If everyone is thinking alike, then someone isn’t thinking. – George Patton
Peter Thiel is the founder of PayPal, Palantir, and Founders Fund. With a net worth of over $2.5 billion and many remarkable achievements to his name, Thiel is a trailblazing entrepreneur.
The trait that sets Thiel apart the most is his contrarian thinking, where he ponders on questions and states perspectives that few people believe. As a result, few other people subscribe to his school of thought. But this contrarian deep thinking has helped him identify and seize hidden opportunities at the right moment and build high-value businesses.
In his remarkable book Zero to One, Thiel shared such thoughts on building a valuable business.
What a Valuable Business Means
Creating value is not enough. You also need to capture some of the value you create.
A company can create tremendous short-term value for customers without capturing any of it for itself and shareholders. For instance, the US airline industry generated $160 billion in revenue in 2012 with an average one-way fare of $178, but made just 37 cents of profit per customer. By comparison, in the same year, Google earned just $50 billion in revenue but kept 21% as profits.
Not all value will be visible immediately. For instance, Twitter went public at a twelvefold higher valuation than New York Times Company because analysts expected Twitter to generate cash flow in the future. WeWork, which dominated the coworking space, lost over 600% of its valuation because it failed to show how it would generate cash-flow and profit in the future.
The value of a business today is the sum of all the money it will make in the future.
A business can only create value for itself by constantly innovating to serve the customer better. How BigBasket has innovated constantly while its competitors have found it difficult to catch up is a strong example of this.
The Drivers of a Valuable Business
Most companies that create long-term value share some combination of the below characteristics.
1. Proprietary Technology
The clearest way to make 10x improvement is to invent something completely new.
Proprietary technology must be at least ten times better than its closest substitute and deliver huge value to customers. This gives the company a massive advantage.
For instance, despite being the seventh search engine, Google outcompeted other search engines because of its proprietary technology for quick page load times and accurate autocomplete suggestions.
Once you radically innovate, you escape the competition and can focus on aspects other than making money while other businesses stay stuck in the struggle for daily survival.
2. Network Effects
Your product should be very valuable to its very first users when the network is necessarily small.
MS Office suite is a classic example of network effects. The number of times organizations have tried to move to free software that has similar features but reverted to the Office suite is baffling. Even today, MS Office’s licenses keep growing because Microsoft created tremendous value for its users when the network was small.
Instead of trying to capture 1% of a $100 billion market, create 10x value for a tiny initial market so that following the next step becomes easy from there.
3. Economies of Scale
A good startup should have the potential for great scale built into its first design.
A business gets stronger if its fixed costs (engineering, management, office space) can spread out over a larger number of sales.
Amazon built a solid foundation to cater to a niche customer segment: book buyers. Eventually, it used this foundation to scale up in every major area of e-commerce, cloud computing, digital streaming, and artificial intelligence.
Another example is Basecamp which can use a core group of talented people to provide value to millions of separate clients.
A company has a monopoly on its own brand, so creating a strong brand is a powerful way to create a monopoly.
The combination of the three points above enables a business to create a brand so strong that the name becomes a differentiation by itself.
Apple is the strongest example of this point. Many companies tried to copy Apple’s techniques like paid advertising, branded stores, luxurious devices, keynote speeches, high prices, and minimalistic design. But what set Apple apart was its proprietary technology (in hardware and software), economies of scale (which enabled it to dominate pricing for the material it bought), and network effect (thousands of app developers for platforms that millions of users use).
Branding is not just a marketing task. It’s a combination of factors to create products so good that they create a category of their own. The products make a brand, not vice versa.
Tips to Create a Valuable Business
Here are four tips from Thiel.
1. Start Small and Then Scale
Focus on a tiny sect of customers that’s serviced by a handful of or no competitors. PayPal started with eBay power instead of competing for the attention of millions of scattered Individuals. With time, it popularized internet payments and scaled up rapidly to generate cash flows in the long run.
2. Don’t Disrupt
Disruption is a buzzword in the startup and corporate space alike. But Thiel calls it a trivial fad because it makes businesses look at competition rather than at customers. Airbnb and Uber, for instance, saw untapped supplies and unaddressed demands where others saw nothing at all because the others focused too hard on trying to disrupt competition.
Don’t disrupt by trying to create a new market. Instead, tap the ones that already exist but aren’t served. Scaling up becomes easier from there.
3. Be the Best, Not First
The first-mover advantage sounds lucrative since a business can reap profits while competition scrambles to get started. But this “advantage” comes with its own massive challenges – changing buyer behavior, securing funds, creating a new market. Instead, Thiel talks about creating 10x improvement to enjoy substantial profit for years.
Tesla Motors is a powerful example. Though it was a late entrant in the electric car space, it used its last mover advantage and proprietary technology (which Musk generously opened to competitors) to push its followers to embrace a movement.
Zero to One is a must-read for every leader and everyone who wants to become a leader.