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From Zero To One

🔖How would I describe this book in 1 sentence?

Guidebook to your every startup idea.

🗺️What was the role of this book in my journey?

This book is extremely useful when you can immediately reflect the ideas from the book into real-life examples. A the time of reading, I was occupied by 2 things: founding the OB Trading company (founders agreements, responsibilities, structure, etc.) and product strategy for the OB Trader app - the main product of OB Trading. The book perfectly matched and covered both of these topics. When I was reading, I instantly imagined how I would apply certain things in the OB Trading case and it helped a lot with adopting the acquired knowledge.

From Zero to One provides an unchanging philosophy to globalization and other eternal principles related to your business strategy, so I think it is definitely worth getting back to it from time to time.

Thanks to Vadym for this recommendation.

💡Key Insights

  1. Progress can be either horizontal or vertical. Horizontal or expansive progress results from duplicating success—going from 1 to n. This kind of progress is easy to envision because it looks a lot like the present. Vertical or intensive (focused) progress requires doing something entirely new—going from 0 to 1. It’s more difficult to envision because we’ve never seen it before. For example, starting with one typewriter and building 100 of them would be horizontal progress (duplicating something). Starting with a typewriter and building a word processor would be vertical progress (creating something new).
  2. Globalization is horizontal progress—it entails taking something that works in a particular place and replicating it everywhere. For instance, China’s 20-year plan is to be like the West is today. Technology, going from 0 to 1, is vertical progress—it encompasses anything new and better, including but not limited to computers.
  3. Continued globalization isn’t feasible without technological progress because the industrialization of more countries will lead to more environmental problems and competition for limited resources. For instance, if China doubles its industrial production without technology improvements, it will double its air pollution. Spreading the practices of developed countries globally will bring devastation rather than wealth. The key to a better future is both imagining and creating the technologies to get us there.
  4. Startups consisting of a few people with a common mission are the source of most new technology.
  5. On the contrary to the conventional belief that in order to succeed on the market, you must outlast your competitors, what you should really do is to avoid the competition by building monopolies on yet uncaptured markets. The only way to achieve extraordinary success in business is by creating monopoly products
  6. Monopolies are good for society. While it may seem counterintuitive, they can be more ethical, treat workers with greater consideration, and create more value than companies locked in competition do.
  7. Competitors are caught up in a daily struggle for survival. For instance, with their low margins, restaurants have to do everything possible to minimize expenses—which can include paying minimum wage to employees and putting family members to work for nothing. In survival mode, money is everything.

    In contrast, in a monopoly where profits are assured, there’s room to consider other things besides money. For instance, lacking intense competition, Google can give consideration to its workers, its products, and its impact on society.

  8. When starting a company, it’s important to choose leaders who have the right technical knowledge and whose skills are complementary. Equally important, however, is how well the founders know each other and work together. You also need a structure and clearly defined roles so everyone is aligned to move the organization forward
  9. To start a company with effective alignment you need to make 3 decisions:
    • Ownership: Who will own the company’s equity. Ownership is typically divided among founders, employees, and investors.
    • Possession: Who will run the company day-to-day. It may be a founder/CEO or manager and employees.
    • Control: Who will govern the company. A board of directors (usually consisting of founders and investors) maintains control.
  10. A CEO of a venture-funded startup shouldn’t be paid more than $150,000 a year. High pay (more than $300,000) encourages him to protect his salary by defending the status quo and minimizing problems rather than exposing and fixing them.
    1. Other advantages of low CEO pay are that it:

    2. Encourages the executive to focus on increasing the value of the company.
    3. Motivates employees to work harder. By working for lower pay, an executive demonstrates his commitment to the company and its mission. Employees will follow his example.
  11. Cash bonuses encourage short-term thinking. Offering equity or part ownership of the company shifts the focus to the future.
  12. The first few employees in a startup might be attracted by exciting roles or equity. But beyond your first round of hires, you must be able to articulate to the 20th candidate why he/she should want to join your company. Your answers need to be specific to your company. They should address:
  13. 1) Your mission: Explain what makes your mission unique and compelling—what’s the important thing you’re doing that no one else is doing?

    2) Your team: Show potential employees that the people on your team are the kind of people they want to work with. Show recruits how your company is a unique match for them.

  14. Many Silicon Valley entrepreneurs underestimate the importance of distribution, or the process of selling the product (advertising, sales, marketing, and distribution channels). They often believe their product is so superior it should sell itself: if they build it, customers will come. But understanding distribution and having a plan for it is critical to a company’s success; it should be part of designing your product.
  15. There are two considerations for planning a sales strategy for your product: customer lifetime value and customer acquisition cost.
    • Customer lifetime value or CLV is the profit you earn over the course of your relationship with a customer. For example, if you sell low-priced prescription eyeglasses at about $100 a pair and the typical customer needs only a few pairs over her lifetime, the CLV would be only a few hundred dollars.
    • The customer acquisition cost is the amount you spend to acquire a customer (your marketing cost divided by the number of customers). You want your customer acquisition cost be lower than your CLV to maintain a successful business
  16. The real truth is often the opposite of what everyone agrees is true. When you’re blinded by the latest conventional wisdom, you can’t create anything new.
  17. Good question to ask a potential new employee: “What important truth do few people agree with you on?” Any good response to this question will be unpopular, so it will require both intellect and psychological strength. But a good answer will provide the best window we can get into the future. All modern developments we take for granted today were once ideas rejected by the majority of people. This means looking for ideas which are contrary to popular opinion yet true (aka “secrets”) can lead us to valuable unrealized business opportunities.
  18. Anyone considering a startup should ask: “What valuable company hasn’t been built yet?”
  19. Some companies create value without being valuable (profitable), but that isn’t enough to be successful (sustainable). A company has to accrue some of the value it creates. Airlines in 2012 were a prime example of companies that create value without keeping much—they served millions of passengers, creating value of hundreds of billions of dollars, but made little money per passenger. While airfare averaged $178 each way, they made 37 cents per passenger trip. In contrast, Google created less value but brought in far more money—more than 100 times the airline industry’s profit margin that year. Google is worth more than three times the airline industry.
  20. Economists have two models for markets: “perfect competition” and monopoly; perfect competition is considered to be the ideal.
  21. Perfectly competitive markets are balanced: supply matches demand. The products are basically the same regardless of which company sells them. The price is whatever the market determines. If there’s a chance to make money, new companies enter the market, increase supply, and push prices down, thereby eliminating profits. If too many companies enter the market, some fail and prices rise again. In perfect competition, no one profits in the long run.

  22. To protect their interests, companies tend to lie about their market status so that all businesses seem similar. However, most businesses are closer to one extreme or the other—perfect competition or monopoly—than it appears from what they say. Monopolies lie because acknowledging their market control attracts attention (audits) and attacks. To keep monopoly profits rolling in, they downplay their status by claiming nonexistent competition. For example, Google distracts attention from its monopoly status in search, by emphasizing its competition in consumer tech products, where Google owns only a small share of the overall market
  23. You create a monopoly when you solve a unique problem, when you do something other companies don’t do, or when you do something so well nobody else can offer a reasonably close replacement.
  24. All happy companies are different: each one earns a monopoly by solving a unique problem. All failed companies are the same: they failed to escape competition.
  25. When businesses focus on competitors and lose sight of more important things, they end up hurting themselves. For example, compare Microsoft and Google. The growing companies began obsessing over each other and creating competing products: Windows vs. Chrome, Bing vs. Google, Explorer vs. Chrome, Office vs. Docs, and Surface vs. Chrome. The obsession cost both companies their dominance—Apple surpassed them in market capitalization, exceeding the value of Microsoft and Google combined.
  26. Future cash flow. A monopoly by definition has avoided competition, but to be a great business, there’s more: it must last into the future. To understand how this works, compare the New York Times Company with Twitter. Each employs thousands of people and delivers news to millions. However, in 2013, Twitter was valued at $24 billion, which was 12 times the Times’ market capitalization. Yet the Times earned $133 million in 2012, while Twitter lost money. How could the money-losing Twitter be worth more than the money-gaining Times? The reason for the dramatic difference in value is cash flow—the hallmark of a great business is its ability to generate future cash flow. Investors expected Twitter to generate monopoly profits for the next 10 years, while investors believed the New York Times lacked that ability.
  27. A business’s current value is the sum of the profits it will earn throughout its lifetime. Low-growth businesses are those like newspapers that aren’t expected to grow dramatically in the future—most of their value is near-term. They might retain their value and keep current cash flows for a few years, but competition will erode it in the future. A successful restaurant might be profitable today, but cash flows will dwindle in a few years as new restaurants open.

    The pattern is the opposite for tech companies—they often lose money initially and require time to build value. Most of a tech startup’s value will be a decade or more in coming.

  28. Every moment in business happens only once. The next Bill Gates will not build an operating system. The next Larry Page or Sergey Brin won’t make a search engine. And the next Mark Zuckerberg won’t create a social network. If you are copying these guys, you aren’t learning from them.
  29. Entrepreneurs must build the business to ensure it will last for a decade or more.
  30. For proprietary technology to give you a monopolistic edge, it needs to be at least 10 times better in some major way than anything like it. Anything short of a dramatic difference will seem insignificant to users, which means they’ll be unlikely to switch from what they’re used to.
  31. You can think of the future as either: 1) definable and definite or 2) a hazy uncertainty. Your belief about the future determines what you do in the present. If you think of the future as definable and definite, you try to understand it and work to shape it. If you think of it as indefinable and random, you can’t intelligently predict or plan for it.
  32. Entrepreneurship requires definite future plans rather than diversification. An entrepreneur cannot “diversify” herself: you cannot run dozens of companies at the same time and then hope that one of them works out well. Less obvious but just as important, an individual cannot diversify his own life by keeping dozens of equally possible careers in ready reserve.
  33. The power law says that a few companies will achieve exponentially greater value than all others. A venture fund typically loses money at first because most of the companies in its portfolio fail soon after starting. The investors hope the fund’s value will shoot up in a few years when the most successful startups experience exponential growth and scale up. Venture returns follow a power law: a very small number of companies far surpass all others combined. For your portfolio to succeed, you need to focus on finding those few companies that will be standout performers rather than focusing on diversification. For example, Facebook, the most successful company in Thiel’s Founders Fund, returned more than everything else in the portfolio combined. Palantir, the second-most successful investment in the fund, was set in 2005 to return more than all of the others combined excluding Facebook.
  34. For example, if you invest in ten startups (too many) with monopoly potential, their early returns will look similar. Their values will start to vary from each other over a few years but overall fund growth will still look linear. However, after about 10 years, one investment will shoot up, far exceeding everything else. Power law distributions were there all along, unnoticed.
  35. Everyone should be aware of the power law—a minority of effort leads to a majority of results—because we’re all investors.
    • An entrepreneur invests by spending time on a startup and therefore should think about the company’s chances of taking off.
    • The average person investing in a career should consider how valuable that type of work will be decades into the future.
    • Students can learn to think in power law terms and focus intensely on something they’re good at rather than trying to do well on a predefined menu of course and career
  36. Today, most people act as if there isn’t anything left to discover; they simply accept conventional wisdom. Specifically, four trends have undermined our belief in secrets:
    • Incrementalism: from an early age, we’re taught that the right way to do things is by taking one small step at a time. You don't get credit for thinking outside the box or learning something that’s not on the test. But if you follow directions step by step, you’ll get an A.
    • Risk aversion: People are afraid to explore or look for secrets because they’re afraid of being wrong. Secrets haven’t been vetted by the mainstream, so if you announce something new, you’ll risk going out on a limb by yourself or making a mistake.
    • Complacency: Social elites—those with wealth, advanced education, and status—have the greatest ability to explore new thinking, but they come to like their comfortable position and don’t want to rock the boat.
    • Homogenization: As globalization increases, people increasingly view the world as a single market—or flat—with everyone competing on an equal basis, thanks in large part to the spread of technology, which has eroded geographic and political barriers. Many believe that if there were anything new to discover, someone in the global talent pool would already have done it.
  37. The most critical question in starting a business is choosing partners or co-founders. As in marriage, if you choose the wrong person, breaking up can be ugly.
  38. In startups, most conflicts occur between founders and investors on the board (between ownership and control). For instance, a board member who’s an investor might want the company to go public as soon as possible to benefit his venture fund, while the founders want to continue building the business as a private entity.
  39. Keeping the board small can make it easier to communicate, provide oversight, and maintain consensus. Three to five members is the ideal size. Large boards are unwieldy and ineffective. Nonprofits often have dozens of board members who are so unfocused they can’t provide any meaningful oversight. This may leave too much power in the hands of a dictatorial executive.
  40. Because they often have limited resources, startups may be tempted to use consultants and part-time and remote employees, which cost less than full-time employees. But this works against building a cohesive team and is a recipe for misalignment. Everyone involved in your company, except possibly lawyers and accountants, should be working on it full time. Anyone, including consultants, who isn’t getting a regular salary or stock options is misaligned. People who are only peripherally involved are predisposed toward short-term rewards rather than helping to build long-term value.
  41. Culture is something a company is, not something it has
  42. Instead of the professional view of a workplace where employees check in and out, simply exchanging hours for a paycheck, work relationships should extend beyond work and also be long-lasting. In fact, if the considerable time you spend at work doesn’t build longer-lasting relationships, you haven’t used it well.
  43. In the early stages of a typical startup, responsibilities are often fluid, which creates a risk of conflict that a startup can’t afford. Infighting weakens a company by hindering productivity and focus, making it vulnerable to outside competition. At work, most conflicts stem from people competing for the same responsibilities. While creating a team of like-minded people, Thiel avoided this kind of competition by making each person in the company responsible for doing one specific thing—each person’s one thing was unique. Further, each employee knew he would be evaluated only on that responsibility.
  44. Sales is a $150 billion industry that employs more than 600,000 people in the US. We often overlook the importance of distribution because society in general looks down on salespeople and advertising as dishonest and manipulative. Silicon Valley entrepreneurs take this a step further—because of a bias toward building rather than selling, they often believe their product is so superior it should sell itself: if they build it, customers will come. But customers won’t buy your product automatically; you have to sell it, which is more challenging than many entrepreneurs and engineers realize.
  45. Startups fail more often because of poor distribution than because they have a bad product. Getting the right channel to work is the key to a successful business.
  46. The best sales is hidden. There’s nothing wrong with a CEO who can sell, but if he actually looks like a salesman, he’s probably bad at sales and worse at tech. Like acting, sales works best when hidden.
  47. The sales process is often subtle—selling is a hidden art that secretly drives the economy. And knowing how to sell your product from the get-go can give you a leg up.

    All salespeople are actors; like actors, their priority is persuasion, not transparency. We react negatively to inept salespeople (“used-car salesman” is a slur), but the best salespeople are masters who sell without our realizing it.

    For example, Mark Twain’s character Tom Sawyer persuaded his friends to whitewash a fence for him. That took talent, but his masterstroke was convincing them to pay him for the privilege of doing so. They never caught on.

    Sales still works best when hidden. Sales is never mentioned in anyone’s job title—for instance, advertising salespeople are “account executives;” fundraisers trying to sell you on a cause work in “development,” and those who sell companies are “investment bankers.” Yet sales ability in each position separates superstars from average performers.

  48. In the future, the most valuable businesses will be the ones that use technology to help and empower people to do things better, not replace them.
  49. You can build a high-value business if you combine the complementary capabilities of humans and computers.
  50. Checklist for your startup idea
  51. Engineering: Is your technology a significant advance or only incremental improvement?
    Timing: Is this the right time to sell this technology?
    Monopoly: Are you targeting a big share of a small market?
    People: Do you have the right people on your team?
    Distribution: Do you have a plan to sell your product?
    Durability: Will you dominate your market in the next 10 to 20 years?
    Secret: Have you identified a unique opportunity overlooked by everyone else?
  52. Tech entrepreneurship and eccentricity seem to go together. This can be mostly a strength if it doesn’t get out of hand.
    1. Many founders have traits that are both extreme and paradoxical. For instance, they may be:

    2. Cash poor but millionaires on paper
    3. Obnoxious but also charismatic
    4. Insiders and outsiders
    5. Both famous and infamous
  53. There are four ways of thinking about the future, according to philosopher and Oxford professor Nick Bostrom:
  54. 1) Recurrent collapse: It will follow a historical pattern alternating between prosperity and ruin or collapse. This was the view of ancient people. Since we’re in prosperity today, humanity’s next cycle will be collapse.

    2) Plateau: The future will look a lot like the present as poor countries catch up with rich countries and the world reaches a plateau of development. Many people hold this view today.

    3) Extinction: The world may experience a catastrophe too big to contain and survive, given our global interconnectedness and weapons of mass destruction.

    4) Takeoff: Humanity is readying for takeoff toward a better future, which will be indescribably different from the present.

🦅Key Principles

  1. Look for monopoly opportunities rather than competing on already established markets
  2. Don't focus on disrupting the competition while building your product.
  3. Proprietary technology must be at least 10 times better than its closest substitute in some important dimension to lead to a real monopolistic advantage
  4. When starting a business, build in the capability of scaling
  5. Understand that small changes can lead to disproportionate results.
  6. Focus on generating "future cashflows"
  7. Be the "last mover" on the market - make a concussive blow that will ensure your monopoly advantage for years ahead
  8. Do not make your business model/product easily reproducible. Focus on creating products, systems, or networks that are hard and too inefficient to replicate
  9. When starting a company, outline ownership, possession, and control aspects
  10. Offer equity or part of the ownership in a company to focus on the long-term future.
  11. Choose your co-founders wisely and thoroughly.
  12. Co-founders must have right technical knowledge and complementary skills
  13. Have 3-5 members on the company board.
  14. Hire people to work on your idea full-time.
  15. Develop personal relationships with your colleagues.
  16. Clearly outline each member's area of responsibility.
  17. Understand the most appropriate distribution channel for your business.
  18. Walk each startup idea through the checklist.
  19. Engineering: Is your technology a significant advance or only incremental improvement?
    Timing: Is this the right time to sell this technology?
    Monopoly: Are you targeting a big share of a small market?
    People: Do you have the right people on your team?
    Distribution: Do you have a plan to sell your product?
    Durability: Will you dominate your market in the next 10 to 20 years?
    Secret: Have you identified a unique opportunity overlooked by everyone else?
  20. Be ready to explain why new employee candidates should join your company by describing your mission and your team.
  21. Focus on the distribution channels from the beginning. Sales strategy matters as much as your product
  22. Develop grand vision from the beginning. Be bold rather than inconsequential
  23. Build businesses that will last for at least a decade
  24. Focus on creating one company at a time. Do not diversify yourself.
  25. Have definite plans about your company future
  26. Get a grip on your key product metrics: CLV + CAC
  27. Dominate one small market first, then expand
  28. Look for secrets. Knowing a secret is the cornerstone of great businesses

✍️Notes

Why Look for Secrets?

Finding secrets takes faith that they exist as well as effort—but the potential value to society, whether in the form of new knowledge or a valuable new business, is unlimited.

English mathematician Andrew Wiles demonstrated both faith and persistence, when, after nine years of work, he proved Fermat’s last theorem in 1999—a mystery that had gone unsolved for 358 years.

There’s much more to accomplish in science, medicine, technology, and engineering by pursuing the unknown. We could cure cancer, dementia, and many other diseases and address the problems of aging. We could find sustainable ways to produce energy and come up with new ways to travel.

In business, we could build highly successful companies on new ideas or newly noticed opportunities. For instance, several Silicon Valley startups discovered how to leverage unused capacity. Airbnb recognized and connected a supply of unoccupied lodging with travelers’ demand for affordable and unique accommodations. The founders of Uber and Lyft built billion-dollar businesses by connecting people who needed rides with drivers willing to provide them. Believing in secrets (untapped potential) and looking for them enabled these entrepreneurs to see an opportunity no one else noticed.

If ideas that seem so simple in hindsight can support such high-value businesses, imagine how many more great companies could be started.

4 Mistake Lessons From the 1990s dot-com Bubble and Crash:

  1. Make incremental advances: Be wary of big visions that drive bubbles. Move forward with small, incremental steps.
  2. Stay lean and flexible: To stay lean and flexible, don’t tie your hands with planning. Instead, try things and iterate or build on the ones that work.
  3. Build on the competition: Don’t try to create new markets. Build your business by improving on a product people are already buying from someone else.
  4. Focus on product, not sales: If you have a good product, it should spread virally without a need for advertising.

Tech startups treat these lessons as sacrosanct, but they actually undermine success, especially big innovations. The opposite of each lesson is more accurate:

  1. It’s better to be bold than inconsequential.
  2. A bad plan is better than none.
  3. Don’t compete: competition destroys profits.
  4. Sales strategy matters as much as product.

Monopoly Characteristics

Monopoly businesses with strong future cash flows share several characteristics:

  • Proprietary technology: This may be your greatest possible asset because it makes your product difficult to copy. For example, proprietary technologies used in Google’s search algorithms for aspects such as query autocompletion make the search engine hard to replicate. For proprietary technology to give you a monopolistic edge, it needs to be at least 10 times better in some major way than anything like it. Anything short of a dramatic difference will seem incremental and unimportant.
  • Network effects: A network effect is the way additional users improve the value of a product or service for all users. For example, the more your friends use Instagram, the more value you get from being on it too. To generate network effects, your product has to be immediately valuable to its earliest adopters and then grow from there. A network business has to work on a small scale before it can go big—in fact, you have to plan on starting small. Mark Zuckerburg started Facebook by getting just his Harvard classmates to sign up.
  • Economies of scale: A monopoly gets stronger as it grows because the fixed costs of creating a new product (like office space and engineering or development) are spread over a greater volume of sales and the cost per unit declines. When starting a business, you should build in the capability of scaling. For example, Twitter enjoys built-in scale: it can keep increasing the number of users without adding customized features.
  • Branding: Creating an unassailable brand is integral to having a monopoly. For example, Apple is the most powerful technology brand. Everything from product design (including look and materials), to store design, price, and advertising contributes to an overall impression that Apple products are like no other. Of course, branding alone isn’t enough—you also need substance. Apple’s market dominance is based on superior products backed by an array of proprietary hardware and software technologies.

There are five additional considerations in building a monopoly:

  • Discovering a secret: Creating a great business that no one else can compete with starts with discovering and building on a secret. It can be an untapped opportunity or a different way of looking at a problem. For example, Airbnb recognized and connected a supply of unoccupied lodging with travelers’ demand for affordable and unique accommodations. The founders of Uber and Lyft built billion-dollar businesses by connecting people who needed rides with drivers willing to provide them. Believing in secrets (untapped potential) and looking for them enabled these entrepreneurs to see an opportunity no one else noticed.
  • Expanding your market: How you choose and expand your market are critical to your success. Start with a small market because it will be easier to dominate than a large one. Once you’ve dominated a small market, slowly expand into related markets that are a bit wider. This was Amazon’s approach. Jeff Bezos’s long-term goal was to dominate online retail but he chose to start by selling only one thing—books. After a successful start with books, the company began selling CDs, videos, and software and gradually expanded to other categories until it became the dominant online retailer.
  • Disrupting: When entrepreneurs think of their companies as disrupting a market, they’re focusing on things as they currently are, rather than coming from a new perspective. It’s far more important to focus on the new product you’re creating than on how old companies will react to it. If disrupting existing companies is part of your company’s identity, then your company isn’t new and isn’t likely to become a monopoly.
  • Being a ‘last mover’: The “first mover advantage” means getting into a new market first and taking a substantial share of the market before anyone else gets there. But moving first is a tactic, not a goal." Your goal is to generate cash flows for the future. You do this by starting with a small slice of the market (being the first mover) and gradually expanding, dominating each new slice until you own the ultimate market for your product. You want to be the last mover—the one who makes the last spectacular improvement in a market that ensures years of monopoly profits.
  • Understanding the power law: The power law describes a common phenomenon in which small changes can have disproportionate results. Startups should operate according to the power law. A narrow focus on the right thing will produce the greatest results:
    • One market will bring the greatest success.
    • One distribution strategy will outperform all others.
    • Some moments will count more than others.
    • What’s most important probably won’t be obvious.

4 Ways Of Thinking About Future:

  1. Definite Pessimism: definite pessimist believes the future is certain to be bleak and therefore tries to prepare for it.
  2. Indefinite Pessimism. An indefinite pessimist expects a grim future, but he doesn’t know what to do about it or have any plans to do anything.
  3. Definite Optimism. The definite optimist has a concrete plan for the future and strongly believes in that future being better than today.
  4. Indefinite Optimism. The indefinite optimist is bullish on the future but lacks any design and plan for how to make such a future possible.

Matrix below displays correlation between the history and global way of thinking

image

CleanTech Companies VS Tesla

The start of the 21st century was marked by a boom in clean technology, spurred by several high-profile environmental disasters: smog in Beijing that was so bad people couldn’t see or breathe, arsenic polluting the water in Bangladesh, and blockbuster hurricanes in the U.S (Ivan and Katrina) prompting worries about future effects of global warming.

Entrepreneurs launched thousands of green technology companies and investors kicked in more than $50 billion. However, the rush to cleantech created a bubble. Most cleantech companies failed—Solyndra was one of the most notorious. When the maker of solar panels collapsed it left taxpayers on the hook for over $500 million. Over 40 solar companies folded or filed for bankruptcy in 2012.

Conservatives blamed the crash on government involvement. In reality, most cleantech companies crashed because they failed to adequately address the seven questions crucial for new companies:

  1. Engineering: Is your technology a significant advance or only incremental improvement?
  2. Timing: Is this the right time to sell this technology?
  3. Monopoly: Are you targeting a big share of a small market?
  4. People: Do you have the right people on your team?
  5. Distribution: Do you have a plan to sell your product?
  6. Durability: Will you dominate your market in the next 10 to 20 years?
  7. Secret: Have you identified a unique opportunity overlooked by everyone else?

A startup won’t succeed without a business plan that addresses each question. If your answers are weak, your company will fail—however, with a solid answer for each, you'll be on your way to having a great business.

As examples of how not to run your business, here’s a look at cleantech company responses to each question.

As examples of how not to run your business, here’s a look at cleantech company responses to each question.

  • Engineering: As previously noted, a great company should have proprietary technology that far exceeds that of the nearest rival. Cleantech companies rarely offered improvements two times better, let alone 10 times better. In Solyndra’s case, its product was worse: the company’s cylindrical solar cells didn’t work as well as flat ones. Companies must aim for 10 times better improvement because incremental improvements often are invisible to the user. Your superiority is clear only when your improvement is 10 times better.
  • Timing: Entrepreneurs believed cleantech’s time had come. In pitching the government and investors, they compared cleantech advances to microprocessor advances; however, solar cell efficiency improvements were much slower than microprocessor improvements, which had improved exponentially since 1970. In comparison, solar cell efficiency only improved from 6% to 25% efficiency in 50 years.
  • Monopoly: The huge energy market was ruthlessly competitive. Because the trillion-dollar market was so huge, many companies thought they could get a piece of it, that there was room for everyone. But many had similar technology and failed to stand out, especially in a global market.
  • People: Many cleantech companies that failed lack technical talent; they were run by non-tech teams of salesmen and executives who could raise capital and government subsidies, but who lacked the expertise to develop and sell outstanding products.
  • Distribution: Cleantech companies lobbied investors and government but failed to plan how to sell and deliver their products. An example was the Israeli electric vehicle company Better Place. It had decent technology—a swappable battery—but made its cars too hard for customers to buy. Customers had to jump through many hoops, including proving they lived near a battery swapping station, promising to follow certain routes, and signing up for a fueling subscription. The company only sold 1,000 cars before filing for bankruptcy.
  • Durability: As noted previously, an entrepreneur should aim to be the last mover in her market, which requires asking what the market and the company will be like in 10 and 20 years. Most cleantech companies had no answer and ended up blaming China for their failures. However, they could have predicted that China would act to give its manufacturers an edge and planned for it. Besides not anticipating competition, cleantech made bad assumptions about the energy market as a whole. They didn’t foresee the fracking boom, which knocked down fossil fuel prices and blew up most renewable energy business models.
  • Secret: The belief that solar energy had huge potential had become conventional wisdom in the early 2000s. Cleantech and government officials alike embraced solar. But great companies aren’t built on convention but on secrets: truths that others don’t see.

A Cleantech Success: Tesla

Tesla is one of the few cleantech companies that lasted because it had good answers for the seven entrepreneurial questions:

  • Technology: Tesla’s technology is superior, but what made Tesla really stand out was its ability to integrate many components into one great product, the (2013) Tesla Model S sedan.
  • Timing: CEO Elon Musk seized the opportunity to secure a half-billion-dollar loan from the government in the small window before the government pulled the plug on cleantech subsidies.
  • Monopoly: Tesla started with a tiny submarket it could dominate: high-end electric sports cars. It then moved into the luxury electric sedan market and is positioned to continue expanding into broader markets.
  • Team: Musk assembled a team good at both engineering and sales.
  • Distribution: Tesla decided to own the distribution chain. It sells and services its cars in its own stores. The cost is higher than for traditional dealership distribution, but the approach gives it control over the customer experience, strengthens its brand, and saves money in the long run.
  • Durability: By getting a head start, moving faster than anyone else, and establishing a strong brand, Tesla is set to extend its lead in the future.
  • Secrets: Tesla realized that while rich people wanted to look green by buying an electric car, they’d rather look green and cool at the same time—if he gave them the opportunity, they’d choose his sleek car over the boxy Prius. Tesla created a product based on the secret that cleantech was in large part a social phenomenon.

Types of Distribution Channels

There is a place where you want to be regarding distribution and sales. Types of sales:

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  1. Complex Sales - $100,000 - $1,000,000 CAC One example is SpaceX, which is the rocket company started by Elon Musk from PayPal. The SpaceX team has been working on their rocketry systems in Southern California for about 8 years now. Their basic vision is to be the first to send a manned mission to Mars. They went about doing this in a phenomenal way. Time constrains make it impossible to relate all of Elon’s many great sales victories. But if you don’t believe that sales grandmasters exist, you haven’t met Elon. He managed to get $500m in government grants for building rockets, which is SpaceX, and also for building electric cars, which is done by his other company, Tesla.
  2. Personal Sales - $10,000 - $100,000 CAC As we move from big, complex sales to sales, the basic difference is that the sales process involves a ticket cost of $10k-100k per deal. Things are more cookie cutter. You have to figure out how to build a scalable process and build out a sales team to get a large number of people to buy the product. David Sacks was a product guy at PayPal and went on to found Yammer. At PayPal, he was vehemently anti-sales and anti-BD. His classic lines were: “Networking is not working!” and “People doing networking are not working!” But at Yammer, Sacks found that he had to embrace sales and build out a scalable distribution system. Things are different, he says, because now the sales people report to him. Because of its focus on distribution, Yammer was able to hire away one of the top people from SalesForce to run its sales team.
  3. The Missing Middle There is a fairly serious structural market problem that’s worth addressing. On the right side of the distribution spectrum you have larger ticket items where you can have an actual person driving the sale. This is Palantir and SpaceX. On the extreme left-hand side of the spectrum you have mass marketing, advertising, and the like. There is quite possibly a large zone in the middle in which there’s actually no good distribution channel to reach customers. This is true for most small businesses. You can’t really advertise. It wouldn’t make sense for ZocDoc to take out a TV commercial; since there’s no channel that only doctors watch, they’d be overpaying. On the other hand, they can’t exactly hire a sales team that can go knock on every doctor’s door. And most doctors aren’t that technologically advanced, so internet marketing isn’t a perfect solution. If you can’t solve the distribution problem, your product doesn’t get sold—even if it’s a really great product.
  4. Marketing - <$100 CAC Further to the left on the distribution spectrum is marketing. The key question here is how can one advertise in a differentiated way. Marketing and advertising are very creative industries. But they’re also quite competitive. In order to really succeed, you have to be doing something that others haven’t done? To gain a significant advantage, your marketing strategy must be very hard to replicate.
  5. Viral Marketing - <$1 CAC Viral marketing is, of course, the classic distribution channel that people tend to think of as characteristic of Internet businesses. There are certainly ways to get it to work. But it’s easy to underestimate how hard it is to do that. William Shatner and James Doohan seemed similar. In fact they were a world apart. Salesmen may seem similar. But some get Cadillac’s, while others get steak knives. Still others get fired and end up as characters in novels. PayPal’s initial user base was 24 people. Each of those people worked at PayPal. They all knew that getting to viral growth was critical. Building in cash incentives for people to join and refer others did the trick. They hit viral growth of 7% daily—the user base essentially doubled every 10 days. If you can achieve that kind of growth and keep it up for 4-5 months, you have a user base of hundreds of thousands of people.