Secrets to Startup Success

Today, literally anyone can build a start-up. It is so easy that we do not even need to rent an expensive office to start. Nowadays many entrepreneurs can work from their living rooms or cafs.

For anyone interested in creating an innovative product or service, this is good news. However, not all start-ups last for long.

In this article, we will learn the experience, the philosophy, and also the benefits of having a start-up from Peter Thiel, who is the world's leading venture capitalist. Thiel is the co-founder of PayPal and the first outside investor in Facebook. His knowledge of business approaches will show us how to predict the future and transform it into a successful start-up.

To imagine what progress the future will bring, you must be able to perceive the present differently.

Image the world in the year of 2030. What do you see? The future is a dreadful topic to think for most people.

What does it mean to talk about the future?

Of course, we do not only think of the passage of time, but also about the progress made during this period. We are more concerned about the progress in comparison of its differences to the present. This is what defines the future.

We can divide it into a horizontal and a vertical progress.

The horizontal progress can be defined as a process of expanding the existing ideas and innovations. Globalization is a prevalent trigger in this progress for its ability to magnify the existing ideas to the masses.

However, the vertical progress is defined as a process of creating something totally new that never existed before, such as a new technology or method.

In short, the horizontal progress is going from one to n while the vertical progress is going from zero to one.

If you mass-produce mobile phones and distribute them to developing countries, this is a horizontal progress, but if you create a new Smartphone out of a regular model, then this is a vertical progress.

As we can imagine, the vertical progress is hard to predict because we need to imagine new ideas that do not yet exist. For this reason, we can only predict the future if we can see the present from a different perspective.

The truth of the matter is that the future is really different from the past, so we have to perceive it from a different angle ignoring the status quo. To imagine what the future holds, we must be able to analyze the present.

The author of the article believes this to be an extraordinary ability, which is usually tested by him on a job interview. He always asks his candidates to talk about one popular belief they disagree with. Why? Because only someone who can think out of the box is not only able to see the future, but is also capable of changing the present.

Be the architect of your own future and make a focused effort to attain it.

So, how do we prepare for an unknown future that awaits us?

Nowadays, people are constantly thinking of how to do their best to get ready for the undiscovered future events. This is a critical approach; however, the future holds a great variety of unrevealed variables.

The best approach is to put all our efforts into achieving the future that describes us best, thus becoming the architect of our own future.

For instance, many schoolchildren take up extracurricular activities in the hope of being accepted to a top-notch university. Yet, would it not make more sense to focus on mastering the subject they like most so that they could become the professional in at least one thing?

It would.

Of course, success is the product of focus, dedication and strong determination. Fate and luck have almost nothing to do with it. After all, if we thought that success is nothing but a mere product of chance, we would not see such stories of victory like Steve Jobs or the authors about who the foundation of profitable businesses.

It is important to keep all this in mind when building a start-up. In the end, start-ups have only one possible variant of a successful future and attaining this means we need a collective effort.

Why only one?

Because the start-up can only be successful under specific conditions; therefore, there is only one best market for the companys products, one best time to launch it etc.

To strike at the right time, we must make a calculated choice to pursue the future at hand.

The biggest problem would be figuring out the ideal time to execute the start-up. In short, what future are you aiming for?

When selecting a future, it is in our best interest to remember what was said previously: we can only see the future by looking beyond the established conditions.

Monopolies are good for business and society: this means that you are doing something better than everyone else.

When we hear the word "monopoly", we tend to think about large and evil companies unfairly squeezing out its smaller competititors. This type of thinking is incorrect.

From an intelligent point of view having this kind of competitions is an ideal economic stimulus to encourage companies to keep on improving their products constantly. That is why monopolies are the drivers of innovations.

How is this?

Firstly, the existence of monopoly does not mean that the competition is being treated unfairly. This means that the monopoly does something far better than its competitor.

Similarly, if we create something unique that no other company can copy, it is not necessarily a bad thing.

Google almost has a monopoly in the search engines industry, having faced little or no competition at all in the twenty-first century. This has been seen unfair for those who want to compete, but good enough for the consumer who uses the Google's powerful search engine.

Furthermore, monopolies are regarded as good for the society since they drive progress. They encourage other businesses to create a better innovative solution to take out the dominant player on the market.

For instance, if a new company wants to compete in the search-engine market, then it has to invent a better robust search engine algorithm than Google. Doing this will most likely benefit the user.

It will be even more practical to say that having a monopoly is a condition of running a successful profitable business.

Why so?

Because a monopoly allows us to set our own prices to ensure the higher profits for us.

If our products are not better than the competitors, then we will be forced to set our prices lower to attract customers. This will, however, minimize the profit margins.

Take, for example, the competitive airline industry, in 2012 the prices were lowered to the extend where $0.37 profit was generated from a single passenger trip.

Goodle, on the contrary, keeps over a quarter of their revenue as a profit.

Monopolies thrive thanks to technological advantages, network effects, economies of scale and great branding.

What turns monopolies into successful businesses? Well, monopolies share a unique combination of four important characteristics:

First, monopolies have the technological advantage. Their technology is more advanced than any other in the industry. In case of Google, the algorithms are much faster, and it has a better predictive search than anyones in this sector. This set a challenge for competitors to surpass them.

Second, monopolies benefit from the network effects. With more people using their product, they become more valuable on the market. An example of this can be Facebook. It would not be that good if none of our friends signed up for it. What makes Facebook popular? The fact that the majority of people from our network can be easily found on this platform. This means that newcomers to the industry struggle to attract customers from those monopolies which already have an existing customer base.

Third, monopolies benefit from the economies of scale. They save money by mass-producing products instead of the low production. Take, for example, a Bakery, which has a fixed cost of rent, heating, and electricity of $1000 in total. You can produce between 1 and 10 000 breads per month with the fixed cost of Bakery maintenance remaining the same. The more bread you sell, the more you can spread out the fixed cost. This results in less cost being incurred per one bread. Usually, monopolies are the largest producers in the industry. This means that the economies of scales allow them to offer customers more attractive prices than their competitors, and thus increase the market share.

Finally, monopolies always have a strong brand that is difficult to replicate. Apple is a good example of a powerful tech brand to ever exist today. Over the years, we have seen many companies trying to replicate its uniquely designed products and stores. None was successful enough, because all of them lacked the Apple's powerful brand.

When analyzing our business models, we should look at these four characteristics above to get an understanding of whether our business models are close to having a monopoly or not.

Successful companies need to chase secrets others cannot copy.

In our modern world of high-tech, it is easy to believe that there is no space for vertical progress or new ideas. However, this is a wrong misconception that can keep us from being successful.

The truth is, the world still has plenty of secrets. There are things which importance is misunderstood by many people who have not yet considered the way to use them differently. This made them hard to discover, but not impossible. These secrets can be so deeply buried in our society that it might take generations to uncover them.

Let us consider slavery in this case. It was a commonly and socially acceptable phenomenon a few centuries ago. In simple words, the fact of slavery being wrong was a secret at first.

In the tech industry, the best secret is having a technology that is better than your competitors. This makes your position on the market unassailable.

As future entrepreneurs, we need to find and chase such secrets on the market. Otherwise, we will end up as one more provider of the horizontal progress, offering the same products to the competitive market.

The case of Hewlett-Packard clearly shows the fundamental importance of having a better technology. In late the 90s, the company had the best technology and used it to produce one innovative product after another, like a color printer, and an all-in-one printer, a copier and a fax machine. These were truly wild, innovative ideas at that time.

Yet, the company lost half of its market value in the 2000s, when they stopped chasing secrets and inventing new products.

Building a successful, profitable company takes years of work.

As stated earlier, we believe monopolies to be large evil corporations towering over their competitors. Surprisingly, they do not start out being that way already. Building a successful monopoly takes time.

This is also true when it comes to profit making. It can take years for a start-up to become profitable. Even though a company does not have a profit at the beginning, it can still have a value, because the value is calculated by the overall profit the start-up makes over its entire lifespan.

PayPal is a case in point. Back in 2001 the company was not making any profit. Yet, when the author estimated the value of the company, he found out that a great part of the value came from the profit which was expected to be generated in the next ten years.

The lesson here is that we cannot expect our start-up to be a top dog in business immediately from its start. We need to focus on our margins in the long run. This is what will make it profitable.

How do we turn our start-up into a profitable monopoly?

We need to start small and gradually work up the ladder.

We need to understand that we do not have to be the best in every business, but only in our business. So, it is crucial to define our market as clear and straight to the point as possible. This will make us a dominant player on that market.

Once we have a monopoly accomplished in that niche, we can expand it to the next broader market.

For example, Amazons founder Jeff Bezos primary goal was to become the world's greatest online retailer, but he started very small by selling books only. Having dominated the book market, he expanded to other categories such as CDs and videos, and other products later on. So, Amazon's success did not happen overnight, but for an extended period of time.

Start-ups need a solid foundation: the right people and culture, and the balanced owners interests.

It is of the utmost importance for any start-up to have a solid foundation to make it successful in the long run. So, when we embark on a long journey to building a business, the first days matter a lot.

The first component of the business foundation is attracting the right people. Usually, a start-up is so small that every single person on board plays a significant role in the business.

For this reason, the author examined the skills and visions of people involved along with their personal connections before letting them make an investment in the company. This was because he had previously witnessed what weak personal ties of people involved can do to a team. Before he co-founded PayPal with Luke Nosek, the author invested in a company that Nosek had started with some distant acquaintance. In the end, their personal differences brought the whole venture to fail along with Thiels investment.

The second component of the business foundation is ensuring the balance of interest of the various company owners. We are well aware of the fact that founders and investors might have different interests, and the business should not be affected by their misunderstanding.

For example, the founder of the company may wish to develop the product slowly, whereas the board of directors wants to make a profit as soon as possible. Even though these interests are not necessarily disjoint, they can lead to a conflict. Thus it is vital to resolve this difference on the earliest stage of business operations.

The final component is culture; start-ups need to install this component to help people involved work together.

The companys culture does not only consist of benefits we offer to our employees like a pool table or a soda machine, but rather the relationship that people have among each other.

A good example of a strong companys culture is seen at PayPal, where the team members were so close that many of them went on to start a new venture together.

Your product will never sell itself: your team has to do that.

When we hear the word "salesperson", we imagine a man wearing a cheap suit going door to door hawking the vacuum cleaner. Not a flattering picture at all.

Well, sales is a major component in any business. People who are fascinated by technologies will prefer to focus on the products innovations, but not all the innovative products are worthless if they are not being sold. No one will buy your product if you do not sell it.

To sell our products effectively, we need to create a clear distribution channel. This does not only include sales channel, but also the organizational effort it takes to sell the product.

To leverage the most efficient distribution, we need to consider each potential client before delegating the effort we need to put into the process to make the sale happen.

For example, the author is also a co-founder of Palantir, a data analytics company, whose single closed deal usually results in a few million profit. Hence, the CEO has to close the deal personally, because each client spending this significant sum of money expects the personal involvement of the executives.

For such businesses where sales deals bring in a few thousand per contract, the CEO getting involved may not be an efficient use of time. However, the CEO still needs a highly qualified sales team in this case to represent the companys interest in the negotiation.

We can also enhance our distribution by using different sales strategies.

Many clients hate salespeople because of the manipulative tactics they use to sell them the product. Some manipulation techniques may not work under some circumstances; some strategies may not guarantee to work with some people. So, it is up to us to make them suit our business scenario.

Take a look at Tom Sawyer from Mark Twain's classic books. He was known as an excellent salesperson. When being told to paint a fence, he made other children to pay for the privilege of doing his work. So, do we not have such great salespeople as Tom Sawyer today?

Many cleantech companies failed because they did not consider the seven critical questions every business must answer.

There was an investment boom in Silicon Valley between 2005 and 2009. The most popular industry was the clean technology (Cleantech) which involved products and services that promoted a sustainable use of natural resources and renewable energy sources.

Many companies were founded in the industry, with a budget of over $50 billion investments. However, many failed to recover the investor's monies.

Why did they fail? Merely because they did not thoroughly analyze and understand the market opportunity.

To avoid this, companies should ask the following important questions on the market:

1. Engineering: Can you create a true technological breakthrough? Take the Cleantech companies for example, they did not understand that they had to make the technology stronger to succeed over established competitors.

2. Timing: Is this time right to start your business? Many Cleantech companies thought that the industry was on its booming stages with its exponential advance and solar-panel technologies, and this would help them to become successful. Yet, the truth of the matter was that the clean technology advanced slowly.

3. Monopoly: Will the start-up start with a significant market share of the smaller market? Cleantech companies were a part of a trillion-dollar energy industry, which meant that the competition was too severe for smaller businesses to get a share on the market. A small market with a chance to create a monopoly might be a good place to start for a start-up project.

4. People: Is your team committed to pursuing the opportunity? Many Cleantech companies were managed by non-technical executives who had no idea on how to create great innovative products.

5. Distribution: How will you deliver the product to the final consumer? Cleantech companies, like an electric vehicle start-up Better Place, thought that they had the best technology and thus did not need to plan their distribution channel. The company filed for bankruptcy after spending $800 million of investors' money and selling only 1000 cars.

6. Durability: For how long are you able to defend your market share after 10 - 20 year? When Chinese companies entered the market with a similar product at a lower cost, it was a big blow for many solar technology companies. This was supposed to be foreseeable from the future point of view.

7. Secret: What unique opportunity have you seen that others have missed? During that time, many people thought that Cleantech was a tremendous business opportunity. But in reality every successful company has one secret. They look for opportunities that not everyone can find.

Such innovative companies as Telsa had answers to almost each key question, whereas many Cleantech companies had from little to zero. For this, many had failed.

Founders tend to be oddballs, but their vision is crucial for any company.

How does a random start-up founder look like?

In most cases, founders are strange people, especially those from successful companies. They could have been born strange or could have changed their ways to imitate the great founders of the past. It can anyway be noted that many successful founders are somewhat strange.

Almost every PayPal founding team was a bit weird. Four of its founders had quite unusual hobbies of building bombs, for example.

Founders are the most important components of each start-up because they form the companys vision. This contribution is necessary because no matter how good the management strategies are, they should have a version to pursue.

Take a look at what happened to Apple when Steve Job returned in 1997. He was kicked out of the company over a decade earlier, but in 2001, he launched the iPod, which was criticized by many analytics for being just a cool gadget for those people only who use Mac computers.

However, Jobs master plan was revealed when he launched the iPhone and the iPad, and it created a set of Apple's "post-PC devices" which had elegant looks and exclusive features.

Jobs used a carefully thought-out plan along with his vision effectively to make Apple the most valuable company in the world today.

This story of success shows that even a strong company needs the originality and the vision of its founder to perform at its highest levels.

Final summary

The central message of this Zero to One story is that success of a start-up does not happen by pure luck. We can pursue the future we desire as long as we are able to challenge the established innovations. Only after we obtain a monopoly by producing something better than anyone else, will the success follow on its own.

The friendly advice would be to try to dominate in one niche at a time.

When you find the unique idea for your start-up, do not expand too quickly. Find a small market to dominate better than your competitor can. Once you have created a monopoly on this market, you can think of expanding to other markets.