One to n: Market Size, Not Innovations

In his popular Zero to One, Peter Thiel singles out original product development as the most important step for entrepreneurs to make. After that, “it’s easier to copy a model than to make something new. Doing what we already know how to do takes the world from 1 to n, adding more of something familiar.”

Of course, building a prototype is important. But it’s not the most important problem in the hi-tech industry. More often, startups passes the zero-to-one step trivially. They fail in what comes next: in going from one to n.

Right from the preface, Peter Thiel supports his thesis with the cases of Microsoft, Google, and Facebook. But these companies never went from zero to one. Their core products were invented and marketed by their predecessors. Unix was there ten years before Microsoft DOS release. AltaVista and Yahoo! preceded Google. LiveJournal had pioneered social networks five years before Mark Zuckerberg founded Facebook. Do a small research on any big company mentioned in the book’s index, and you’ll find someone else who did zero to one before the big and famous.

Now, there’s an obvious merit in what Microsoft, Google, and Facebook did. Reaching billions of customers is more difficult than being a pioneer. However, it principially changes the startup problem. Going from zero to one doesn’t make a great company. Going from one to n does.

And startups pay little attention to their one-to-n problem. Take the minimum: the product’s target market, the n itself. In their stylized business plans, founders routinely misestimate their ns by a few digits. For one example, developers of a healthy-lifestyle app equated this app’s market to all obesity-related spendings, including things like liposuction. Naturally, the number was large, but it wasn’t their n.

Many founders sacrifice several years of their lives to ideas with overestimated ns. Back to Thiel’s examples, Microsoft, Google, and Facebook knew their huge ns before their grew big. Moreover, they purposefully increased their ns by simplifying their products on the way. In the end, each human being with Internet access happened to be their potential (and often actual) customer.

What do other founders do, instead? They see a monster like Microsoft and run away from competition into marginal niches. A marginal niche leaves them with a small n, while requiring about the same several years of development. In fact, it’s cheaper to fail early with such a niche product because if a modest project survives, it distracts its founders from bigger markets. The project functions like a family restaurant: good people, nice place, but, alas, no growth.

How to escape competition right? For example, by building a path to a big market right from the start, as Y Combinator suggests when it welcomes a possible competitor to Google.

Here, Zero to One again may mislead if taken literally. The book’s emphasis on innovation and technology sidelines simple facts about successful companies. Successful companies are lazy innovators. In their early years, Microsoft, Google, and Facebook were too small to invest in serious innovations. They’ve been built on simple technologies. Google run on low-cost consumer hardware and Facebook was a simple content management system written on PHP in a few weeks. Common-sense creativity, not fancy innovations, supported these companies. While their simple initial products remain critical to business performance, their graveyard of failed zero-to-one innovations grows (look at Google’s).

The path to a big market is perpendicular to innovations. In the innovation scenario, founders become scientists who dig a single topic until the zero-to-one moment. Such as very advanced DeepMind, which was virtually unknown before Google’s acquisition. In the big market scenario, founders devote their attention to marketing, namely, how to earn new users and retain their loyalty. Often, this task is easier to complete with handwritten postcards to early adopters than spending years teaching a computer to recognize cat videos. And it’s clearly not a single zero to one step, but many steps back and forth, with the foreseeable n in mind.

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