Zero to One: Notes on Startups, or How to Build the Future

Viral Marketing
A product is viral if its core functionality encourages users to invite their friends to

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become users too. 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 the 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.
A t PayPal, our initial 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 cost 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 emigrants 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 “PowerSellers,”
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 this segment and became
the
payments platform for eBay, there was no catching up—on eBay or anywhere else.
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 get just 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 investors. There is a “human resources” version of the lie that great
products sell themselves: “This 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

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be banging down our door to invest.” Clamor 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 will
admire your company without a public relations 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.

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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
on 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.

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12

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MAN AND MACHINE
A
S MATURE INDUSTRIES
stagnate, information technology has advanced so rapidly that it has now
become synonymous with “technology” itself. Today, more than 1.5 billion people enjoy
instant access to the world’s knowledge using pocket-sized devices. Every one of today’s
smartphones has thousands of times more processing power than the computers that
guided astronauts to the moon. And if Moore’s law continues apace, tomorrow’s
computers will be even more powerful.
Computers already have enough power to outperform people in activities we used to
think of as distinctively human. In 1997, I BM’s Deep Blue defeated world chess
champion Garry Kasparov. 
Jeopardy!
’s best-ever contestant, Ken Jennings, succumbed
to IBM’s Watson in 2011. And Google’s self-driving cars are already on California roads
today. Dale Earnhardt Jr. needn’t feel threatened by them, but the 
Guardian
worries (on
behalf of the millions of chauffeurs and cabbies in the world) that self-driving cars
“could drive the next wave of unemployment.”
Everyone expects computers to do more in the future—so much more that some
wonder: 30 years from now, will there be anything left for people to do? “Software is
eating the world,” venture capitalist Marc Andreessen has announced with a tone of
inevitability. VC Andy Kessler sounds almost gleeful when he explains that the best way
to create productivity is “to get rid of people.” 
Forbes
captured a more anxious attitude
when it asked readers: 
Will a machine replace you?
Futurists can seem like they hope the answer is yes. Luddites are so worried about
being replaced that they would rather we stop building new technology altogether.
Neither side questions the premise that better computers will necessarily replace human
workers. But that premise is wrong: computers are complements for humans, not
substitutes. The most valuable businesses of coming decades will be built by
entrepreneurs who seek to empower people rather than try to make them obsolete.

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SUBSTITUTION VS. COMPLEMENTARITY
Fifteen years ago, American workers were worried about competition from cheaper
Mexican substitutes. And that made sense, because humans really can substitute for each
other. Today people think they can hear Ross Perot’s “giant sucking sound” once more,
but they trace it back to server farms somewhere in Texas instead of cut-rate factories in
Tijuana. Americans fear technology in the near future because they see it as a replay of
the globalization of the near past. But the situations are very different: people compete
for jobs and for resources; computers compete for neither.
Globalization Means Substitution
When Perot warned about foreign competition, both George H. W. Bush and Bill Clinton
preached the gospel of free trade: since every person has a relative strength at some