Author: Blake Masters, Peter Thiel

ISBN: 978-0753555194

Great short book on philosophy of business.

EXCERPTS

If you want to create and capture lasting value, don’t build an undifferentiated commodity business.

 

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?

 

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.

 

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. [Competition authorities? :)]

 

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.

 

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

 

Competition can make people hallucinate opportunities where none exist. The crazy 90's version of this was the fierce battle for the online pet store market.

 

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

 

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.

 

The perfect target market for a startup is a small group of particular people concentrated together and served by few or no competitors.

 

Once you create and dominate a niche market, then you should gradually expand into related and slightly broader markets. [Crossing the Chasm by Geoffrey Moore]

 

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 .

 

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

 

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.

 

Europeans just react to events as they happen and hope things don’t get worse.

 

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

 

First, only invest in companies that have the potential to return the value of the entire fund.

 

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. [Keeping options open means not purusing any of them seriously!]

 

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.

 

Are there any fields that matter but haven’t been standardized and institutionalized? [That's me.]

 

A great company is a conspiracy to change the world; when you share your secret, the recipient becomes a fellow conspirator.

 

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.

 

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

 

Founders should share a prehistory before they start a company together — otherwise they’re just rolling dice.

 

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

 

As a general rule, everyone you involve with your company should be involved full-time. Sometimes you’ll have to break this rule; it usually makes sense to hire outside lawyers and accountants, for example. However, anyone who doesn’t own stock options or draw a regular salary from your company is fundamentally misaligned. At the margin, they’ll be biased to claim value in the near term, not help you create more in the future. That’s why hiring consultants doesn’t work. Part-time employees don’t work. Even working remotely should be avoided, because misalignment can creep in whenever colleagues aren’t together full-time, in the same place, every day. If you’re deciding whether to bring someone on board, the decision is binary. Ken Kesey was right: you’re either on the bus or off the bus. [In my opinion advice holds true for aggressive young start-ups, with all shareholders working full-time. Forcing the same committment of time and place on non-shareholders won't bring desired returns. You can force people to come and stay at your place but you cannot force them to be productive!]

 

In no case should a CEO of an early-stage, venture-backed startup receive more than $150,000 per year in salary.

 

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.

 

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.

 

Equity is the one form of compensation that can effectively orient people toward creating value in the future. [In my opinion equity is only effective allignment enhancer if substantial; if holder's actions alone can impact it's increase in value! Usually that is only at early stages of start-up and only when one holds at least 30% share in the company.]

 

However, for equity to create commitment rather than conflict, you must allocate it very carefully. Giving everyone equal shares is usually a mistake.

 

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.

 

We didn’t assemble a mafia [PayPal mafia; PayPal's founders, including Elon Musk.] 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.

 

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.

 

Recruiting is a core competency for any company. It should never be outsourced.

 

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.

 

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.

 

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.

 

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.

 

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

 

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

 

The most valuable businesses of coming decades will be built by entrepreneurs who seek to empower people rather than try to make them obsolete.

 

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.

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