a16z Podcast - a16z Podcast: Secrets, Power Laws, and Technology – The Ideas of “Zero to One”

Episode Date: September 12, 2014

Have we as a culture become expert at globalizing industries, but are we failing when it comes to truly world-changing technological breakthroughs? Is competition bad for business? Should you bother with creating the “nth” social network (the answer is no)? Chris Dixon and Blake Masters dig into these themes, plus “power laws” and the importance of secrets from Peter Thiel's new book with Masters, “Zero to One.” Dixon tries to pry a secret from Masters, but they aren’t called “secrets” for nothing.

Hi, this is the A16Z podcast. This is Chris Dixon. I'm here today with Blake Masters, who's the co-author of a new book called Zero to One, and his co-author is Peter Thiel. And this is, this came out of a class Peter taught at Stanford, which Blake wrote about and, or blogged about rather, and it became very popular. I know I read it all and I think blogged about it and tweeted about it. So it's great to have you. Thanks for having me. So, so let's just talk about some of the big themes of the book. I know there's sort of competition, monopolies versus commodities. It's one big theme. There's this idea of sort of having a secret for your startup idea. There's the idea of sort of power laws existing as, you know, in venture capital and startups.

Maybe can you kind of explain to some of these ideas? Yeah, the biggest macro theme in the book is the distinction that we draw between technology and globalization. So zero to one, the title of the book, that's the shorthand for going from nothing and creating something, going from zero to one. And that's the single word for that, we say, is technology. In contrast, you have one to end copying something that already works. That's globalization. And so the whole book is a call to do new things on the theory that technology is not just gadgets. It's not just nice to have that could make the future better.

Actually, the future is going to be radically better than what we have now or it's going to be radically worse. and that's going to hinge on the question of whether we can develop new technology. So the idea is we've gotten good at globalization at one to end, but in the process neglected the zero to one? Is that kind of? Exactly, exactly. They're both progress. So it's like when you, you know, everyone hopes for a future of progress,

but we really need to distinguish between these two modes, kind of spreading old ways of creating wealth everywhere and then doing new things. So if you look at like, you know, before World War I, the world was, you know, from maybe the mid-19th century to World War I, There was lots of globalization, lots of trade, also lots of technological development. Then you have World War I, and you get from maybe 1914 to like Kissinger and China, you get a tremendous amount of technological development, but not much globalization. And since the early 70s, we think there's been tons of globalization and limited progress in technology.

Almost all that progress has been confined to IT, which of course we know all about in Silicon Valley. What is the theory as to why, you know, this is sort of connects to Peter's venture fund who has a famous sort of saying that we asked for flying cars and all we got were 140 characters referring to like social networks and things. What, in your view, in Peter's view, is the theory as to why there's been so much progress in bits and not in atoms, or in computer science and not in the real world stuff or whatever? Well, the libertarian answer, of course, is just regulation. regulation um you know any hacker can go and and get stuff done it's actually really hard to to manipulate the world of atoms because you have to deal with people uh regulators who know something about that they know what it looks like um it's a convenient answer it probably doesn't explain everything there's probably a certain path to also things like more's law for example

it's not every area where you have this incredible exponential improvement it would be really hard actually to like improve uh you know global food production uh in any any sort of exponential way that resembles Moore's law. But we also, so there's something singular about the computer business or something singular about the last 40 years in IT. And at the same time, the more that goes, we run the risk of just sort of conflating progress with computers and kind of stop, you know, stopping, demanding it in all these other contexts. Yeah.

Because what are some of the other big themes? One of the biggest sort of sub-themes is the distinction between, competition and monopoly in business. So kind of Americans mythologized competition, we really, really like it. We sort of conflate it with free market capitalism and political discussions. And so, you know, politicians come out and say, I'm all in favor of competition. But the theory on this is actually competition is distracting in business, in a perfectly competitive business, sort of an econ 101 textbooks.

Competition means that, like, nobody makes any economic profit. your profits are competed away. You're a homogenous supplier of goods. Actually, the most successful businesses make a lot of money, and they do that by doing something that no one else can do. It's funny because, like, Michael Porter, you know, the Harvard strategist says strategy is the art and science of making your industry less competitive

and therefore higher profit margins, right? Right. I mean, you're right. I agree. They're in direct opposition, right? Competition and margins. And it's, but it's interesting. So, yeah, a lot of what we say in the book,

you know, it's not always novel ideas, but sometimes it's just what we think is like a useful rhetorical shift. So Porter talks a lot about competitive edges, you know, what's your competitive edge? But even that bias, you know, there's a linguistic bias there, pro-competitionary. Like, you know, Clay Christensen talks about disruption. And so startups have gone around talking about how good it is to disrupt things. Actually, disruption is a term very much anchored in the vantage point of like bigger firms. The book was written for bigger firms as to how to avoid threats from these technology startups. So we say like don't disrupt, don't compete, think about like what unique and valuable things you can do and then go do them. And of course

that's, you know, any successful industry is going to attract competition, but it's almost like the moment you focus on your competitors, you're going to lose sight of the big opportunity in front of you. So the advice, the specific advice to entrepreneurs is don't create the endth social network go and do like Elon Musk style like, you know, SpaceX, electric cars, things where you can, you know, you can be the only one who's doing it in sort of a modern Silicon Valley style or something. Exactly, exactly. And the pushback to this, so people say, you know, we say don't create the endth social network. And people love to point out, you know, well, Zuckerberg, you know, came after Friendster. He created an endth social network. And that's true in a technical

sense. And yet Facebook worked in a way that Friendster didn't. So then there's a question of why did he just merely take the idea that already existed and sort of iterate on it in this agnostic process? He didn't, right? He didn't focus on the competition. As soon as he knew he

had something at Harvard, right, there was a long-term plan that they set in motion. And so it's not about it's not about necessarily being first, right? The first mover advantage can be a good tactic. But what you really want to do is ignore competition and figure out how you can be the last mover in any industry, how you can

define it. You never want to be like a competitive player in social networking. You want to be the company that defines social networking. It's interesting. Sometimes I hear people say it's a similar idea, which is it's sometimes harder ideas are easier. And, you know, I saw this for your investors. Actually, Founders Fund was too, I think, in Oculus as an example. And it's interesting what I saw I was on the board there and I got to observe it, which is you sort of go out and you plant a flag. You say, I'm building virtual reality. And then all of these people, interesting people who have been thinking about the problem for years that had never had a home all kind of came together, right? And you sort of ended up with a talent monopoly. And I have no

connection to the Elon Musk companies, but I've heard the similar things happened at SpaceX and Tesla. If you want to go make rockets, like, yeah, there's one place to go. Right. If you're like the smartest rocket person and you're tired of dealing with government bureaucracy, like they all went there is my understanding, right? And so that, in a weird way, like it's harder, but then by doing it, it sort of inspires all of the best people to come, potentially to come join you. And I think that's the only way that if you're a startup, that's the only way that you're going to, you're not going to be able to pay as much as Google or Facebook at this point. And that's the only way to attract people. Yeah.

Probably. It's interesting. Yeah. It's something that was sort of counterintuitive. I never would have understood it until I kind of got to observe some of it myself and see how it works. And some of the other big ideas in the book? Another big idea, kind of in the investment context, or at least we use VC to explain it is the power law. The idea that some things are just radically, um,

less equal than others. There's radical, you know, unequal distributions. Power law is sort of exponential growth, whether it's being the value of a company or, you know, the value of a, whatever, an asset, like a VC portfolio, things like this, right? So it's a tricky chapter to explain because everybody sort of feels like they've already internalized this. Obviously, you know, people kind of think like things are unequal. I know things are unequal. Not everything's purely equal. But the claim is just like however unequal you think things are, it can actually be much more stark than that. You know, so if you look at Facebook's valuation compared to like, you know, all these other members of the so-called Unicorn Club,

you know, I think TechCrunch did like a bar graph line. It's like, it's staggering. It's staggeringly valuable relative to even like very, very successful companies. This is sort of the, and this is power law is sort of the outside way to describe what happened inside of the mechanism, usually is some kind of what they would call a cumulative advantage or rich get richer effect or something like this like internally there's an effect that happens where this the successful company gets even more successful it compounds you get runaway growth and so the idea is uh we think it's sort of universally applicable outside the investment context you know so many decisions you face in life appear to be equal should i stay in silicon valley or should i move home you know to live

with my parents after college should be sort of nice to be at home you know maybe maybe things really are equal a lot of the times but uh but i think the power law is a useful device because if you know it exists merely sort of injecting that possibility that things could be radically unequal into your thinking is going to help you kind of think about everything from an outsider's perspective and then hopefully you can stumble on like the really valuable path. It's very hard to think that way though, right? I mean, isn't there, it's sort of like you're trained in so many other contexts to think of things in kind of this linear like let me do the thing that's more prudent as opposed to let me do this thing that has, you know, like just to give you an example,

like I think the basic mistake that entrepreneurs make when they're pitching VCs is they they kind of pitch that they're likely to succeed as opposed to pitching that there's a small chance they'll be mega successful. Totally. Which is sort of counterintuitive. Like, of course you're going to walk in and say this is going to succeed, right?

Yeah, it doesn't feel good to say. We'll probably fail, but like, you know, on the 10% chance we don't. That's right. But the reality is like nobody, like once you do the investing for a while and you kind of internalize the power law stuff, you don't, like if you pass on a company

where, okay, maybe they'll be successful, you don't, you don't stay up at night thinking about that. If you pass on a company that there's a 1% chance at the next Google and people are going to talk about, this story for the next 30 years, you know, like there are still lots of stories about the people that passed on Facebook and Google and, you know, that's what bothers you, right? And so flipping it around, the entrepreneur wants to pitch that little possibility that it's going to be the next big thing. Exactly. Yeah. It's incredibly unintuitive as a mode of thinking. I mean, you see this

every day as a professional investor. And even in that context, it's probably still hard. So for like the, you know, non-investment professional, I think it's just like staggeringly hard. And But the idea behind that chapter is just to remind people that these sort of distributions exist. If you don't see them every day, it's because you're not looking for them, not because they don't exist. And so another big idea is this idea of secrets, right? Can you talk about that? Yeah. So people have talked about this.

A lot of people say, like, what's your edge? What's your competitive advantage again? To go back to Porter a little bit. Similar concept just reframed, I think when you ask what a competitive edge is, you can get myopically focused on what other people are doing and how you're a little bit different and maybe some sort of micro-truth that you know that they don't, when you come out and declare that, like, hey, secrets exist and every great business is built on a secret, I think it just, I think it just shifts the conversation towards a more, you know, taking a more ambitious tilt. So the idea is there are hard truths out there. We can find them, but they're not easy, you know. What's an example?

an example we give in the book is Andrew Wiles proving for Ma's last theorem, didn't really change the world in a non-academic sense, but it was a really important discovery because for 300 years, no one really had succeeded at this, and yet he thought it was possible, right? So it's like if you see people fail for 300 years and you just assume that that's not possible, you'll never even try. And so the idea is there's hard problems out there.

We can solve them. Going to Mars would be an example. Like a lot of people probably think it's impossible. I think Elon's destined to fail. But I thought a secret, though, is you believe something that no one else, or very few people. So his secret would be like, I can build a company that goes to Mars by 2020, right? So there's like academic secrets. And the idea is every great business is founded on a secret, is that right?

Yeah. So you look at like, you know, I guess you look at all the delivery startups right now. Some are really succeeding. The secret there is like, that was a good idea. didn't work in the 90s for all these reasons, but that's a good idea. And the secret is like now it's a good idea and you can make the logistics work.

How do you get a secret if you're an entrepreneur? Well, you have to be, I think you sort of have to be weird and you have to be like looking. You have to be looking for secrets and you have to be sort of a strange person because the average person does not do that. It's much, I mean, all of society basically runs on convention, right? Like you have to interact with other people

in all these conventional ways. And that can sound like pejorative just because we don't like the word conventional, but actually that's how society runs, it's how it functions. But how it moves forward, I think, is when the small minority of people who are sort of strange enough

and interesting enough to look for secrets actually care to and find it. So it's like you have to, we say that, yeah, every company is a conspiracy to change the world. And like when you bring someone on, you can recruit someone if you can successfully convince them

that your secret is valuable and that you can pull it off. Yeah, the way, so I think it's, I agree, I think it's a really fascinating idea. I think of it as sort of there's different classes of secrets. There's like, there's like academic, like you might have a computer science thesis, you know, a secret. You might have gone, you know, whatever you did a PhD at Stanford and you now have a secret that networking can be done through software and not hardware or something like this, right? And then there could be maybe like cultural secrets, like maybe Airbnb arguably, like it's that the, you know, this generation wants to go and explore the world and sleep on each other's couches and it's just different, right?

Yep. So I sort of think of it as like there's like, and then maybe there's an industry secret. Like I worked in fashion for 10 years and I have this deep insight. I don't know. I think it's a really interesting idea. And I actually use it as a way like on a first meeting. My view is as a VC, you can't really evaluate somebody's idea if it's a good idea in 30 minutes an hour or whatever. And that instead you kind of look for things like does this person have a plausible background to have earned a secret?

Right. Right. Like did this person spend, like in some ways you got to earn it. right? And you don't typically just walk down the street and boink you get hit by a secret, right? Like you have to like have spent time doing something different. You were off in some other country and some other industry, doing some research or something to see the world differently. Yeah, yeah. I'm not a professional investor, but I think it's a good sign if I left a pitch meeting, having just been pitched saying that person believes something really weird that I don't,

that I'm not on board with yet, but man, they really believe it, you know? Well, because you also like part of the story in a startup has to be why hasn't, why hasn't Apple, you know, I want to build a phone that has a better battery level. Great. Well, so does everybody. Like, you know, and they have, you know, tens of billions of dollars. Are you really going to do it better versus a secret, which is, hey, this is why everyone overlooked it. Yeah. The way we, the way we open the book is with what Peter calls his contrarian question, what valuable truth does no one agree with you on? Which he says he likes to do, ask as an interview question. Interview question. Yeah. Yeah. See, here are some, you hear some funny answers, but it's actually really tough, you know. So what valuable truth do you believe? that no one has the whole catch

Paul Graham has an essay what you're not allowed to say or what you can't say so you have to be careful So you have certain beliefs which you think are things you can't say Well probably everyone should Because if you

Some like libertarian political thing or something You know sure sure I mean everyone should Because if you're comfortable telling like You know everything you know or think to be true on a podcast Then it actually literally means Like you have purely conventional beliefs

Yeah But What would be would be my quick answer. Do you have any socially acceptable socially acceptable answer? Well, you can't be the first person who asked us. No, but it just shows it's a tricky question. I think, I think probably that I think Silicon Valley is like really culturally important.

I think a lot of people would agree with that. So maybe it's a bad answer because it violates the presumption that no one agrees with it. But I think it's going to be a lot more important in the future. You know, I think. Do you think people are underestimating the importance to the degree to which it will be important? I do. I do. And it's risky to say because it can be easy to sound like Silicon Valley technologists or smug. And do you think, I mean, do you think

like some people think, okay, there was the 90s bubble and now we're having the second bubble or is this like, no, this is, it's like more like the Gartner hype cycle where you had a bubble and it fell and now it's going to be the next 50 years of world domination. Probably more of the latter. I mean, it's hard. I mean, from my casual perspective,

things can seem a little frothy. but, you know, at the same time, if you're optimistic, I think you have to, I think you have to be bullish on Silicon Valley because it's, it's, it's, we need new technology. And it's not, it's not like technology only comes from Silicon Valley or that everybody needs to be like us. I don't know if it was you or Mark who tweeted, you know, we need 50 Silicon Valleys. We need like a Silicon Valley. Mark has a view. He calls it like, you need drone valley. You need Bitcoin Canyon. Yeah, just, yeah, all these. all these versions but um well i think and his point is though that you need to get it you know don't try to go head to head against silicon valley on operating systems or something right right like go differentiate yourself including you know i think he agrees with your kind of regulatory view that like including through regulatory changes right like if still if san francisco is not going to be friendly to drones maybe utah can be or something and that can give them some edge especially as we apparently are moving into an area into an era in which we're more about atoms and bits right right so

So I'm incredibly bullish on technology because I think we have to be. If we're going to have any good future at all, it's almost unbearable to contemplate, you know, being bearish on it. All right. All right. Well, awesome. Well, congratulations on the book. I have to say, like, I think there's probably only a handful of business books worth reading. And this is definitely one of them.

So everyone who's interested in technology and startups should definitely read it. Appreciate it. Thank you. Thanks.