The 7 business questions (Peter Thiel)

In his book Zero to One, Peter Thiel talks about seven business questions to answer in order to successfully start a business:

[…] If you don’t have good answers to these questions, you’ll run into lots of ‘bad luck’ and your business will fail. If you nail all seven, you’ll master fortune and succeed. Even getting five or six correct might work.[…]

The questions are really interesting to asses a business:

  1. The Engineering Question: Can you create a breakthrough technology instead of incremental improvements?
  2. The Timing Question: Is now the right time to start your particular market?
  3. The Monopoly Question: Are you starting with a big share of a small market?
  4. The People Question: Do you have the right team?
  5. The Distribution Question: Do you have a way to not just create but deliver your product?
  6. The Durability Question: Will your market position be defensible 10 and 20 years into the future?
  7. The Secret Question: Have you identified a unique opportunity that others don’t see?

One of the central ideas in the book is that you should work towards a monopoly. From the WSJ:

“Perfect competition” is considered both the ideal and the default state in Economics 101. So-called perfectly competitive markets achieve equilibrium when producer supply meets consumer demand. Every firm in a competitive market is undifferentiated and sells the same homogeneous products. Since no firm has any market power, they must all sell at whatever price the market determines. If there is money to be made, new firms will enter the market, increase supply, drive prices down and thereby eliminate the profits that attracted them in the first place. If too many firms enter the market, they’ll suffer losses, some will fold, and prices will rise back to sustainable levels. Under perfect competition, in the long run no company makes an economic profit.

The opposite of perfect competition is monopoly. Whereas a competitive firm must sell at the market price, a monopoly owns its market, so it can set its own prices. Since it has no competition, it produces at the quantity and price combination that maximizes its profits.

To an economist, every monopoly looks the same, whether it deviously eliminates rivals, secures a license from the state or innovates its way to the top. I’m not interested in illegal bullies or government favorites: By “monopoly,” I mean the kind of company that is so good at what it does that no other firm can offer a close substitute.

Qualitative characteristics of monopolies mentioned in the book:

  1. Proprietary Technology
  2. Network Effects
  3. Economies of Scale
  4. Branding

Also, don’t always believe companies when they formulate their competitive position:

[…] Non-monopolists exaggerate their distinction by defining their markets as the intersection of various smaller markets: British food ∩ restaurant ∩ Palo Alto. 

Monopolists, by contrast, disguise their monopoly by framing their market as the union of several large markets: search engine ∪ mobile phones ∪ wearable. 

What does a monopolist’s union story look like in practice? Consider a statement from Google chairman Eric Schmidt’s testimony at a 2011 congressional hearing:

“We face an extremely competitive landscape in which consumers have a multitude of options to access information”. 

Or translated from PR-speak to plain English:

“Google is a small fish in a big pond. We would be swallowed whole at any time. We are not the monopoly that the government is looking for” […]

This last one is a fun exercise for the coming earnings season (or when reading the newspaper in general). You will notice that some business claim to be market leaders (of which market?) and others claim to be under attack from all angles.