Investment Insights from Zero to One by Peter Thiel

I believe Peter Thiel does not need much of an introduction. In short, he is the co-founder of PayPal and Palantir Technologies as well as an investor in hundreds of startups including Facebook and SpaceX. He also appears to be one of the successful investors on earth, flipping $1700 to $5 billion dollars in 22 years. That’s a whopping 2,941,176x returns!

Back in 2014, he published a book called ‘Zero to One’ which focuses on building new successful businesses and debunking traditional thinking on innovation. Zero to One essentially lifts the veil on how he thinks and how he approaches businesses. It also offers his philosophy and lessons learned from his journey into becoming a billionaire.

I will be sharing my favourite takeaways from this book which I found valuable in making investment decisions.

Insight 1: Monopoly is the Condition of Every Successful Business

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A monopoly is when one company and its product dominate the entire industry or little to no competition. Peter Thiel defines monopoly as one-of-a-kind, solving an unique problem where no companies do or that is so far differentiated from competitions, that is not even competing. Peter Thiel is never a fan of competition and he claimed, “Competition is for losers”. I will be summarising his views on monopolies.

Characteristics of a Monopoly

Monopolies usually share some combination of these 4 characteristics; proprietary technology, network effects, economies of scale and branding.

1. Proprietary Technology

An innovation that makes it difficult or impossible for others to replicate. As a good rule of thumb, proprietary technology must offer at least 10x better than any existing solutions to create a monopoly position. Alternatively, invent something completely new.

2. Network Effects

A product gets more valuable as more people use it. Network effects are powerful but a product must be valuable to its very first users when the network is necessarily small just like Facebook. Facebook started off with just Harvard students and not to attract all people on Earth in the beginning.

3. Economies of Scale

As a company gets larger, they can manufacture products more cheaply as their fixed costs are widely spread over a large number of sales. Software businesses usually benefit heavily from this as the marginal cost of producing another copy of the product is close to zero.

4. Branding

A strong brand is a powerful way to claim a monopoly. Let’s take Apple as an example. Apple has a complex suite of proprietary technologies, manufacturing products at a large scale and having thousands of developers to write software for Apple devices where most users are. These monopolistic advantages are less apparent than its brand however, such fundamentals are the reason why the branding supports Apple’s monopoly effectively.

Monopoly Creation

The most successful companies make the core progression by first dominating a specific niche market before scaling up to adjacent markets.

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Here are some common patterns we can look at:

• PayPal started with eBay powersellers who really needed a way to receive payments online. Focusing only active eBay users to casual eBay users afterwards.
• Facebook started with Harvard students. Afterwards, it expanded to colleges then high school, then to the masses.
• Amazon started with books followed by CDs and videos. Afterwards, it continued to add categories gradually until it became the world’s general store.

Establishing a monopoly allows businesses to net high profits and focus on the future rather than competition. To sum this up, he quoted, “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”.

Insight 2: Peter Thiel’s 7 Questions to Achieve Long-Term Business Success

1. Engineering Question - Can you create breakthrough technology instead of incremental improvements?
2. Timing Question - Is now the right time to start your particular business?
3. Monopoly Question - Are you starting with a big share of a small market?
4. People Question - Do you have the right team?
5. Distribution Question - Do you have a way to not just create but deliver your product?
6. Durability Question - Will your market position be defensible 10 and 20 years into the future?
7. Secret Question - Have you identified a unique opportunity that others don’t see?

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According to Peter Thiel, a company that answers these 7 questions correctly is on the path to success and he considered Tesla as an ideal example.

Engineering: Tesla’s technology is so great that companies rely on it. Back in 2014, companies such as Toyota and Mercedes-Benz utilised Tesla’s technology. General Motors even created a task force to track Tesla’s next moves.

Timing: In January 2010, Tesla secured a $465 million loan from the U.S. Department of Energy where such loans are not easily considered till today. During that time, the government highly supported cleantech and ‘green jobs’ were a political priority. Tesla seized this perfect opportunity.

Monopoly: Tesla started by tapping on a small submarket that it could dominate; a high-end electric sports car. Only later, they expand to luxury cars then average-priced cars.

People: Tesla’s CEO, Elon Musk is a skilled engineer and salesman thus, it isn’t surprising that he assembled a team that is skilled at both. Elon even describes his staff as such; “If you’re at Tesla, you’re choosing to be at the equivalent of Special Forces”.

Distribution: Tesla owns the entire distribution chain, not relying on dealerships to sell them. Although such processes are costly at the start, it affords control over the customer experience, strengthening Tesla’s brand and being cost-effective in the long run.

Durability: Tesla has a head start and is moving faster than anyone else. Its lead is set to widen in the years ahead. Furthermore, unlike other car companies, Tesla the founder is still in charge thus far, so it’s not going to ease off anytime soon.

Secret: “Green” cars were a thing back then, especially among rich people. They don't mind driving a boxy Prius or clunky Honda Insight for the purpose of it. Thus, Tesla decided to build cars that made drivers look cool that even Leonardo DiCaprio ditched his Prius for an expensive Tesla Roadster. While other clean energy companies failed to differentiate themselves, Tesla built a unique brand around this secret that cleantech was more of a social phenomenon than an environmental imperative.

Closing Thoughts

Peter Thiel is known to be a contrarian, thus we may not completely agree with some of his ideas. Nevertheless, I believe it allows us to view companies from a whole new perspective and gain some insights on how to identify possible investment opportunities. There’s so much more covered in this book, containing all kinds of ideas that I found inspiring relating to building new businesses and looking for opportunities to create a brighter future. In my opinion, investing in stocks is like investing in businesses. I believe we can exercise such thinking for our investment decisions since the stock market is a forward-looking instrument as well.

I hope this has been a good read, cheers!