You can’t just add value anymore – investors want entire new markets

One of the keys to being a successful investor is the ability to find value, and a November holiday to Morocco, outside of school holidays and peak season, is as good a demonstration as any.

The false economies of kind-of hot temperatures and periods of rainfall aside, the real value of the time away, as ever, was finding time to catch up on some long overdue reading. So it is that I found myself racing through Peter Thiel’s new book Zero to One.

There can be no denying that Thiel is a man who knows a few things about successful startups. He was a co-founder of PayPal and made the first outside investment in Facebook, and now is chair of Palantir Technologies, a red hot data analytics firm he co-founded.

Having myself founded the sum total of zero startups I wouldn’t even deign to criticise to book, which is an edited collection of notes from a Stanford MBA class he delivered on the subject. And anyway, this is not a book review.

What I will say is that it’s a book about startups, written by a guy who knows a lot about startups, so if you’re in the business you should definitely read it.

Spray and pray

Nevertheless, I did want to pick up on one point he makes about developing new monopolies, which is the essence of his concept of “zero to one”. It is easier to copy a model than to make something new, says Thiel. Adding more of something familiar takes the world from 1 to n, whereas a new creation goes from 0 to 1.

For any tech, and growth, investor the benefits of diversification have long been espoused in theory and in practise.  The turnover of companies is high and it is a sensible demonstration of humility to spread investments around.

As much as we perennially attribute guru status to those that have been successful in hindsight, there are many factors that lead to success that cannot be anticipated even with the best products and best people.

The idea when it comes to tech in particular is that the magnitude of the small number of winners will compensate for the many that end up worthless. Superficially the “spray and pray” approach is well known.

The golden tickets

What Thiel points out is that this only really works when every company in the portfolio is capable of succeeding at vast scale. Individually, they all must have the potential of outperforming the rest of the portfolio combined. And that can only occur for companies taking a market from 0 to 1.

With the easiest capital-raising period of this cycle probably behind us it seems like good advice for those starting out to try to be companies that can offer this to their investors.

In the end the concept is not that much of a revolution. It is basically saying find a niche that is underserved and potentially large.

Nevertheless, as with the rest of the book, it is a useful strategy tip from a startup veteran,. And on the subject of value investments, at £17 it’s a heck of a lot cheaper than paying for a Stanford MBA.

Image Credit: Wikimedia / GRuban