It is inherently difficult to distinguish between an entrepreneur’s skill and luck, even in retrospect. Peter Thiel, however, is the cofounder of two different billion-dollar technology businesses and the first outside investor in Facebook. If he’s only lucky, I’d like to borrow his rabbit’s foot.
In the spring of 2012, Thiel co-taught the Stanford computer science course CS183: Startup. A law student named Blake Masters began blogging about it and publishing his lecture notes online each week. They became an Internet sensation, and they form the basis for Zero to One. As telegraphed by the subtitle—Notes on Startups, or How to Build the Future—it makes an argument on two levels: The narrower argument is how to build a successful startup technology company; the broader one is how America should build a more successful economy. Based on my experience, Thiel’s advice on how to create a startup is practical, often unconventional, and uniformly excellent. Here are a few examples, chosen almost at random:
While there is an exception to every rule, my own software company developed versions of these exact beliefs, often through painful experience. Thiel’s strands of insight come together in the penultimate chapter, which explains why the Solyndra model for green energy is fundamentally flawed. It is a 21st-century version of what a Harvard Business School case-study ought to be.
Thiel begins with a question that he poses to job applicants: What important truth do very few people agree with you on? This is a great interview question, and I’m going to steal it from him. But the question also points to a deeper truth: It is extremely difficult to come up with an idea that is simultaneously contrarian, true, and valuable.
Such an idea is the genesis of most great technology companies. The unique intellectual task of the entrepreneur is to distinguish between the core contrarian idea, which must be preserved at all costs, and everything else, which is subject to endless questioning and change.
This is not usually as simple as it sounds, because there is almost always a difficult road from idea to realization. The exact boundaries of the core idea itself are usually clarified through sustained contact with the marketplace and repeated trial-and-error learning about various approaches to technology, sales, people management, and other elements of a real-world company.
The day-to-day role of the entrepreneur is to overcome the endless practical obstacles to realizing the vision. I have often described the subjective feeling of this experience with a paraphrased version of what I once heard another entrepreneur say: “You just keep putting one dumb foot in front of the other, while the whole world throws bricks at your head.” Joseph Schumpeter summed up this combination of intellectual and practical tasks almost perfectly in Capitalism, Socialism, and Democracy (1942):
As Schumpeter writes, this isn’t a wise career choice for most normal people, and the implication of Zero to One is that most readers who come to it looking for advice about creating a startup are really being given the advice to do something else for a living.
One of Thiel’s most controversial ideas is that “capitalism and competition are opposites.” This is an unfortunate phrasing that obscures an important truth. The content behind the aphorism could be more accurately stated as the view that a successful startup usually engages in a different kind of competition than is usefully described in economics textbooks or engaged in by any but the most innovative competitors. Schumpeter again:
This basic concept of strategic advantage through unique knowledge or capability is not limited to startups. The most important modern thinker-practitioner of the art, outside of startups, was probably the late Bruce Henderson, who founded the pioneering strategy consulting firm Boston Consulting Group (BCG). Unlike the more conventional strivers who joined established consulting firms, Henderson was a classic entrepreneur who started with a desk, a telephone, and some contrarian ideas to create a business that is, today, by my rough calculation, worth several billion dollars. The whole focus of BCG was to help large, established companies achieve competitive advantage in the sense described by Schumpeter. In his Logic of Business Strategy (1984), Henderson draws a very similar distinction between what he calls “natural” and “strategic” competition. By strategic competition, Henderson was describing the ability to foresee the future evolution of competing moves and countermoves among competitors, and leaping ahead to achieve a decisive advantage. This is another version of what Thiel means by “secret knowledge,” but it is appropriate to companies at a later stage of their life.
It is telling that Thiel, Schumpeter, and Henderson all make a point of attacking “textbook economics.” This isn’t a knock on economics per se; it’s a knock on books, at least as a basis for achieving extraordinary results in business. Economics just happens to be the discipline that tries to describe what entrepreneurs do. All three men consider quantitative, prescriptive economic models for entrepreneurship to be simplistic and destructive because they point people toward the wrong bases for successful competition.
Yet the deeper complaint is that textbooks are not so much wrong as they are conventional—and an entrepreneurial idea must be contrarian. Even a correct, canonical textbook—which constitutes knowledge that any successful entrepreneur should have mastered in order to succeed in a given field—cannot be the basis for a successful startup, since everyone already uses this knowledge in the marketplace. If an economist were able to reduce some aspect of entrepreneurial success to an algorithmically defined process and it achieved widespread acceptance, it would cease to be a source of profit. The entrepreneurial frontier would have moved on to some other, not-yet-systematized field of action.
So at the level of an entrepreneurial firm, Zero to One is full of excellent advice. Ironically, however, it is the implication of Thiel’s views—how real competition works—that complicates the picture of how society should set the rules of the game to encourage innovation and progress.
Thiel (and Schumpeter and Henderson) emphasizes that achieving entrepreneurial breakthroughs requires not just intellectual assent to some contrarian idea but a high level of commitment to applying that idea in the real world. Thiel uses the term “definite” to denote this kind of commitment to a fixed goal and “indefinite” for the tendency to keep one’s options open. America, he argues, was a definite/optimistic society in the 1950s and ’60s but has been an indefinite/optimistic society for the past three decades.
This is disturbing to Thiel, and he questions whether it is possible for a society to be indefinite and optimistic in the long run: “How can the future get better if no one plans for it?” he asks. Nearly everybody in the modern world has a ready answer to this question: evolution. But Thiel finds this answer unsatisfying and believes it will lead to small, incremental improvements rather than important changes.
The echoes of Friedrich Hayek are unmistakable here, but it is striking that technology entrepreneur Thiel sides with the planners. It is also important to see his argument as a contrarian reaction to current Silicon Valley orthodoxy, which favors web-based companies that conduct repeated online tests only to make minor adjustments. This represents the exploitation of inherent capabilities of a new technology platform. But, as Thiel argues, it is also a reaction to the crashing and burning of so many businesses during the dot-com boom: The current generation of entrepreneurs resembles the generation scared by the Great Depression into a lifelong (and irrational) fear of debt. Thiel argues for a return to grand entrepreneurial ambition to create major innovations—“zero to one” changes—and issues this call to arms:
The key institutions that define what is distinctive about Western civilization—science, free markets, democracy—share many important features beneath the skin. Among them is a multilevel structure in which individual actors must be definite while the system as a whole remains indefinite. We need scientists to commit to outlandish new theories and work at them for years in the face of skepticism; but we want science to be open to alternative theories, as well. We want aspiring politicians and thinkers to commit to theories for policies and work to realize them; but we want the political system to remain open to alternative viewpoints. We want entrepreneurs to commit to new business ideas; but we want the economy to remain open to new entrepreneurs with competing businesses.
To be sure, we shouldn’t idealize such open systems: Under some conditions, they outperform planning; under others, they do not. William F. Buckley famously said that he would rather be governed by the first 2,000 names in the Boston telephone book than by the Harvard faculty, and so would I. But I would rather fly in an airplane designed by competent aeronautical engineers. Open systems outperform planning when we are more ignorant: The notion that contrarian ideas are the basis for successful startups implies that the economy is a system in which ignorance is endemic. You can have a world where contrarian startups are worthwhile, or you can have a world where planning at the level of society works—but you can’t have both.
Of course, there are huge technical projects that, even in an open society, are more effectively done through government leadership: Large-scale infrastructure building, a manned mission to Mars, and long-term medical research to cure disease are all examples of projects that would not only accomplish tangible goals but would help catalyze the cultural change described in Zero to One.
I suspect that Thiel has a fairly nuanced view about this, but what is missing is a serious engagement with the fundamental questions of political economy that emerge directly from his vision for innovation. Yes, this is a short book full of terrific ideas; but Thiel’s ambition to furnish insight at the level of society raises two questions: Given that the process of innovation requires commitment to contrarian ideas, what are the boundaries between government planning and private action? And since innovation requires there to be entrepreneurs (a tiny minority), how do we provide them with sufficient incentives and freedom of action while ensuring that the benefits of innovation flow broadly to maintain social consent to the market process?
This volume provides some valuable field notes on how innovation really works in our present economy, ringing truer to my experience than anything I’ve read on the subject in a Washington policy paper. It would be great to see a second book from Peter Thiel that draws out some of the implications of Zero to One for political action.
Jim Manzi is founder and chairman of Applied Predictive Technologies, a global software company.
