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

Exposing what is mortal and unsure
To all that fortune, death, and danger dare,
Even for an eggshell. Rightly to be great

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Is not to stir without great argument,
But greatly to find quarrel in a straw
When honor’s at the stake.
For Hamlet, greatness means willingness to fight for reasons as thin as an eggshell:
anyone
would fight for things that matter; true heroes take their personal honor so
seriously they will fight for things that 
don’t
matter. This twisted logic is part of human
nature, but it’s disastrous in business. If you can recognize competition as a destructive
force instead of a sign of value, you’re already more sane than most. The next chapter is
about how to use a clear head to build a monopoly business.

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5

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LAST MOVER ADVANTAGE
E
SCAPING COMPETITION
will give you a monopoly, but even a monopoly is only a great business if
it can endure in the future. Compare the value of the New York Times Company with
Twitter. Each employs a few thousand people, and each gives millions of people a way to
get news. But when Twitter went public in 2013, it was valued at $24 billion—
more than
12 times
the Times’s market capitalization—even though the Times earned $133 million
in 2012 while Twitter 
lost
money. What explains the huge premium for Twitter?
The answer is cash flow. This sounds bizarre at first, since the Times was profitable
while Twitter wasn’t. But a great business is defined by its ability to generate cash flows
in the future
. Investors expect Twitter will be able to capture monopoly profits over the
next decade, while newspapers’ monopoly days are over.
Simply stated, the value of a business today is the sum of all the money it will make in
the future. (To properly value a business, you also have to discount those future cash
flows to their present worth, since a given amount of money today is worth more than the
same amount in the future.)
Comparing discounted cash flows shows the difference between low-growth
businesses and high-growth startups at its starkest. Most of the value of low-growth
businesses is in the near term. An Old Economy business (like a newspaper) might hold
its value if it can maintain its current cash flows for five or six years. However, any firm
with close substitutes will see its profits competed away. Nightclubs or restaurants are
extreme examples: successful ones might collect healthy amounts today, but their cash
flows will probably dwindle over the next few years when customers move on to newer
and trendier alternatives.
Technology companies follow the opposite trajectory. They often 
lose
money for the
first few years: it takes time to build valuable things, and that means delayed revenue.
Most of a tech company’s value will come at least 10 to 15 years in the future.

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In March 2001, PayPal had yet to make a profit but our revenues were growing 100%
year-over-year. When I projected our future cash flows, I found that 75% of the
company’s present value would come from profits generated in 2011 and beyond—hard
to believe for a company that had been in business for only 27 months. But even that
turned out to be an underestimation. Today, PayPal continues to grow at about 15%
annually, and the discount rate is lower than a decade ago. It now appears that most of
the company’s value will come from 2020 and beyond.
LinkedIn is another good example of a company whose value exists in the far future.
As of early 2014, its market capitalization was $24.5 billion—very high for a company
with less than $1 billion in revenue and only $21.6 million in net income for 2012. You
might look at these numbers and conclude that investors have gone insane. But this
valuation makes sense when you consider LinkedIn’s projected future cash flows.

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The overwhelming importance of future profits is counterintuitive even in Silicon
Valley. For a company to be valuable it must grow