7 Important Questions for Emerging Entrepreneurs Courtesy of Peter Thiel

Jun 22, 2020
Created by the author — original image from Kevin Moloney/Fortune Brainstorm Tech

 

Half the internet tells you to just do it. Just start. Yet 90% of businesses fail so why do what everyone else is doing.

Entrepreneurship can suffer from survivor bias. We only hear about the superstars because the ones that fail don’t even get big enough to be on our radar. It gives us a lofty idea of everyone starting a company and becoming rich. Business isn’t that simple.

‘Failing to plan is planning to fail’ — Benjamin Franklin

There are simple questions you should ask yourself first and they aren’t difficult. If your idea is as good as you think it is of course. It’s better to struggle to answer the question now but find a solution then to only think of the question when it’s too late.

As someone who founded Paypal and invested in Facebook early, Peter Thiel is a master at creating successful businesses. In Zero To One, he outlines seven critical questions all startup owners should ask themselves.

 

1. The Engineering Question

Can you create breakthrough technology instead of incremental improvements?

We aren’t entitled to start a business doing whatever we want and expect customers to come running. Nobody will buy your cakes if they taste like dirt. You should know your product is at least good but it’s not enough. Peter Thiel says you need to be ten times better than the competition to get anywhere.

Take Theranos, they had the awesome idea of a home testing kit for a huge variety of diseases. There was only one problem. They couldn’t build it. All the lies and marketing tricks couldn’t save them because they just did not have the skill to deliver. Elizabeth Holmes, the founder, is now facing criminal charges. If you talk the talk, you better be able to walk the walk.

Whereas Salesforce went from nothing to a multi-billion dollar company. Marc Benioff and his team were not only able to dream up an inspiring solution to business problems but bring it to life. They met their potential customers’ needs in a way far better than what giants such as Oracle and SAP were doing.

To be more like Salesforce and less like Theranos, take the time to map out how you are going to create something worth people taking notice of.

 

2. The Timing Question

Is now the right time to start your particular business?

Your company’s success will be determined by many factors outside of your control. Sometimes these are unpredictable like the global pandemic but you can make an educated guess in normal times.

There are 6 key aspects to consider using the PESTEL framework:

  • Political — Policy changes can kill a company’s business model overnight. Yet most plans are transparent. It’s not a good idea to create a social media platform in North Korea right now.
  • Economic — Some companies thrive when everyone is doing well and some swim against the flow. Dominos pizza does well in recessions because fewer people are willing to go to expensive restaurants.
  • Social — Society, and culture are dynamic so it’s important to stay up to date. The news may focus on young people but the faster-growing market is the silver generation in Western countries.
  • Technological — You can be too early with technology because people aren’t ready to accept it yet. Google glasses is a perfect case of a product launched before its time.
  • Environmental — We’ve seen a big push toward sustainability in recent years. It’s a bad time to be a plastic straw manufacturer.
  • Legal — Check out the expected law changes in your industry. It would be pretty embarrassing to market your idea and then find out it has become illegal.
 

3. The Monopoly Question

Are you starting with a big share of a small market?

It’s easy to believe your own hype. You probably aren’t going to force Google out of the search business with your first attempt at a web search. Your idea may be unique to you. Yet is there a distinct market for it or do you need to take customers away from other products?

Future generations may be completely unaware Amazon originally only sold books. It took several years for it to dominate this market before Jeff Bezos expanded. Then Amazon dominated e-commerce. Then it expanded again. Now it is locked in a battle for dominance for the cloud infrastructure market. If Jeff Bezos had tried to do this when he started, we’d hear amazon and think rainforest.

The reason Amazon’s model works is monopolies earn supernormal profits. These can then be reinvested to innovate and drive entry to a new market. It forms a virtuous circle. Investors believe you can replicate the success, throw more money at you and make it more likely you’ll be successful.

Choose a war you believe you can win. Then increase your strength and go for a bigger market.

 

4. The People Question

Do you have the right team?

So many entrepreneurs try to do everything themselves. Even if they have a team, they micromanage because it needs to be exactly how they want. None of us are experts in all fields though. We need the right team around us to fill our gaps. Only when your team has the correct blend of skills can your idea achieve it’s potential.

It’s not just about skills though. Culture is critical to your success. Your leadership team needs to challenge each other respectfully. When there’s toxic tension between founders then there’s no need to worry about the competition. You’re sabotaging yourselves already.

Pixar and Disney Animation are fantastic examples. Both shared similar technology but opposite cultures. Ed Catmull and John Lasseter created an environment of rapid innovation. Their philosophy of radical candor spread throughout the company and empowered everyone to produce their best work. Disney Animation was stifled by rigid rules from men in suits instead.

You must decide what kind of culture you want in your enterprise and be ruthless in choosing your people to reflect it.

 

5. The Distribution Question

Do you have a way to not just create but deliver your product?

I’ve been to 47 countries and no matter where I’ve been there’s always one product being sold. Take a guess. Yes, it’s Coca-Cola. You’ll see their famous red in both remote Indian villages and African jungle camps. Their distribution network is unparalleled and cracked markets that were supposedly uncrackable.

Now Coca-cola is an outlier but they had to think like a startup every time they wanted to grow their reach. They created a hub and spoke system for India. The lorries deliver to regional centers, which then use smaller trucks to deliver to more local centers then the last stage to the shack might use a cyclist or donkey cart!

It doesn’t matter how much people love Coca-cola if there’s no way for them to get their hands on it. When starting your business, this needs to be on your mind. People need to find your product to buy it otherwise all your work is wasted. For consumer products, it’s crucial to secure prime shelving space. For a web page, you must know how you will drive traffic.

 

6. The Durability Question

Will your market position be defensible 10 and 20 years into the future?

Economics teaches the first-mover advantage. If you’re the first player in a market then you gain extraordinary profits. Yet in reality, this can be shortlived as new companies pile in with innovations. Peter Thiel argues you should instead be the last mover. Aim to have a great innovation building on top of what the others have done.

There are four key ways to have a company durable in the long run:

  1. Proprietary technology — If you make something no one else can sell, it’s much harder for them to replace you. The adalimumab drug patent owned by AbbieVie earned them tens of billions!
  2. Network effects — Why did you join social media? Likely because other people had it. It’s true of all kinds of technology. Offices all over the world used Microsoft Excel because we knew everyone knew what it was.
  3. Economies of scale — Up to a point, the more you create something, the cheaper each unit becomes. Starbucks is way more profitable than other places because they can buy their beans in bulk.
  4. Strong branding — Nike clothing is the same as pretty much every other sports company. Yet it invested heavily in its brand so it is the only company associated with Michael Jordan and countless other stars.

 

 

7. The Secret Question

Have you identified a unique opportunity that others don’t see?

A typical venture capitalist hears over 500 pitches every year. It’s not hard to imagine there hear the same old stuff a lot. VR is the future. Cleantech is the future. Cryptocurrency is the future. When everyone has the same ideas, how can you possibly stand out?

Even if you get a lucky break, how long before a competitor does the same? Instead, invest your time into an area no one else thinks is worth it. Many world-changing products were dismissed when they began. This quote by film producer Darryl Zanuck about the television in 1946 has not aged well:

‘People will soon get tired of staring at a plywood box every night.’

More recently think about the iPad. I remember making fun of it myself. That is the next great Apple product? Tablets were seen as a minor product category but Steve Jobs redefined it. In 2011, Apple had over 50% of the multi-billion dollar growing market. It takes real genius to forge success when others think it’s impossible.

If you want spectacular results, you’ve got to do what others gave up on. Maybe you’ll be ridiculed at the start but you can laugh when you prove everyone wrong.

 

Summary

How did you do? I hope you answered all these questions confidently about your business. Good luck in building your empire.

Here’s a recap if you need to refer to these questions in the future:

  1. The Engineering Question: Can you create breakthrough technology instead of incremental improvements?
  2. The Timing Question: Is now the right time to start your particular business?
  3. The Monopoly Question: Is now the right time to start your particular business?
  4. The People Question: Are you starting with a big share of a small market?
  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?

Thank you for reading and I hope you have a wonderful day!

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