Summary of ‘Zero to One’, Chapter 2: party like it’s 1999
Summary: Market bubbles prove that conventional wisdom is often wrong. The 90s pinned all financial hopes on the internet, and overvalued many companies; this crashed in March 2000. Software business principles today are a Pavlovian reaction: at all costs, avoid the pain of another crash! Actually, these principles are errors which cut off the possibility of creating new things (such as Google or PayPal). Error 1: “work incrementally; distrust visionaries” (actually, we need visionaries). Error 2: “be lean/agile because the future is unknowable” (actually, it’s not unknowable and any plan is better than no plan). Error 3: “improve markets, don’t create them, because they might be bubbles” (actually, you should avoid competition at all costs). Error 4: “focus on product, not sales; sales is wasteful” (actually, a product is useless without distribution).
Conventional beliefs are frequently wrong. This is proved by bubbles such as the Dot-com crash. The conventional belief then was that companies were valued by number of clicks, not by their profits. The market popped when people realized that clicks were not inherently valuable.
People remember the 90s as optimistic, but they weren’t! Silicon Valley in the 80s was about economics, not computer science. The internet changed this. By the mid-90s, Netscape, Yahoo and Amazon very quickly became incredibly valued. Aside from this, there were severe economic problems globally resulting in bailouts. With these problems, people pinned all their hopes on the internet “New Economy”. Dot-com mania from 1998 to 2000 was a gold rush; a mad rush of starting new companies. I was scared because it seemed that people would believe anything was valuable.
But PayPal, which I was running, had a grander vision than most: to replace the $ with an internet currency. People could transfer money to each other by email. But we needed scale for it to be profitable, so we paid people $10 to sign up, and gave them $10 every time they referred someone! This was rational, because this customer acquisition cost (CAC) was greater than the customer lifetime value (CLV) produced by taking a cut of transfers. We were valued up to $500M, and took huge loans just before the bubble popped in March 2000.
The dot-com crash affected the whole world. It was seen as divine judgment against tech optimism. One lesson learned was to see the future as indefinite; we should plan in months, not years or decades. People moved to real estate as a perceived unbubbleable economy; but this just caused another bubble.
Four big business ideas today are the direct result of dot-com crash:
- incrementalism is the only safe path (because the crash was caused by visionaries).
- stay “lean”, i.e. “unplanned” (because planning is impossible when the future is unknowable).
- Improve on markets, don’t create (because new markets might be bubbles).
- focus on product, not sales (because the dot-com was salesmen and advertising, not backed by a real product).
These lessons are dogma; the opposites are more true!
- be bold, not trivial.
- A bad plan is better than no plan.
- Competition destroys profit.
- Product is useless without sales!
The dot-com really was overvalued. But the optimistic attitudes of the 90s were necessary to create new things (think Google, PayPal, etc). We need those attitudes again today.
More by Jim
- Project C-43: the lost origins of asymmetric crypto
- How Hacker News stays interesting
- My parents are Flat-Earthers
- The dots do matter: how to scam a Gmail user
- The sorry state of OpenSSL usability
- I hate telephones
- The Three Ts of Time, Thought and Typing: measuring cost on the web
- Granddad died today
- Your syntax highlighter is wrong
I wrote this because I felt like it. This post is not associated with my employer. Found an error? Edit this page.