Peter Thiel's Zero to One is a thin, little book that is jam-packed with strong opinions on almost every conceivable topic. I didn't agree with everything Thiel -- co-founder of PayPal and a successful venture capitalist -- said, but I found many of his investing insights very compelling. Here are seven to consider.
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1. "...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 simple insight provides a great framework for discovering outstanding companies. A decade ago, investors may not have thought the recruiting industry was the best place to put their money. LinkedIn's founder Reid Hoffman even conceded that his company wasn't "the natural leader of a market or technology trend that everyone was paying attention to." Today, of course, LinkedIn has a market cap of $33 billion.
Thiel notes that LinkedIn didn't "try to write software that would replace recruiters outright." Instead, the company "set out to transform the way recruiters did their jobs." And the company recognized the power of a network that people would want to be a part of. LinkedIn is a great example of a business that has created tremendous value from a very unlikely place.
2. "The first step in thinking clearly is to question what we think we know about the past."
Thiel points to the dot-com crash as an example of a historical episode that should be examined more closely, and notes that many companies learned the wrong lessons from that unfortunate event.
For example, he believes that many companies learned from the dot-com crash that they should only make incremental advances, and that they should focus on product, not sales. Thiel feels that the opposite is true: Companies going forward needed to "risk boldness rather than triviality," and sales are just as important as your product.
I think Thiel's approach here is very helpful for investors, even if you might disagree with his takeaways on this particular event. Conventional wisdom on historical events is often inaccurate, and taking a critical look can yield helpful insights.
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3. "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."
This is an excellent reminder for investors from Thiel. Ignoring competitive realities can be a costly mistake.
While perfect competition sounds great in economic textbooks, it can be extremely tough on business owners. He notes how difficult it is for a restaurant owner to grind out a profit. Thiel advises, "Only one thing can allow a business to transcend the daily brute struggle for survival: monopoly profits."
4. "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."
Here, Thiel is making another simple, but essential point. He believes that a great business must grow and endure. Too often, leaders focus on the growth, but not on the durability.
He cites Zynga and Groupon as two examples of companies that were able to grow rapidly in the short term, even though there were a lot of questions about their long-term feasibility. Zynga has had a hard time finding a way to deliver a "constant stream of popular entertainment for a fickle audience." And Groupon has struggled to get local businesses to become repeat customers. Amazon, Thiel suggests, might be an example of a company that is both growing and durable.
5. "Whatever Einstein did or didn't say, the 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 is perhaps the most important point in the book. Thiel states that monopoly businesses capture more value than "millions of undifferentiated competitors." And we all know how just one great investment can dwarf all the others. Thiel points out,
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.
The power law has numerous applications. For example, who would you rather have? One LeBron or three other average NBA performers?
In Netflix's famous culture deck, the company declares that the best performers in creative/inventive work are 10x better than the average, so there's a huge premium on finding the most talented contributors. Thiel believes this rule is essential to success in both business and investing.
6. "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."
I find this view refreshing. Our culture sometimes encourages us to do things we love, regardless of our talents or prospects. Thiel mentions a university course catalogue as an example of this phenomenon. Pages and pages of courses are listed, and are supposed to reassure us that "it doesn't matter what you do, as long as you do it well."
Thiel thinks that outlook is silly. In the start-up world, what you do matters a lot. And individuals and companies should aim to focus on those pursuits that can benefit from the power law. Just wanting to do something, even if you're somewhat talented at it, might not be good enough.
7. "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 sales-people, you're the salesperson."
Thiel strongly disagrees with the notion held by a lot of Silicon Valley types that if you just build something, customers will come. Successful businesses also need effective distribution strategies. Great products alone aren't enough.
Zero to One is a fascinating book for readers of all backgrounds. I strongly believe it's a must-read for investors, however. He's extremely effective at explaining general principles that could possibly help you identify the outstanding businesses of the future.
The article 7 Insights for Investors From Peter Thiel's "Zero to One" originally appeared on Fool.com.
John Reeves owns shares of LinkedIn. The Motley Fool recommends LinkedIn and Netflix. The Motley Fool owns shares of LinkedIn and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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