Zero to One (by Peter Thiel) Summary - Chapter 7

The following is a summary of Zero to One: Notes on Startups or How to Build the Future. I do not claim to own any of the book's original work, the following is simply a bulleted summarization with a few direct quotes. All copyrights and trademarks belong to their respective owners. Chapter 7 - Follow the Money:
  • Pareto Principle (80-20 Rule) states that 80% of the effects come from 20% of the causes
    • Thiel says this effect also affects many social and natural things
  • This chapter shows that: “where investors try to profit from exponential growth in early stage, companies a few companies attain exponentially greater value than all others.
  • The Power Law of Venture Capital
    • VCs fund early stage companies in hopes of profit
      • raise money from wealthy people, pool it, and fund/invest it
    • If the company is successful, they take a chunk (usually 20%)
    • They make money when the companies they fund go public or are bought
    • Usually have a lifespan of 10 years (Companies take time to grow)
    • Most-venture backed companies fail and don’t get to be bought/IPO
    • VCs lose money at first, then hope the value of their funded companies will grow exponentially
    • VCs know that some funded ventures will fail
      • They try to balance their portfolio so that the winners counterbalance the losers
        • This pattern usually fails
        • Ventures do not follow normal distribution
          • They follow a power law
          • “...a small handful of companies radically outperform all others
    • “The biggest secret in venture capital is that the best investment in a successful fund equals or outperforms the entire rest of the fund combined
      • Implies that VCs should only invest if the company has the potential to return value of the entire fund
    • Since funds have great amounts of money to get the funds big returns, they have to net a lot of money.
      • $1.5 billion fund nets 80 million on a venture, would need 19 more to break even
    • This is why investors put a lot of money into single companies
    • “...every single company in a good venture portfolio must have the potential to succeed on a vast scale
  • Less than 1% of businesses each year are VC backed
    • .2% of GDP in funding
    • But, venture backed companies created 11% of private sector jobs
    • and 21% of GDP
  • “One market will probably be better than all others…”
  If you've liked this summary, I highly recommend you get the full book here: Zero to One: Notes on Startups, or How to Build the Future < Previous Chapter | Overview | Next Chapter > - Alec Kriebel