Transcript
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Clay Fink (0:03)
On today's episode, we'll be exploring the book Zero to One by Peter Thiel. Zero to One is one of my favorite books on the topic of innovation, monopolies and what it really takes to build something that's enduring. Thiel has one of the most interesting backgrounds of any investor I've come across. At his core, Thiel is an entrepreneur. The first team that Thiel built became known as the PayPal mafia because so many of his former colleagues went on to help each other start and invest in successful tech companies. Thiel challenges the idea that progress comes from simply doing more of what already works. Instead, he argues that the biggest breakthroughs happen when someone creates something entirely new, or, in his words, when a business goes from zero to one. I wanted to cover this book because it forces investors to look beyond the spreadsheets and the near term metrics and and instead think deeply about competitive advantages, long term value creation, and the future of an industry. Much like investing, it's easy to assume that success comes from following the crowd and competing in familiar markets. But as Thiel explains, competition often destroys profits, while truly great businesses escape competition altogether. Zero to one is a reminder that the most valuable companies are not built by copying what already exists. They're built by seeing the world differently and acting on that insight. At the end of the episode, I'll also share my thoughts around a company that had its own Zero to one moment, and that company is Uber. There's a lot of debate currently around the strength of Uber's moat, and I find it to be one of the most interesting case studies in today's market. So with that, I hope you enjoy Today's episode on Zero to One by Peter Thiel.
Podcast Announcer (1:55)
Since 2014 and through more than 190 million downloads, we break down the principles of value investing and sit down with some of the world's best asset managers. We uncover potential opportunities in the market and explore the intersection between money, happiness, and the art of living a good life. This show is not investment advice. It's intended for informational and entertainment purposes only. All opinions expressed by hosts and guests are solely their own and they may have investments in the securities discussed. Now for your host, Clay Fink.
Clay Fink (2:37)
Hey everybody. Welcome back to the Investors Podcast. I'm your host, Clay Fink. On today's episode, I'll be chatting about the book Zero to One by Peter Thiel. Peter Thiel is one of the most successful and unconventional investors of the modern era. In 2005, Thiel launched the Founders Fund which sought to invest in founders who were building revolutionary technologies. His unconventional investment style led him to make successful venture capital investments in companies like SpaceX, Facebook, PayPal, Palantir, and Stripe in their infancy. His book Zero to One matters because it distills the mental models he used to spot monopolies before the rest of the market understood their true power. Rather than teaching incremental improvement, Thiel challenges investors to look for businesses that create something entirely new and can dominate a niche. His framework has deeply influenced how venture capitalists and other long term investors evaluate businesses that are built on a zero to one technological breakthrough. For value investors, this framework is especially useful because it really forces you to step back from the spreadsheets and ask yourself whether a business truly has the potential to become dominant instead of simply looking at a business's financials and determining whether it's expensive or cheap based solely on the numbers. I felt this, you know, firsthand as an investor. There have been times where I spent hours refining a model down to the second decimal place, only to realize later that I never stopped to ask whether the business itself could actually become dominant. Zero to one was a reminder for me that a flawless spreadsheet will not save you if you're modeling a company that never had a chance to matter in the first place. As Thiel puts it, every moment in business happens only once. The next Bill Gates will not build an operating system, the next Larry Page or Sergey Brin will not make a search engine, and the next Mark Zuckerberg won't create a social network. If you're trying to copy these guys, you are not learning from them. End quote. And right off the bat, I just love this insight from Thiel. In order for a great company to remain great, they need to be innovating and trying new things. Otherwise they're destined for failure. But as you can imagine, creating new things tends to be incredibly difficult. And copying a model that already exists is much easier and tends to be exactly what most people do. When I look at our business here at the Investors Podcast Network, we hit our own zero to one moment when we launched a podcast that discussed stock investing back in 2014. In the years that followed, especially after 2020, we then saw a tidal wave of podcasts enter the space, and we knew that if we did not innovate and create something new, then our business was doomed for failure. It reminds me of Jeff Bezos's line where he essentially said that he predicts that one day Amazon will go out of business. And this reality is what keeps Amazon Experimenting and innovating because it's what's required to continue to extend the life of a business that's on its way to one day failing. Innovating and creating new ways of doing things is the way that society really progresses forward. And for some, it might feel like you're sort of hoping for a miracle. If American business is going to succeed, is going to need thousands of miracles to happen. What makes humans really unique relative to other species is our ability to work miracles. And today we call those miracles technology. Technology is what enables us to continue to do more with less, ratcheting up our fundamental capabilities to an ever higher level. If you want to find the next home run investment opportunity, it's probably in a company that's creating groundbreaking zero to one technologies. But there's no formula for creating these types of miracles. A formula cannot exist because every innovation is new and unique, and no authority can give you the blueprint on how to be innovative. When we think about the future, we hope for a future of progress. As Thiel explains, this progress can take one of two forms. We have horizontal or extensive progress, which means copying things that already work. Horizontal progress is easy to imagine because we already know what it looks like. Whereas vertical or intensive progress means doing new things or going from 0 to 1. Vertical progress is harder to imagine because it requires doing something nobody else has ever done. If you take one typewriter and build 100 of them, you've made horizontal progress. If you have a typewriter and build a word processor, you've made vertical progress. I like to think about this the way we would think about transportation. Building faster horses is horizontal progress. It might help with the margin, but you're still limited by the horse. Inventing the automobile is vertical progress because it changes what's possible altogether. Investors tend to overestimate how far incremental improvement can take them and underestimate how disruptive a true paradigm shift can be. At a macro level, the single word for horizontal progress is globalization. For example, the US saw the rise of Amazon and E Commerce, and we've seen several other Amazons emerge in their own form in recent years, whether that be Alibaba in China, Mercado Libre in Latin America, or Sea Limited in Southeast Asia. In Thiel's view, China has been copying the developed world for decades now, from 19th century railroads and 20th century air conditioning to to how cities are built. On the flip side, the single word for vertical zero to one progress is technology. The rapid progress of information technology in recent decades has made Silicon Valley the capital of technology in general. Since 1971, we've seen rapid levels of globalization, and most of the technological development has been confined to information technology. In Thiel's view, in order for humanity to continue to progress, it is essential that new technologies continue to emerge, because if all of these emerging market countries see their standards of living continue to rise and adopt these technologies that are being used in developed countries, then energy production will increase substantially and the end result would be an environmental catastrophe. In a world of scarce resources, globalization without new technology is simply unsustainable. The challenge that society faces today is to both imagine and create the new technologies that can make the 21st century more peaceful and prosperous than the 20th century. And it shouldn't come as a surprise that Thiel believes that new technologies tend to come from startups or a small group of people brought together by a sense of mission to change the world for the better. The easiest explanation for this is that it's hard to develop new things in big organizations, and it's even harder to do it by yourself. Bureaucratic organizations tend to move slowly and not really take too much risk, whereas startups operate on the principle that you need to work with other people to actually make an impact, but you also need to stay small enough to keep bureaucracy at bay. A new company's most important strength is new thinking. Small size affords you the space to think. In the 1990s, Amazon did not try to beat Barnes and Noble by building better bookstores. They've reimagined the entire book buying experience around the Internet. And based on first principles thinking, they leverage the Internet's capabilities to deliver more value to customers for less. Peter Thiel's favorite question to ask in a job interview is, what one important truth do very few people agree with you on? It's a difficult question to answer, especially when you're coming out of college and you were more or less taught the same dogmas as everyone else. Some might say that the educational system is broken and urgently needs fixed, but practically everyone agrees with that statement. Many people might believe that they're contrarian without actually being contrarian. If we jump Back to the 1999 tech bubble, this was a time where both entrepreneurs and investors behaved very irrationally and short term. In Thiel's view, the collapse of the tech bubble left Silicon Valley with four primary lessons. First, make incremental advancements. The grand visions of the tech bubble were a clear indication that the vast majority of people got way too carried away with themselves. Anyone who claims to be great at something is suspect. And anyone who wants to change the world should really be more humble. Small incremental steps are the only safe path forward. The second lesson that people took away from the tech bubble is to stay lean and flexible. All companies must be lean because the future will deliver you curveballs. You just don't expect. You shouldn't know what your business will do, so planning is arrogant and inflexible. Third, improve on the competition. Don't try to create a new market prematurely. The safe way to start a real business is to start with an already existing customer and pursue recognizable products that are already offered by successful competition. And lastly, focus on the product, not sales. If your product requires advertising or salespeople to sell it, it's just not good enough. Technology is primarily about product development, not distribution. Bubble era advertising was obviously wasteful, so the only sustainable growth is viral growth. It was widely believed that if you did not follow these principles, then you were bound to fall for the same mistakes that others made during the 1999 tech bubble. Thiel, being the contrarian that he is, believes that the opposite principles are probably more correct. So to list all four here it's better to risk boldness than triviality. A bad plan is better than no plan. Competitive markets destroy profits, and marketing and sales matter just as much as the product. The late 90s was a time of hubris in when many people believed in going from 0 to 1. But too few startups were actually getting there, and many were never beyond just talking about it. Thiel then explains that the business version of the contrarian question is what valuable company is nobody building? This question is harder than it sounds because your company could create a lot of value without becoming very valuable itself. Creating value is not enough. You also need to capture some of the value you create. This means that even very large businesses can be bad businesses. US Airlines are a perfect example. They serve millions of passengers and create hundreds of billions of dollars in value each year. But the majority of that value goes to society and not to the companies themselves. In 2012, the average airfare each way was $178, but airlines only made 37 cents per passenger trip. Thiel then compares the airlines to Google, which creates less value but captures far more of it. In 2012, Google brought in revenues of $50 billion, while the airlines brought in revenues of 160 billion. Despite generating less than one third of the revenue, it kept 21% of that revenue as profit. That's more than 100 times the airline industry's profit margin that year as of the Time of the book, Google was worth three times more than all of the US airline companies combined. Today, that figure is more like 25 times more valuable than the airline industry. So running a great business is more about having the ability to capture the value that you are creating and less about just generating more revenue. One critical difference between these two case studies is that Google had practically no competition in the search business, and all of the airlines competed with each other head to head, more or less offering the exact same product. If we were sitting in an economics class, we might say that Google was a monopoly and the airlines were in perfect competition. A perfectly competitive market is considered both ideal and the default state in economics 101. And it's when markets achieve equilibrium between producer supply and consumer demand. Every firm in a competitive market is undifferentiated and sells the same homogeneous products. And since no firm has really any market power, they must sell at whatever price the market determines. For example, if I do a search on flights for my trip to New York this September, I might see Southwest Airlines, they have a flight for $350. United Airlines, they have a flight for 375. And pretty much every situation, I would select the Southwest flight because I view the product offered about essentially the same in the long run. Under perfect competition, no company makes an economic profit. A monopoly is the opposite of perfect competition. In contrast to a market with several competitors, a monopoly owns the market and is able to set its own prices. Since it has no competition, it sets prices and volume levels in order to maximize its profits. To an economist, every monopoly looks the same, whether they deviously eliminate rivals, secure a license from the state, or innovate its way to the top. But in the book zero to one, Thiel is most interested in the companies that are so good at what they do that no other firm can offer a close substitute. So he's not interested in companies that are government favorites or do shady or illegal things in order to get a leg up on the competition. Google is a really good example of a company that went from 0 to 1. Since the early 2000s, Google has effectively had no real competition. And of course, the jury is still out on how LLMs will impact Google long term. But so far, they seem to still be in a league of their own.