• EVERY MOMENT IN BUSINESS happens only once. The next Bill Gates will not build an operating system. The next Larry Page or Sergey Brin won’t make a search engine. And the next Mark Zuckerberg won’t create a social network. If you are copying these guys, you aren’t learning from them.
• 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.
• If you take one typewriter and build 100, you have made horizontal progress. If you have a typewriter and build a word processor, you have made vertical progress.
• It’s hard to develop new things in big organizations, and it’s even harder to do it by yourself.
• In the most dysfunctional organizations, signaling that work is being done becomes a better strategy for career advancement than actually doing work (if this describes your company, you should quit now).
• Startups operate on the principle that you need to work with other people to get stuff done, but you also need to stay small enough so that you actually can.
• Anyone who claims to be able to do something great is suspect, and anyone who wants to change the world should be more humble. Small, incremental steps are the only safe path forward.
• All companies must be “lean,” which is code for “unplanned.” You should not know what your business will do; planning is arrogant and inflexible. Instead you should try things out, “iterate,” and treat entrepreneurship as agnostic experimentation.
• Don’t try to create a new market prematurely. The only way to know you have a real business is to start with an already existing customer, so you should build your company by improving on recognizable products already offered by successful competitors.
• If your product requires advertising or salespeople to sell it, it’s not good enough: technology is primarily about product development, not distribution.
• If there is money to be made, new firms will enter the market, increase supply, drive prices down, and thereby eliminate the profits that attracted them in the first place.
• Under perfect competition, in the long run no company makes an economic profit.
• By “monopoly,” we mean the kind of company that’s so good at what it does that no other firm can offer a close substitute.
• Monopolists lie to protect themselves. They know that bragging about their great monopoly invites being audited, scrutinized, and attacked.
• Since they very much want their monopoly profits to continue unmolested, they tend to do whatever they can to conceal their monopoly—usually by exaggerating the power of their (nonexistent) competition.
• Non-monopolists tell the opposite lie: “we’re in a league of our own.”
• You’ll spend time trying to convince people that you are exceptional instead of seriously considering whether that’s true.
• When you hear that most new restaurants fail within one or two years, your instinct will be to come up with a story about how yours is different.
• You’ll spend time trying to convince people that you are exceptional instead of seriously considering whether that’s true.
• If you lose sight of competitive reality and focus on trivial differentiating factors—maybe you think your naan is superior because of your great-grandmother’s recipe—your business is unlikely to survive.
• In business, money is either an important thing or it is everything. Monopolists can afford to think about things other than making money; non-monopolists can’t.
• Monopolies drive progress because the promise of years or even decades of monopoly profits provides a powerful incentive to innovate. Then monopolies can keep innovating because profits enable them to make the long-term plans and to finance the ambitious research projects that firms locked in competition can’t dream of.
• If your industry is in a competitive equilibrium, the death of your business won’t matter to the world; some other undifferentiated competitor will always be ready to take your place.
• 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.
• If you can’t beat a rival, it may be better to merge.
• But a great business is defined by its ability to generate cash flows in the future. Simply stated, the value of a business today is the sum of all the money it will make in the future.
• Simply stated, the value of a business today is the sum of all the money it will make in the future.
• Nightclubs or restaurants are extreme examples: successful ones might collect healthy amounts today, but their cash flows will probably dwindle over the next few years when customers move on to newer and trendier alternatives.
• For a company to be valuable it must grow and endure, but many entrepreneurs focus only on short-term growth. They have an excuse: growth is easy to measure, but durability isn’t.
• If you focus on near-term growth above all else, you miss the most important question you should be asking: will this business still be around a decade from now?
• Proprietary technology is the most substantive advantage a company can have because it makes your product difficult or impossible to replicate. Google’s search algorithms, for example, return results better than anyone else’s.
• As a good rule of thumb, proprietary technology must be at least 10 times better than its closest substitute in some important dimension to lead to a real monopolistic advantage.
• The clearest way to make a 10x improvement is to invent something completely new. Once you’re 10x better, you escape competition.
• Network effects make a product more useful as more people use it. For example, if all your friends are on Facebook, it makes sense for you to join Facebook, too. Unilaterally choosing a different social network would only make you an eccentric.
• 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.
• Software startups can enjoy especially dramatic economies of scale because the marginal cost of producing another copy of the product is close to zero.
• Many businesses gain only limited advantages as they grow to large scale. Service businesses especially are difficult to make monopolies.
• If you own a yoga studio, for example, you’ll only be able to serve a certain number of customers. You can hire more instructors and expand to more locations, but your margins will remain fairly low and you’ll never reach a point where a core group of talented people can provide something of value to millions of separate clients, as software engineers are able to do.
• 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, and there’s no inherent reason why it should ever stop growing.
• Beginning with brand rather than substance is dangerous.
• 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.
• Therefore, every startup should start with a very small market.
• Any big market is a bad choice, and a big market already served by competing companies is even worse.
• This is why it’s always a red flag when entrepreneurs talk about getting 1% of a $100 billion market.
• In practice, a large market will either lack a good starting point or it will be open to competition, so it’s hard to ever reach that 1%.
• Once you create and dominate a niche market, then you should gradually expand into related and slightly broader markets.
• Jeff Bezos’s founding vision was to dominate all of online retail, but he very deliberately started with books.
• Amazon then had two options: expand the number of people who read books, or expand to adjacent markets. They chose the latter.
• As you craft a plan to expand to adjacent markets, don’t disrupt: avoid competition as much as possible.
• If you treat the future as something definite, it makes sense to understand it in advance and to work to shape it. But if you expect an indefinite future ruled by randomness, you’ll give up on trying to master it.
• A definite pessimist believes the future can be known, but since it will be bleak, he must prepare for it. To a definite optimist, the future will be better than the present if he plans and works to make it better.
• To an indefinite optimist, the future will be better, but he doesn’t know how exactly, so he won’t make any specific plans. He expects to profit from the future but sees no reason to design it concretely.
• Instead of working for years to build a new product, indefinite optimists rearrange already-invented ones.
• A whole generation learned from childhood to overrate the power of chance and underrate the importance of planning.
• While a definitely optimistic future would need engineers to design underwater cities and settlements in space, an indefinitely optimistic future calls for more bankers and lawyers.
• Making small changes to things that already exist might lead you to a local maximum, but it won’t help you find the global maximum.
• A business with a good definite plan will always be underrated in a world where people see the future as random. A small handful of companies radically outperform all others.
• The biggest secret in venture capital is that the best investment in a successful fund equals or outperforms the entire rest of the fund combined.
• However, every single company in a good venture portfolio must have the potential to succeed at vast scale.
• An entrepreneur makes a major investment just by spending her time working on a startup. Therefore every entrepreneur must think about whether her company is going to succeed and become valuable.
• When you choose a career, you act on your belief that the kind of work you do will be valuable decades from now.
• For the startup world, this means you should not necessarily start your own company, even if you are extraordinarily talented. If anything, too many people are starting their own companies today.
• 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.
• Natural secrets exist all around us; to find them, one must study some undiscovered aspect of the physical world. Secrets about people are different: they are things that people don’t know about themselves or things they hide because they don’t want others to know.
• 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.
• A startup messed up at its foundation cannot be fixed.
• Bad decisions made early on—if you choose the wrong partners or hire the wrong people, for example—are very hard to correct after they are made.
• When you start something, the first and most crucial decision you make is whom to start it with. Choosing a co-founder is like getting married, and founder conflict is just as ugly as divorce.
• Now when I consider investing in a startup, I study the founding teams. 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.
• It’s not just founders who need to get along. Everyone in your company needs to work well together.
• Most conflicts in a startup erupt between ownership and control—that is, between founders and investors on the board. The potential for conflict increases over time as interests diverge: a board member might want to take a company public as soon as possible to score a win for his venture firm, while the founders would prefer to stay private and grow the business.
• Every single member of your board matters. Even one problem director will cause you pain, and may even jeopardize your company’s future.
• A board of three is ideal. Your board should never exceed five people, unless your company is publicly held.
• Anyone who doesn’t own stock options or draw a regular salary from your company is fundamentally misaligned. At the margin, they’ll be biased to claim value in the near term, not help you create more in the future. That’s why hiring consultants doesn’t work. Part-time employees don’t work.
• A company does better the less it pays the CEO—that’s one of the single clearest patterns I’ve noticed from investing in hundreds of startups.
• In no case should a CEO of an early-stage, venture-backed startup receive more than $150,000 per year in salary.
• If a CEO collects $300,000 per year, he risks becoming more like a politician than a founder.
• However, high cash compensation teaches workers to claim value from the company as it already exists instead of investing their time to create new value in the future. A cash bonus is slightly better than a cash salary—at least it’s contingent on a job well done.
• Startups don’t need to pay high salaries because they can offer something better: part ownership of the company itself.
• Giving everyone equal shares is usually a mistake: every individual has different talents and responsibilities as well as different opportunity costs, so equal amounts will seem arbitrary and unfair from the start.
• Since it’s impossible to achieve perfect fairness when distributing ownership, founders would do well to keep the details secret.
• Sending out a company-wide email that lists everyone’s ownership stake would be like dropping a nuclear bomb on your office.
• Anyone who prefers owning a part of your company to being paid in cash reveals a preference for the long term and a commitment to increasing your company’s value in the future.
• The lawyers I worked with ran a valuable business, and they were impressive individuals one by one. But the relationships between them were oddly thin. They spent all day together, but few of them seemed to have much to say to each other outside the office. Why work with a group of people who don’t even like each other?
• 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?
• You’ll attract the employees you need if you can explain why your mission is compelling: not why it’s important in general, but why you’re doing something important that no one else is going to get done.
• You should be able to explain why your company is a unique match for him personally. And if you can’t do that, he’s probably not the right match.
• 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.
• For the company to work, it didn’t matter what people looked like or which country they came from, but we needed every new hire to be equally obsessed.
• When assigning responsibilities to employees in a startup, you could start by treating it as a simple optimization problem to efficiently match talents with tasks. But even if you could somehow get this perfectly right, any given solution would quickly break down. Partly that’s because startups have to move fast, so individual roles can’t remain static for long.
• The best thing I did as a manager at PayPal was to make every person in the company responsible for doing just one thing.
• Every employee’s one thing was unique, and everyone knew I would evaluate him only on that one thing.
• Most fights inside a company happen when colleagues compete for the same responsibilities.
• Internal peace is what enables a startup to survive at all.
• In Silicon Valley, nerds are skeptical of advertising, marketing, and sales because they seem superficial and irrational. But advertising matters because it works.
• But advertising doesn’t exist to make you buy a product right away; it exists to embed subtle impressions that will drive sales later.
• Anything, people overestimate the relative difficulty of science and engineering, because the challenges of those fields are obvious. What nerds miss is that it takes hard work to make sales look easy.
• The engineer’s grail is a product great enough that “it sells itself.” But anyone who would actually say this about a real product must be lying: either he’s delusional (lying to himself) or he’s selling something (and thereby contradicting himself).
• 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.
• 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).
• In general, the higher the price of your product, the more you have to spend to make a sale—and the more it makes sense to spend it.
• You might expect revenue to increase 10x as soon as customers learn about an obviously superior product, but that almost never happens.
• Good enterprise sales strategy starts small, as it must: a new customer might agree to become your biggest customer, but they’ll rarely be comfortable signing a deal completely out of scale with what you’ve sold before.
• Once you have a pool of reference customers who are successfully using your product, then you can begin the long and methodical work of hustling toward ever bigger deals.
• Startups should resist the temptation to compete with bigger companies in the endless contest to put on the most memorable TV spots or the most elaborate PR stunts.
• A product is viral if its core functionality encourages users to invite their friends to become users too.
• This is how Facebook and PayPal both grew quickly: every time someone shares with a friend or makes a payment, they naturally invite more and more people into the network. This isn’t just cheap— it’s fast, too.
• At PayPal we didn’t want to acquire more users at random; we wanted to get the most valuable users first.
• We needed a smaller niche market segment with a higher velocity of money—a segment we found in eBay “PowerSellers,” the professional vendors who sold goods online through eBay’s auction marketplace.
• Better technology in law, medicine, and education won’t replace professionals; it will allow them to do even more.
• But the most valuable companies in the future won’t ask what problems can be solved with computers alone. Instead, they’ll ask: how can computers help humans solve hard problems?
• A great technology company should have proprietary technology an order of magnitude better than its nearest substitute. But cleantech companies rarely produced 2x, let alone 10x, improvements.
• Companies must strive for 10x better because merely incremental improvements often end up meaning no improvement at all for the end user.
• The best projects are likely to be overlooked, not trumpeted by a crowd.
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