The Pete Quiñones Show - Pete Reads Peter Thiel's 'Zero to One' - Part 5

Episode Date: March 9, 2024

62 MinutesPG-13Pete continues reading and commenting on Peter Thiel's best-seller, Zero to One. In this fifth episode, Pete covers chapters 9, 10, and 11: Foundations, The Mechanics of Mafia, and If You Build It, Will They Come?FoxnSons Coffee - Promo code "peter" for 18% offVIP Summit 3-Truth To Freedom - Autonomy w/ Richard GroveSupport Pete on His WebsitePete's PatreonPete's Substack Pete's SubscribestarPete's VenmoPete's Buy Me a CoffeePete on FacebookPete on TwitterBecome a supporter of this podcast: https://www.spreaker.com/podcast/the-pete-quinones-show--6071361/support.

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Subject to lending criteria, terms and conditions apply. Volkswagen Financial Services Ireland Limited. Trading as Cooper Financial Services is regulated by the Central Bank of Ireland. I want to welcome everyone back to this reading of Peter Thiel, 0 to 1. And I'm going to just jump right in. We are on chapter 9, and we'll see if we can get into 10 today as well. I didn't look forward and time it. But let me get going here.

All right. This is chapter nine foundations. Every great company is unique, but there are a few things that every business must get right at the beginning. I stress this so often that friends have teasingly nicknamed it Teal's Law. A startup messed up at its foundations cannot be fixed. Beginnings are special. They are qualitatively different from all that comes afterward. This was true 13.8 billion years ago, I think that's 28.8. billion now at the founding of our cosmos in the earliest microseconds of its existence the universe

expanded by a factor of 10 to the 30th a million trillion trillion as cosmo as cosmogenic or cosmogonic i have no idea epochs came and went in those first few moments the very laws of physics were different from those we know today it was also true 227 years ago at the founding of our country country. Fundamental questions were open for debate by the framers during the few months they spent together at the Constitutional Convention. How much power should the central government have? How should representation in Congress be apportioned? Whatever your views on the compromises reached that summer in Philadelphia, they've been hard to change ever since. After ratifying the Bill of Rights in 1791, we've amended the Constitution only 17 times. We've reinterpreted it

millions of times. That's my commentary. Today, California has the same representation in the Senate as Alaska, even though it has more than 50 times as many people. Maybe that's a feature, not a bug. But we're probably stuck with it as long as the United States exists. Another constitutional convention is unlikely. Today, we debate only smaller questions.

Companies are like countries in this way. 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. It may take a crisis on the order of bankruptcy before anybody will even try to correct them. And then sometimes they get bailed out and they're just like, eh, we'll just keep going if we're going to get bailed out over and over again. As a founder, your first job is to get the first things right, because you cannot build a great company on a flawed foundation. Founding Matrimony. 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.

Optimism abounds at the start of every relationship. It's unromantic to think soberly about what could go wrong so people don't. But if the founders develop irreconcilable differences, the company becomes the victim. In 1999, Luke Nosek, one of my co-founders at PayPal, and I still work with him today at Founders Fund. Let me read that again because it sounded weird. In 1999, Luke Nozik was one of my co-founders at PayPal, and I still work with him today at Founders Fund. But a year before PayPal, I invested in a company Luke started with someone else. It was his first startup.

It was one of my first investments. Neither of us realized it then, but the venture was doomed to fill. from the beginning because Luke and his co-founder were a terrible match. Luke is a brilliant and eccentric thinker. His co-founder was an MBA type who didn't want to miss out on the 90s gold rush. They met in a networking event, talked for a while, and decided to start a company together. That's no better than marrying the first person you meet at the slot machines in Vegas. You might hit the jackpot, but it probably won't work.

Their company blew up and I lost my money. 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. Ownership, possession, and control. It's not just founders who need to get along.

Everyone in your company needs to work well together. A Silicon Valley Libertarian might say you could solve this problem by restricting yourself to a sole proprietorship. Freud, Young, and every other psychologist has a theory about how every individual mind is divided against itself. But in business, at least, working for yourself guarantees alignment. Unfortunately, it also limits what kind of company you can build. It's very hard to go from zero to one without a team. A Silicon Valley anarchist might say you could achieve perfect alignment as long as you hire just the right people who will flourish peacefully without any guiding structure. Serendipity and even free-form chaos at the workplace are supposed to help disrupt all the old rules made and obeyed by the rest of the world.

And indeed, if men were angels, no government would be necessary. But anarchic companies missed at what James Madison saw. men aren't angels. That's why executives who manage companies and directors who govern them have separate roles to play. It's also why founders and investors claims on companies are formally defined. You need good people who get along, but you also need a structure to help keep everyone aligned for the long term. To anticipate likely sources of misalignment in any company, it's useful to distinguish between three concepts. Ownership. Who legally owns a company's equity. Possession. Who actually runs the company on a day-to-day basis? Control. Who formally governs the company's affairs? A typical startup allocates ownership among founders, employees, and investors. The managers and employees who operate the company enjoy possession, and a board of directors usually comprising founders and investors exercises control. In theory, this division works smoothly. Isn't it a man?

how many things work smoothly in theory. Pretty much everything, right? Everything that doesn't work in reality works smoothly in theory. I guess that's why so many people love to debate. Because you're debating about perfection. And, yeah, when someone steps in and goes, you're never going to have the perfect.

Heretic, Burnham. In theory, this division works smoothly. Financial upside from part ownership. attracts and rewards investors and workers. Effective possession motivates and empowers founders and employees. It means they can get stuff done. Oversight from the board places managers' plans in a broader perspective. In practice, distributing these functions among different people makes sense,

but it also multiplies opportunities for misalignment. Too many cooks in the kitchen? Is that too tired of... Too tired of phrase? Those people who love going out shopping for Black Friday deals, they're mad, aren't they? Like, proper mad. Brenda wants a television and she's prepared to fight for it, if you ask me. It's the fastest way to a meltdown.

Me, I just prepare the fastest way to get stuff, and it doesn't get faster than Appliancesdelivered.com. Top brand appliances, top brand electricals, and if it's online, it's in stock. With next day delivery in Greater Dublin. Appliances delivered.e, part of expert electrical. See it, buy it, get it tomorrow. Or, you know, fight Brenda. Ready for huge savings? We'll mark your calendars from November 28 to 30th

because the Liddle Newbridge Warehouse Sale is back. We're talking thousands of your favorite Liddle items all reduced to clear. From home essentials to seasonal must-habs, when the doors open, the deals go fast. Come see for yourself. The Liddle New Bridge Warehouse Sale, 28th to 30th of November.

Liddle, more to value. You catch them in the corner of your eye. Distinctive, by design, they move you even before you drive. The new Cooper plugin hybrid range for Mentor, Leon and Terramar. Now with flexible PCP finance and trade-in boosters of up to 2,000 euro. Search Coopera and discover our latest offers. Coopera, design that moves. Finance provided by way of higher purchase agreement from Volkswagen Financial Services,

Ireland Limited. Subject to lending criteria, terms and conditions apply. Volkswagen Financial Services Ireland Limited. Trading as Cooper Financial Services is regulated by the Central Bank of Ireland. To see misalignment at its most extreme, just visit the DMV. Suppose you need a new driver's license. Theoretically, it should be easy to get one. The DMV is a government agency, and we live in a Democratic Republic. All power resides in the people who elect representatives to serve them in government. If you're a citizen, you're part-owned. owner of the DMV and your representatives control it, so you should be able to walk in and get what you need. Of course, it doesn't work that way. We the people may own the DMV's resources,

but the ownership is merely fictional. The clerks and petty tyrants who operate the DMV, however, enjoy very real possession of their small-time powers. Even the governor and the legislature charge with nominal control over the DMV can't change anything. The bureaucracy lurches ever sideways of its own inertia no matter what actions elected officials take. Accountable to no one, nobody, the DMV is misaligned with everybody. bureaucrats can make your licensing experience pleasurable or nightmarish at their sole discretion. You can try to bring up political theory and remind them that you are the boss, but that's unlikely to get you better service. And on a lot of locations, that will get you arrested.

This is my commentary now. It's very interesting that what he's describing here is he's describing managerialism, a managerial, quote-unquote, elite. And what he's describing is the fact that when you have a managerial state, you have bureaucrats, and things are not going to run smoothly. So what are the answers? Let's read on. Big corporations do better than the DMV,

but they're still prone to misalignment because, between ownership and possession. The CEO of a huge company like General Motors, for example, will own some of the company's stock, but only a trivial portion of the total. Therefore, he's incentivized to reward himself through the power of possession rather than the value of ownership. Posting good quarterly results will be enough for him to keep his high salary and corporate jet. Misalignment can creep in even if he received stock compensation, in the name of shareholder value. If that stock comes as a reward for short-term preference,

he will find it more lucrative and much easier to cut costs instead of investing in a plan that might create more value for all shareholders far in the future. Yeah. What we spoke of previous is having a short-term mindset, having high-time preference versus low-time preference. Most people who are working in quarterly, in the quarterly profits world.

That's all they're thinking about. I'm not thinking 10 years down the road. Unlike corporate giants, early stage startups are small enough that founders usually have both ownership and possession. Most conflicts in a startup erupt between ownership and control, that is, between founders and investors on the board. The potential for conflict arises over time as interest diverge. A board member might want to take a company public as soon as possible,

and score a win for his venture firm, while the founders would prefer to stay private and grow the business. You could see this argument in whoever funds a candidate for office. They're going to the person who has the money is going to be in control, is going to call the shots, is going to want to get the most out of his investment, his or her investment possible. and most of the time that means that the politician is going to have a very short, very low time, a very high time preference for getting the most out of the office and getting the most to his main investors at that moment. Okay.

In the boardroom, less is more. The smaller of the board, the easier it is for directors to communicate. to reach consensus and to exercise effective oversight. However, that very effectiveness means that a small board can forcefully oppose management in any conflict. This is why it's crucial to choose wisely. Every single member of your board matters. Even one problem director will cause you pain or may even jeopardize your company's future. I think a lot of political movements, especially vanguard movements in history, have come to understand that.

You have your Vanguard elite, and then you have your soldiers in the streets. A board of three is ideal. Your board should never exceed five people unless your company is publicly held. Government regulations effectively mandate that public companies have larger boards. The average is nine members. By far, the worst you can do is to make your board extra large. When unsavvy observers see a nonprofit organization with dozens of people on its board, they think, look how many great people are committed to this organization.

It might be extremely well-run. Actually, a huge board will exercise no effective oversight at all. It merely provides cover for whatever micro-dictator actually runs the organization. If you want that kind of free reign from your board, blow it up to giant size. If you want an effective board, keep it small. On the bus or off the bus. As a general rule, everyone you involve with your company should be involved full-time. Sometimes you'll have to break this rule. It usually makes sense to hire outside lawyers and

accountants, for example. However, 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. Even working remotely should be avoid. Because misalignment can creep in whenever colleagues aren't together full time in the same place every day. If you're deciding whether to bring someone on board, the decision is binary. Ken Kesey was right. You're either on the bus or off the bus.

I think you understand when he says even working remotely should be avoided what he's talking about. He's talking about leadership. He's not talking about employment. I mean, in the startup phase, I would think that Peter Thiel would have no problem, has no problem right now when he looks at PayPal and PayPal has all these people working remotely and everything. This is 10 years ago. This is 12 years ago. Times change. And I'm sure he understands that.

Cash is not king. For people to be fully committed, they should be properly compensated. Whenever an entrepreneur asked me to invest in his company, I ask him how much he intends. to pay himself. 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. It doesn't matter if he got used to making much more than that at Google or if he has a large mortgage and hefty private school tuition bills. If a CEO collects $300,000 per year, he risked becoming more like

a politician than a founder. High pay incentives him to defend the status quo along with his salary, not to work with everyone else to surface problems and fix them aggressively. A cash poor executive, by contrast, will focus on increasing the value of the company as a whole. Low CEO pay also sets the standard for everyone else. Aaron Levy, the CEO of Box, was always careful to pay himself less than everyone else in the company. Four years after he started Box, he was still living two blocks away from headquarters in a one-bedroom apartment with no furniture except the mattress. Every employee noticed his obvious commitment to the company's mission and emulated it. If a CEO doesn't set an example by taking the lowest salary in the company, he can do the same thing by drawing the

highest salary in the company. So long as that figure is still modest, it sets an effective ceiling on cash compensation. Cash is attractive. It offers pure optionality. Once you get your paycheck, you can do anything you want with it. 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 as contingent on a a job well done. But even so-called incentive pay encourages short-term thinking and value-grabbing. Any kind of cash is more about the present than the future. Vested interests. Startups don't need to pay high salaries because they can offer something better, part ownership of the company

itself. Equity is the one form of compensation that can effectively orient people toward creating value in the future. It also gives them a sense of belonging to something. So, yeah, I think that that, when you're giving stock options and things like that, you're, they're not only being invested financially, they're being invested emotionally and even spiritually. However, for equity to create commitment rather than conflict, you must allocate it very carefully. 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. On the other hand, granting different amounts up front is just as sure to seem unfair. Resentment at this stage can kill a company, but there's no ownership formula to perfectly avoid it. The problem becomes even more acute over time as more people join the company. Early employees usually get the most equity because they take more risk, but some later employees might be even more crucial to a venture success. A secretary who joined eBay in 1996 might have made 200 times more than her industry veteran boss who joined in 1999. The graffiti artist

who painted Facebook's office walls in 2005 got stock that turned out to be worth 200 million, while a talented engineer who joined in 2010 might have made only 2 million. 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. I would hope that that would be common sense. Most people don't want equity at all. At PayPal, we once hired a consultant who promised to help us negotiate lucrative business development deals.

The only thing he ever successfully negotiated was a $5,000 daily cash salary. He refused to accept stock options as payment. Stories of startup chefs becoming millionaires notwithstanding, people often find equity unattractive. It's not liquid like cash. It's tied to one specific company. And if that company doesn't succeed, it's worthless. Equity is a powerful tool precisely because of those limitations. Anyone who prefers owning a part of your company to being paid cash, being paid in cash, reveals a preference for the long term and a commitment to

increasing your company's value in the future. Equity can't create perfect incentives, but it's the best way for a founder to keep everyone in the company broadly aligned. I hope that's logical. Extending the founding. Bob Dylan has said that he, who is not busy being born, is busy dying. If he's right, being born doesn't happen at just one moment. You might even continue to do it somehow, poetically at least. The founding moment of a moment of a moment of a moment. company, however, really does happen just once. Only at the very start do you have the opportunity to set the rules that will align people toward the creation of value in the future. The most

valuable kind of company maintains an openness to invention that is most characteristic of beginnings. This leads to a second, less obvious understanding of the founding. It lasts as long as a company is creating new things, and it ends when creation stops. If you get the founding moment right, You can do more than create a valuable company. You can steer its distant future toward the creation of new things instead of the stewardship of inherited success. You might even extend its founding indefinitely. Steve is passionate about good coffee. He founded Fox & Sons Coffee in order to provide customers with the very best small batch, family farm-grown, organically roasted beans that he could find.

He also chose the coffee business as a way to honor special times with his father, shared over breakfast and coffee and to teach his sons about entrepreneurship. Fox and Sun's coffee features five amazing blends from Peru. The dark roast was the first blend Steve introduced and it's still my favorite. You can also order a variety of single source beans from all over the world. Currently, you can order beans from Brazil, Tanzania, Guatemala, Mexico, and Ethiopia. And Steve is introducing four new roast this month, so be on the lookout for some special new options. Order online at Fox and Sun That's F-O-X-N-S-O-N-S dot com and use discount code Peter. You'll get 18% off orders of $30 or more, and you'll get free shipping with all orders over

$37.99. Thank you. All right. We are into 21 minutes in, and we are into chapter 10. The Mechanics of Mafia. Start with a thought experiment. What would the ideal company culture look like? Employees should love their work.

They should enjoy going to the office so much that formal business hours become obsolete and nobody watches the clock. The workspace should be open, not cubicleed, and workers should feel at home. Beanbag chairs and ping pong tables might outnumber file cabinets. Free massages, on-site sushi chefs, maybe even yoga classes would sweeten the scene. pets should be welcome too. Perhaps employees, dogs, and cats could come and join the office's tank full of tropical fish as unofficial company mascots. What's wrong with this picture? It includes some of the absurd perks Silicon Valley is made famous, but none of the substance. And without substance, perks don't work. You can't accomplish anything meaningful by hiring an interior decorator to beautify your office, a human resources consultant to fix your policies, or a branding specialization. to hone your buzzwords. Company culture does not exist apart from the company itself.

No company has a culture. Every company is a culture. Apply that how you will. A startup is a team of people on a mission, and a good culture is just what that looks like on the inside. Beyond professionalism. The first team that I built has become known in Silicon Valley as the PayPal Mafia, because so many of my former colleagues

have gone on to help each other start and invest in successful tech companies. We sold PayPal to eBay for $1.5 billion in 2002. Since then, Elon Musk has founded SpaceX and co-founded Tesla Motors. Reed Hoffman co-founded LinkedIn. Steve Chen, Chad Hurley,

and Jared Karim together founded YouTube. Jeremy Stoppelman and Russell Simmons founded Yelp. David Sackle co-founded Yammer and I co-founded Palantir. Today, all seven of these companies are worth more than one billion each. PayPal's office amenities never got much press, but the team has done extraordinarily well, both together and individually. The culture was strong enough to transcend the original company. We didn't assemble a mafia by sorting through resumes and simply hiring the most talented people.

I had seen the mixed results of that approach firsthand when I worked at a New York law firm. 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 seem 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? Then he seems to think it's a sacrifice necessary for making money, but taking a merely professional view of the workplace in which free agents check in and out on a transactional basis is worse than cold. It's not even rational.

Since time is your most valuable asset, it's odd to spend it working with people who don't envision any long-term future together. If you can't count durable relationships among the fruits of your time at work, you haven't invested your time well, even in purely financial terms.

From the start, I want to PayPal to be tightly knit instead of transactional. I thought stronger relationships would make us just, make us not just happier and better at work, but also more successful in our careers even beyond PayPal. So we set out to hire people who would actually enjoy working together. They had to be talented, but even more than that, they had to be excited about working specifically with us. That was the start of the PayPal Mafia. Recruiting conspirators. Recruiting is a core competency

for any company. It should never be outsourced. You need people who are not just skilled on paper, but who will work together cohesively after they're hired. The first four or five might be attracted by large equity stakes or high-profile responsibilities. More important than those obvious offerings is your answer to this question. Why should the 20th employee join your company? Talented people don't need to work for you. They have plenty of options. You should ask yourself a more pointed version of the question.

Why would someone join your company as a 20th engineer when she could go work for Google for more money and more prestige. Here are some bad answers. Your stock options will be worth more here than elsewhere. You'll get to work with the smartest people in the world. You can help solve the world's most challenging problems. What's wrong with valuable stock, smart people, and pressing problems? Nothing, but every company makes these same claims and they won't help you stand out. General and undifferentiated pitches don't say anything about why a recruit should join your company instead of many others, goes back to competition. If you sound just like everybody else, then it's just a competition.

But if you stand out, if you offer something that no one else offers, people are going to be tearing your door down trying to work there or work with you or get near you or just spend time with you. I mean, this applies to everything in life. The only good answers are specific to your company, so you won't find them in this book. But there are two general kind of good answers, answers about your mission and answers about your team. 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. That's the only thing that can make its importance unique.

At PayPal, if you were excited by the idea of creating a new digital currency to replace the U.S. dollar, we wanted to talk to you. If not, you weren't the right fit. However, even a great mission is not enough. The kind of recruit who would be most engaged as an employee will also wonder, are these the kind of people I want to work with? 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 daycare 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. You probably can't be the Google of 2014 in terms of compensation and perks,

but you can be like the Google of 1999 if you already have good answers about your mission and team. You catch them in the corner of your eye, distinctive by design. They move. you even before you drive the new Cooper plugin hybrid range for Mentor Leon and Terramar now with flexible PCP finance and trade-in boosters of up to 2000 euro

search Cooper and discover our latest offers Cooper design that moves finance provided by way of higher purchase agreement from Volkswagen Financial Services Ireland Limited subject to lending criteria Terms and conditions apply Volkswagen Financial Services Ireland Limited. Trading as Cooper Financial Services is regulated by the Central Bank of Ireland. Ready for huge savings? Well mark your calendars from November 28 to 30th because the Liddle Newbridge Warehouse Sale is back. We're talking thousands of your favourite Liddle items all reduced to clear. From home essentials to seasonal must-habs, when the doors open,

the deals go fast. Come see for yourself. The Liddle New Bridge Warehouse Sale, 28th to 30th of November. Liddle, more to value. People who love going out shopping for Black Friday deals. They're mad, aren't they? Like, proper mad. Brenda wants a television and she's prepared to fight for it, if you ask me. It's the fastest way to a meltdown. Me, I just prepare the fastest way to get stuff,

and it doesn't get faster than Appliancesdelivered.aE. Top brand appliances, top brand electricals, and if it's online, it's in stock. With next day delivery in Greater Dublin. Appliances delivered.e. Part of expert electrical. See it, buy it, get it tomorrow. Or you know, five brand.

What's under Silicon Valley's hoodies? From the outside, everyone in your company should be different in the same way. Unlike people on the East Coast, who all wear the same skinny jeans or pinstripe suits depending on their industry, young people in Mountain View and Palo Alto go to work wearing t-shirts. It's a cliche that tech workers don't care about what they wear, but if you look closely at those t-shirts, you'll see the logos of the wearers companies, and tech workers care about those very much. much. What makes a startup employee instantly distinguishable to outsiders is the branded t-shirt or

hoodie that makes him look the same as his co-workers. That startup uniform encapsulates a simple but essential principle. Everyone at your company should be different in the same way. A tribe of like-minded people fiercely devoted to the company's mission. Max Levchen, my co-founder at PayPal, says the startups should make their early staff as personally similar as possible. Startups have limited resources and small teams. They must work quickly and efficiently in order to survive, and that's easier to do when everyone shares an understanding of the world. The early PayPal team worked well together because we were all the same kind of nerd.

We all love science fiction. Cryptonomicon was required reading, and we preferred the capitalist Star Wars to the communist Star Trek. Most important, we were all obsessed with creating a digital currency that would be controlled by individuals instead of governments. 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.

Bought in. Do one thing. On the inside, every individual should be sharply distinguished by her work. 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. But it's also because job assignments aren't just about the relationships between workers and tasks. They're also about relationships between employees. 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. I had started doing this just to simplify the task of managing people. But then I noticed a deeper result. Defining roles reduced conflict. Most fights inside a company happen when colleagues compete for the same responsibilities. Startups face an especially high. risk of this since job roles are fluid at the early stages. Eliminating competition makes it easier for everyone to build the kinds of long-term relationships that transcend mere professionalism. Another

example where competition fails. More than that, internal peace is what enables a startup to survive at all. When a startup fails, we often imagine it's succumbing to predatory rivals in a competitive ecosystem. But every company is also its own ecosystem and factional strife makes it vulnerable to outside threats. Internal conflict is like an autoimmune disease. The technical cause of death may be pneumonia, but the real cause remains hidden from plain view. Of cults and consultants. In the most intense kind of organization, members hang out only with other members. They ignore their families and abandon the outside world. In exchange, they experience strong feelings of belonging and maybe get access to esoteric truths denied to other people.

We have a word for such organizations. Cults. Cultures of total dedication look crazy from the outside, partly because the most notorious cults were homicidal. Jim Jones and Charles Manson did not make good exits. But entrepreneurs should take cultures of extreme dedication seriously, is a lukewarm attitude to one's work a sign of mental health, is a merely professional attitude the only sane approach?

The extreme opposite of a cult is a consulting firm like Accenture. Not only does it lack a distinctive mission of its own, but individual consultants are regularly dropping in and out of companies to which they have no long-term connection whatsoever. Every company culture can be plotted on a linear spectrum. So a line, vertical line, horizontal line, with a circle, it says zero to one, and going all the way to the right is cults, and it says dogmatism, and going all the way to the left, it says consultants, nihilism. The best startups might be considered slightly less extreme kind of cults. The biggest difference is that cults tend to be fanatically wrong about something important.

people in a successful startup are fanatically right about something that those outside may have missed. You're not going to learn those kinds of secrets from consultants, and you don't need to worry if your company doesn't make sense to conventional professionals. Better to be called a cult or even a mafia. Since we got time, we'll go to the next chapter, Chapter 11. It says, if you build it, will they come? Even though sales is everywhere, most people underrate its importance. Silicon Valley underrates it more than most. The geek classic, the Hitchhiker's Guide to the Galaxy, even explains the founding of our planet

as a reaction against salesman. When an imminent catastrophe requires the evacuation of humanity's original home, the population escapes on three giant ships. The thinkers, leaders, and achievers take the A ship, the salespeople and consultants get the B ship, and the workers in the art. artisans take the C ship. The B ship leaves first and all its passengers rejoice vainly. But the salespeople don't realize they are caught in a ruse. The A ship and C ship people have always thought that the B ship people were useless. So they conspired to get rid of them. And it was the

B ship that landed on Earth. Distribution may not matter in fictional worlds, but it matters in ours. We underestimate the importance of distribution, a catch-all term for every everything it takes to sell a product because we share the same bias the A-ship and C-ship people had. Salesmen and other middlemen supposedly get in a way and distribution should flow magically from the creation of a good product. The field of dreams conceit is especially popular in Silicon Valley, where engineers are biased toward building cool stuff rather than selling it, but customers will not come just because you build it. You have to make that happen, and it's harder than it looks. Nerds versus Salesmen

The U.S. advertising industry collects annual revenues of $150 billion and employs more than 600,000 people. At $450 billion annually, the U.S. sales industry is even bigger. When they hear the 3.2 million Americans work in sales, seasoned executives will suspect the number is low, but engineers may sigh in bewilderment. What could that many salespeople possibly be doing? In Silicon Valley, nerds are skeptical of advertising, marketing, and sales because they seem superficial and irrational.

But advertising matters because it works. It works on nerds and it works on you. You may think that you're an exception, that your preferences are authentic, and advertising only works on other people. It's easy to resist the most obvious sales pitches, so we entertain a false confidence in our own independence of mind. But advertising doesn't exist to make you buy a product right away. It exists to embed subtle impressions that will drive sales later. Anyone who can't acknowledge its likely effect on himself is doubly deceived. It always kills me when I realize it's like,

the only reason I want that is because of advertising, because of some kind of propaganda campaign. But a lot of times I just end up getting it, whatever they're selling. I'm sure you do too. Nerds are used to transparency. They add value by becoming expert and a technical skill like computer programming and engineering disciplines a solution either works or it fails. You can evaluate someone else's work with relative ease as surface appearances don't matter much.

Sales is the opposite, an orchestrated campaign to change surface appearances without changing the underlying reality. This strikes engineers as trivial, if not fundamentally dishonest. They know their own jobs are hard, so when they look at salespeople laughing on the phone with a customer or going to two-hour lunches, they suspect that no real work is being done. If 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. Sales is hidden. All salesmen are actors. Their priority is persuasion,

not sincerity. That's why the word salesman can be a slur and used car dealer is our archetype of shadiness. But we only react negatively to awkward, obvious salesman, that is, the bad ones. There's a wide range of sales ability. There are many gradations between novices, experts, and masters. There are even sales grandmasters. If you don't know any grandmasters, it's not because you haven't encountered them, but rather because their art is hidden in plain sight. Tom Sawyer managed to persuade his neighborhood friends to whitewash defense for him, a masterful move, but convincing them to actually, actually pay him for the privilege of doing his chores was the move of a grandmaster,

and his friends were none the wiser. Not much has changed since Twain wrote in 1876. Like acting, sales works best when hidden. This explains why almost everyone whose job involves distribution, whether they're in sales marketing or advertising, has a job title that has nothing to do with those things. People who sell advertisements are called account executives. People who sell customers work. People who sell customers work in business development. People who sell companies are investment bankers. And people who sell themselves are called politicians. There's a reason for these redescriptions. None of us wants to be reminded when we're being sold. Whatever the career, sales ability distinguishes superstars from also brands. On Wall Street, a new hire starts as an

analyst wielding technical expertise, but his goal is to become a dealmaker. A lawyer prides himself on professional credentials, but law firms are led by the rainmakers who bring in big clients. Even university professors who claim authority from scholarly achievement are envious of the self-promoters who define their fields. Academic ideas about history or English don't just sell themselves on their intellectual merits. Even the agenda of fundamental physics and the future path of cancer research are results of persuasion. The most fundamental reason that even business people underestimate the importance of sales is the systematic effort to hide it at every level of every field in a world secretly driven by it.

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. The polar opposite business cliche warns that the best product doesn't always win. economists attribute this to path dependence specific historical circumstances independent of objective quality can determine which products enjoy widespread adoption that's true but it doesn't mean the operating systems we use today and the keyboard layouts on which we type were imposed by mere chance it's better to think of distribution as something essential to the design of your product 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. I just think about like the couple times, now if I buy a car, I try to just buy it privately off of somebody. But the times, and I've worked at dealerships before, is people go there and they really, unless they are recommended to a certain salesperson, they're walking in and they're just basically the person, the person who's next up, that's who they encounter. And it's very, rare in all the car dealerships I worked at that there was you may find one out of three or four car dealerships where he doesn't even present as a salesman he knows exactly he all he's doing

is asking questions all he's doing he's not trying to sell you on the vehicle he's just asking you questions about what you need he's making you decide that this is what you need you're already there, he knows what you need. And now he's just finding out exactly what you need and asking questions. He's not talking about the, you're going to get to the warranty, you're going to get to all the things that are supposed to sell a car, speed, horsepower, everything. You know, if you're looking for that kind of car. But the salesman, the one that can sell you and you don't realize that you've been sold, it's so rare. It's so rare. It's so rare. nowadays. I assume in days past

it was probably better because I think there were more honest people in days past and I think most people today because for whatever reason maybe they're just bad people or they're just in a bad position. They're very eager to make that sale. Ready for huge savings?

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How to sell a product. Superior sales and distribution by itself can create a monopoly, even with no product differentiation. The converse is not true. No matter how strong your product, even if it easily fits into already established habits and anybody who tries it likes it immediately, you must still support it with a strong distribution plan. Two metrics set the limits for effective distribution. The total net profit that you earn on average over the course of your relationship with a customer, CLV, customer lifetime value, must exceed the amount you spend on average to acquire

a new customer, CAC, customer acquisition value. 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. Distribution methods can be plotted on a continuum. $1.C., the customer acquisition costs, viral marketing, marketing, $100 sales, 10,000, complex sales, 10 million. Targets in the beginning, a dollar consumers, in the middle of small businesses, and at the end, complex sales, you've got big business and selling to government.

And he jumps right to complex sales. Complex sales. If your average sale is seven figures or more, every detail of every deal requires close personal attention. It might take months to develop. the right relationships. You might make a sale only once every year or two. Then you'll usually have to follow up during installation and service the product long after the deal is done. It's hard to do, but this kind of complex sales is the only way to sell some of the most valuable products.

SpaceX shows that it can be done. Within just a few years of launching his rocket startup, Elon Musk persuaded NASA to sign billion-dollar contracts to replace the decommissioned space shuttle with a newly designed vessel from SpaceX. Politics matters in big deals just as much as technological ingenuity, so this wasn't easy. SpaceX employs more than 3,000 people at this time, mostly in California. Not anymore. The traditional U.S. aerospace industry employs more than 500,000 people. I don't know.

Are they still in California? I thought he moved to everything, but no well. The traditional U.S. aerospace industry employs more than 500,000 people. spread throughout all 50 states. Unsurprisingly, members of Congress don't want to give up federal funds going to their home districts. But since complex sales required making just a few deals each year, a sales grandmaster like Elon Musk can use that time to focus on the most crucial people and even to overcome political inertia. Complex sales work best when you don't have salesmen at all. Palantir, the data analytics company I co-founded with my law school classmate, Alex

Carp doesn't employ anyone separately tasked with selling its product. Instead, Alex, who is Palantir CEO, spends 25 days a month on the road, meeting with clients and potential clients. Our deal sizes range from 1 million to 100 million. At that price point, buyers want to talk to the CEO, not the VP of sales. Business with complex sales models succeed if they achieve 50% to 100% year-over-year growth over the course of a decade. This will seem slow to any entrepreneur dreaming of viral growth.

You might expect revenue to increase 10 times as soon as customers learn about an obviously superior product, but that almost never happens. Good enterprise sales strategies start 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 even bigger deals. Personal sales

Most sales are not particularly complex. Average deal sizes might range between $10,000 and $100,000, and usually the CEO won't have to do all of the selling himself. The challenge here isn't about how to make any particular sale, but how to establish a process by which a sales team of modest, size can move the product to a wider audience. In 2008, Box had a good way for companies to store their data safely and accessibility and excessively in the cloud, but people didn't know they needed such a thing. Cloud computing hadn't caught on yet. That summer, Blake was hired as Box's third

salesperson to help change that. Starting with small groups of users who had the most acute file sharing problems, Boxes' sales reps built relationships with more and more users in each client company. In 2009, Blake sold a small box account to a Stanford sleep clinic, where researchers needed an easy, secure way to store experimental data logs. Today, the university offers a Stanford branded box account to every one of its students and faculty members, and Stanford Hospital runs on box. If it had started off by trying to sell the president of the university on an enterprise-wide solution, Box would have sold nothing. A complex sale approach would have made Box a forgotten startup failure. Instead, personal sales made it a multi-billion

dollar business. Sometimes the product itself is a kind of distribution. Zoc Doc is a founder's fund portfolio company that helps people find and book medical appointments online. The company charges doctors a few hundred dollars per month to be included in its network. With an average deal size of just a few thousand dollars, Zoc Doc needs lots of salespeople, so many that they have an intent. Internal recruiting teams do nothing but hire more. But making personal sales to doctors doesn't just bring in revenue by adding doctors to the network. Salespeople make the product more valuable to consumers, and more consumer users increases its appeal to doctors. More than 5 million people already use the service each month, and it can continue to scale its network to include a majority of practitioners.

It will become a fundamental utility for the U.S. healthcare industry. distribution doldrums. In between personal sales, salespeople obviously required, and traditional advertising, no salespeople required, there is a dead zone. Suppose you create a software service that helps convenience store owners track their inventory and manage ordering. For a product priced around $1,000, there might be no good distribution channel to reach the small businesses that might buy it. Even if you have a clear value proposition, how do you get people to hear it? Advertising would either be too broad. There's no TV channel that only convenience store owners watch or too inefficient.

On its own, an ad in convenience store news probably won't convince any owner to part with $1,000 a year. The product needs a personal sales effort, but at that price point, you simply don't have the resources to send an actual person to talk to every prospective customer. This is why so many small and medium-sized businesses don't use tools that bigger firms take care. for granted. It's not that small business proprietors are unusually backward or that good tools don't exist. Distribution is the hidden bottleneck. Marketing

and advertising marketing and advertising work for relatively low-priced products that have mass appeal, but lack any method of viral distribution. Proctor and Gamble can't afford to pay salespeople to go door-to-door selling laundry detergent. Procter and Gamble does employ

salespeople to talk to grocery chains and large retail outlets, since one discharge and sale made to these buyers might mean 100,000 one-gallon bottles. To reach its end-user, a packaged goods company has to produce television commercials, print coupons, and newspapers, and design its product boxes to attract attention. Advertising can work for startups, too, but only when your customer acquisition costs and customer lifetime value make every other distribution channel uneconomical. Consider e-commerce startup Warby Parker, which designs and sells fashionable prescription eyeglasses online instead of contracting sales to retail eyewear distributors. Now they actually have retail distributors.

I used to go to one in Atlanta, and these glasses are actually Warby Parker. Each pair starts at around $100, so assuming the average customer buy, these were a lot more than $100. These are progressive and yada yada. each pair starts at around $100, so assuming the average customer buys a few pair in her lifetime, the company CLV is a few hundred, is a few hundred dollars. That's too little to justify personal attention on every transaction, but at the other extreme, $100 physical products don't exactly go viral.

By running advertisements and creating quirky TV commercials, Warby is able to get its better, less expensive offerings in front of millions of eyeglass-wearing customers. The company states plainly on its website that TV is a great big megaphone, and when you can only afford to spend dozens of dollars acquiring a new customer, you need the biggest megaphone you can find. Genius. Every entrepreneur envies, it's interesting when you read this because you wonder, hey, why don't these people advertise on TV or why do these people advertise on TV? And this clearly answers the question and very logically. Every entrepreneur envies a recognizable ad campaign, but 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.

I know this from experience. At PayPal, we hired James Duhon, who played Scotty on Star Trek to be our official spokesman. When we released our first software for Palm Pilot, we invited journalists to an event where they could hear James recite the immortal line. I've been beaming people up my whole career, but this is the first time I've been able to beam money. It flopped. The few who actually came to cover the event weren't impressed. We were all nerds, so we had this thought, we had the, we had thought Scotty, the chief engineer could speak with more authority than say, Captain Kirk. Just like a salesman, Kirk was always showboating out in some exotic locale and leaving it up to the engineers to bail him out of his own mistakes.

We were wrong. When Priceline.com cast William Shatner, the actor who played Kirk, in a famous series of TV spots, it worked for them. But by then, Priceline was a major player. No early startup can match big companies advertising budgets. Captain Kirk truly is in a league of his own. Viral marketing A product is viral if its core functionality encourages users to invite their friends to become users to. 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 their network. This isn't just cheap, it's fast, too. If every new user leads to more than one additional user, you can achieve a chain reaction of exponential growth. The ideal viral loop should be as quick and frictionless as possible. Funny YouTube videos or internet memes get millions of views very quickly because they have extremely short cycle times. people see the kitten, feel warm inside, and forward it to their friends in a matter of seconds. At PayPal, our original user base was 24 people, all of whom worked at PayPal. Acquiring customers through banner advertising proved too expensive.

However, by directly paying people to sign up and then paying them more to refer friends, we achieved extraordinary growth. This strategy costs us $20 per customer, but it also led to 7% daily growth, which meant that our user base nearly doubled every 10 days. After four or five months, we had hundreds of thousands of users and a viable opportunity to build a great company by servicing money transfers for small fees that ended up greatly exceeding our customer acquisition cost. Whoever is first to dominate the most important segment of a market with viral potential will be the last mover in the whole market. At PayPal, we didn't want to acquire more users at random. We wanted to get the most valuable users first.

The most obvious market segment in email-based payments was the millions of immigrants still using Western Union to wire money to their families back home. Our product made that effortless, but the transactions were too infrequent. We needed a smaller niche market segment with a higher velocity of money. A segment we found in eBay power sellers. the professional vendors who sold goods online through eBay's auction marketplace. There were 20,000 of them. Most had multiple auctions ending each day, and they bought almost as much as they sold, which meant a constant stream of payments.

And because eBay's own solution to the payment problem was terrible, these merchants were extremely enthusiastic early adopters. Once PayPal dominated the segment and became the payments platform for eBay, there was no catching up on eBay or anywhere else. there. I remember it. I was an early, early PayPal and eBay user. All right, let's go. The power law of distribution. One of these methods is likely to be far more powerful than every other for any given business. Distribution follows a power law of its own. This is counterintuitive for most entrepreneurs who assume that more is more. But the kitchen sink approach,

employ a few salespeople, place some magazine ads, and try to add. some kind of viral functionality to the product as an afterthought doesn't work. Most businesses get zero distribution channels to work. Poor sales rather than bad product is the most common cause of failure. If you can just get one distribution channel to work, you have a great business. If you try for several but don't nail one, you're finished. Selling to non-customers. Your company needs to sell more than its product.

You must also sell your company to employees and invests. There is a human resources version of the lie that great products sell themselves. The company is so good that people will be clamoring to join it. And there's a fundraising version, too. This company is so great that investors will be banging down our door to invest. Clammer and frenzy are very real, but they rarely happen without calculated recruiting and pitching beneath the surface. Selling your company to the media is a necessary part of selling. it to everyone else. Nerds who instinctively mistrust the media often make the mistake of trying

to ignore it. But just as you can never expect people to buy a superior product merely on its obvious merits without any distribution strategy, you should never assume that people would admire your company without a public relation strategy. Even if your particular product doesn't need media exposure to acquire customers because you have a viral distribution strategy, The press can help attract investors and employees. Any prospective employee worth hiring will do his own diligence. What he finds or doesn't find when he Googles you will be critical to the success of your company. Let's see.

We've got a little more here. Everybody sells. Nerds might wish that distribution could be ignored and salesmen banished to another planet. All of us want to believe that we make up our own minds, that sales doesn't work, us, but it's not true. Everybody has a product to sell, no matter whether you're an employee, a founder, or an investor. It's true, even if your company consists of just you and your computer. Look around. If you don't see any salespeople, you're the salesperson. All right. And that concludes chapter 11, chapter 12, man and machine. We will catch up with that

on episode six of this. We're getting pretty close here. We're at Where are we at? Page 131 of 200, and a bunch of those pages at the end are just referenced. So, yeah, we're getting close. And once again, thank you for stopping by and checking out this part five of Peter Thiel's zero to one. And if you want to support the show, like I said, there's going to be ads on this. And as I've ended every episode, you can go to Freemam Beyond the Wall.com. or slash support and you can go through my website, your Patreon, through SubscribeStar, and however you wish to subscribe, you, I either upload to RSS fees that you will get,

or I email to you a commercial free version of every episode I put out, not only the readings, but the regular episodes as well. All right. Thank you, and I'll see you for episode six. of 0.01. Those people who love going out shopping for Black Friday deals, they're mad, aren't they?

Like, proper mad. Brenda wants a television and she's prepared to fight for it, if you ask me. It's the fastest way to a meltdown. Me, I just prepare the fastest way to get stuff and it doesn't get faster than Appliances Delivered.i.

Top brand appliances, top brand electricals, and if it's online, it's in stock. With next day delivery in Greater Dublin. Appliances delivered.com. Part of expert electrical. Buy it, get it tomorrow. Or you know, fight Brenda.

Ready for huge savings? Well mark your calendars from November 28 to 30th because the Liddle Newbridge Warehouse Sale is back. We're talking thousands of your favourite Liddle items all reduced to clear. From home essentials to seasonal must-habs, when the doors open, the deals go fast. Come see for yourself.

The Liddle New Bridge Warehouse Sale, 28th to 30th of November. Liddle, more to value. You catch them in the corner of your eye. Distinctive, by design. They move you, even before you drive. The new Cooper plugin hybrid range. For Mentor, Leon, and Terramar,

now with flexible PCP finance and trade-in boosters of up to 2,000 euro, search Coopera and discover our latest offers. Coopera, design that moves. Finance provided by way of higher purchase agreement from Volkswagen Financial, Services, Ireland Limited. Subject to lending criteria. Terms and conditions apply. Volkswagen Financial Services Ireland Limited.

Trading as Cooper Financial Services is regulated by the Central Bank of Ireland.