Zero to One
Discover more from From 0 to 1 in the Stock Market
I finished reading Zero to One, written by Peter Thiel (coincidences with the newsletter name were truly unintended haha). The book is filled with unbelievably interesting topics and its thesis is built around this idea of going from zero to one. Peter vaticinates that companies that don’t seek to create new things will eventually perish. In this article, we’ll dive into why this might be the brightest concept I’ve yet encountered in the business line of thought.
Progress
There are two types of progress:
0 to 1 implies creation. It underlies the invention of something unique. A veil of novelty surrounds the product or service, understood as technology by Peter. This type of move supposes vertical innovation, as an unknown and unserved market is unlocked.
1 to n is copying, or, in the best case, making small improvements to another product. This would suppose horizontal innovation, to which Peter refers as globalization. Globalization implies replicating what has worked and taking it everywhere. Availability expansion.
I believe both types of innovation can create value. However, they differ in the magnitude and sustainability. Globalization takes something that has worked to other markets, adding value, but there is a limit. Globalization creates value, but it shouldn’t be something your company’s future depend on. Horizontal innovation also means doing small improvements to a product (could be yours or from a competitor). This could temporarily be a working strategy, but it leads to the same destination, nowhere.
Horizontal innovation implies keeping a profit engine spinning for a bit more time, but it ignores a crucial fact. Competition is after every single company. While a business is doing small improvements or trying to satisfy new markets, there is always someone who wants and will find a way to copy you and compete your benefits away.
Zero to One
All good businesses begin by creating something.
“There is normally a jewel at the heart of most companies that has often been used to fund new ventures” Nick Sleep, Dec 2002
The jewel Nick speaks of, is the zero to one move the company made. It is what allowed the business to create and capture value. It’s where high rates of return derive from. Pat Dorsey identifies and categorizes companies depending on how big could the market of this jewel be and whether management is investing outside of their kingdom.
These moves are truly powerful. There is no competition in new markets and, if backed by competitive advantages, they can bring infinite rewards:
Microsoft created Windows in 1985. In the last fiscal year, 38 years later, it generated 24bn in revenue and still held 74% of the OS desktop market share.
ASML built the first EUV machine 15 years ago. It now holds a complete monopoly on its market, which still has a long runway.
Visa invented VisaNet in 1973. 50 years later, it holds 50% of the payments processing market and generates 30bn in revenue with world-class margins.
Zoetis practically invented the pet-care dermatology market in 2013, with Apoquel and then Cytopoint. It now generates 1.3bn in revenue and has 95% market share.
The most interesting case here is Visa because the company technically did not innovate very much after VisaNet’s creation. They have always had state-of-the-art technology at their datacenters to keep that barrier, but true progress was limited. This suggests that the very best 0 to 1 moves create not only abundance, but also have a long lifetime. I think this possibility was somewhat overlooked by Peter. Nevertheless, Visa will eventually get displaced if it doesn’t innovate within its industry. New monopolies replace old ones.
“The history of progress is a story of monopolistic businesses that continuously get better and replace the old titles”
Quick link with one of the most profound quotes from literature:
“I am the spirit that negates.
And rightly so, for all that comes to be
Deserves to perish wretchedly” Faust; Goethe
The Innovator’s Dilemma
I started reading this book on Tuesday and encountered a gem. Christensen analyzed why good businesses that were correctly run eventually failed, and I saw a clear connection with Peter’s ideas. Clayton writes that leading companies get to the conclusion that investing in new technologies is not rational (I’ll expand on this in a future article). And who would blame them?
It goes against Dorsey’s idea, reaching an absurd paradox. If companies invest outside their jewel’s nature and MOAT, returns on capital will highly diminish. Moreover, given the low success rates on these types of projects, the most likely outcome is they will end up in 0. To the contrary, if the leading company does not try to disrupt itself, somebody else will eventually do it.
Last footnote, look at what shareholders did to Meta, a company that’s trying a zero to one move.
Personal commentary
Short-form articles are back. Difficult to put them together though, there’s too much to include. I’m leaving this article with a very recurrent feeling. The issue was addressed and we advanced, but it is far from solved. This zero to one concept is immense and philosophically complex. Anyway, hope you enjoyed the article!
In case you missed them, two research articles were published: