manifesto on the joys and core elements of building a great company.

“The next Bill Gates will not build an operating system … and the next Mark Zuckerberg won’t create a social network,” he writes at the start. ”If you are copying these guys, you aren’t learning from them.”

Zero to One

Who should read this book?

Anyone in the startup business – whether an entrepreneur or investor – should have this book on their list. Putting aside Thiel’s record as an entrepreneur, his ability to pick a winner from the very-crowded field of Silicon Valley wannabes gives him rare insight into why some startups reach the stratosphere and others end in a smouldering ruin of burned-up cash and ambitions.

While this is not an all-encompassing “hot to succeed in business”-style manual, it is essential reading for putting together companies that, as Thiel succinctly puts it, ”create new things”.

What will it tell me?

While big organisations tend to move slowly and bureaucracies have a natural bias towards conservatism, the startup can be positively defined as “the largest group of people you can convince of a plan to build a better future”, Thiel writes.

But it is infinitely easier to copy than to create something new, a distinction the author exemplifies as the difference between an entrepreneur that makes one typewriter and works out how to build hundreds – and another who takes one typewriter and works out how to build a word processor.

“The paradox of teaching entrepreneurship is that such a formula necessarily cannot exist,” he writes. “The single most powerful pattern I have notices is that successful people find value in unexpected places, and they do this by thinking about business from first principles instead of formulas.”

Tech Tycoon Thiel (left) while serving as PayPal's chief executive in 2000 Source: PAUL SAKUMA/AP/Press Association Images

From that platform, Thiel, who revels throughout his book in espousing contrarian views, comes up with 4 guiding principles as the antithesis of the thinking he believes became commonplace in the early 2000s after the tech bubble burst. These points, which the author spends the rest of the book exploring are: that it is better to risk boldness than triviality; a bad plan is better than no plan; competitive markets destroy profits; and sales matter just as much as product.

The renowned libertarian – who has questioned everything from conventional education to the benefits of democracy – dedicates several chapters talking about the benefits and methods of building a monopoly, often using Google as his textbook example. The point here is that the greatest entrepreneurs build successful businesses with few if any competitors, but in a field where a clear market still exists.

“Monopoly is the condition of every successful business,” he writes. “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.”

However Thiel doesn’t see these business monopolies as strangling innovation or coming at the expense of consumers. Here he uses Apple as his example, with the tech giant’s success with iOS and its mobile devices finally breaking Microsoft’s long running operating-system dominance.

He goes on to explore some of the key attributes the most successful companies possess that allow them to build cash flows which will keep increasing a decade into the future. These include core principles like the development of proprietary products which improve technology by an order of magnitude – 50% better is not enough, according to Thiel’s rule of thumb, the hyper-expanding company must be at least 10 times better than their competition.

Source: sxsw/YouTube

Along the way, he uses the book’s platform to take a few strange tangents – taking a swipe at hipsters, while also digressing into geo-politics and philosophy. At one point he uses unabomber Ted Kaczynski as an example as the kind of pervasive hopelessness that can lead most people to think there are no good “secrets” left to find in the world.

But these digressions have a point – how to find these secrets that lie at the core of a great startup, then what to do with them when discovered. He heaps scorn on buzzwords like “disruption”, pointing out that if a company can be simply summed up as the opposite of an existing firm “it can’t be completely new and it’s probably not going to become a monopoly”. Don’t aim to be disruptive, avoid competition altogether – that’s his message.

There are too many lessons to be listed here despite this being a relatively short book, which is a testament to the depth and breadth of Thiel’s knowledge of the startup scene. At various points he deals with how to build a startup from the right foundation, choosing the right staff and how to reward them, and the reasons why it’s vital to build a great workplace culture.

Such is the strength of Thiel’s conviction about what is and isn’t a good startup, the biggest negative for those reading this book comes from the incredibly high standards he preaches that entrepreneurs should aspire to. There isn’t room for thousands of Facebooks, Amazons or PayPals in the world, but those are the types of companies the author uses to epitomise the goal startup founders should aspire – to stretch their ambitions beyond simply repackaging or redeveloping existing ideas.

As he writes in his final chapter: ”Only by seeing our world anew, as fresh and strange as it was to the ancients who saw it first, can we both recreate it and preserve it for the future”.

Biggest Donors Republicans Source: Ben Margot/AP/Press Association Images

In a nutshell: The point of this book isn’t to give entrepreneurs a great idea that will kickstart their billion-dollar business – if Thiel knew that, he probably would have done it himself by now. Instead it’s a strange hybrid - part philosphy, part rallying call for big-thinking entrepreneurs and part how-to-guide. While it won’t tell a budding Mark Zuckerberg everything they need to know about building the next Facebook, it could stop one falling over at an early hurdle because of a half-developed concept or a badly-thought-out business plan.

If you liked this, you’ll love:

The Hard Thing About Hard Things: Building a Business When There Are NoEasy Answers >

The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses >

Each month, as part of TheJournal.ie’s ongoing SME coverage, we look at a business book that makes a difference. Our focus this month has been on reviewing the year that has passed and helping SMEs and startups look towards the year ahead. To read more articles in our series click HERE

READ: SME book club: How one bull-headed businessman built the ‘everything store’ >

READ: SME book club: Surviving a family business… with your sanity and relationships intact >

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About the author:

Peter Bodkin  / Editor, Fora

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