Thinking from first principles

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

Types of progress

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.

Unsustainable growth

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.

Hardest thing

The most contrarian thing of all is not to oppose the crowd but to think for yourself

Capitalism !== competition

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

Non-monopolists vs monopolists

Non-monopolists exaggerate their distinction by defining their market as the intersection of various smaller markets … Monopolists, by contrast, disguise their monopoly by framing their market as the union of several large markets:

Creative monopolies

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.

Each great business is different

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.

Opportunity costs

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.

Network effects

Network effects can be powerful, but you’ll never reap them unless your product is valuable to its very first users

Getting the first customers

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.

Scalability form day one

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

Cutting down

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.

Starting small

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.

First target group

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

Avoid competition

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.

Luck?

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.

Case and effect

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.”

Schooling with no focus and goal

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.

Focus and monopoly

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.

Iteration vs Evolution

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.

Selling a company

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.

Focus

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.

Hard is possible

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.

What kind of company to build

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.

Secret or not?

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.

Thiel’s Law

teasingly nicknamed it “Thiel’s law”: a startup messed up at its foundation cannot be fixed.

Founder chemistry

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.

Team

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.

3 things for running a 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?

Board

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

Avoiding misalignments

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.

Creation

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.

Talents

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?

Perks

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.

Cults, startups and fanaticism

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.

Advertising

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.

Distribution

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.

Acquired cost and lifetime value

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).

Media

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.

Innovation

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.

Bringing out the best

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.

Create it!

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.