How To Make Wealth by Paul Graham
Your best bet would be to start or join a startup that makes things that lots of people want.
Table of Contents
- Startup is a way to compress your whole working life into a few years
- Money is not wealth
- The people most likely to make wealth are the ones who are good at making things, the craftsmen
- You don’t need to join a company to make something people want
- Measurement and leverage are 2 keys things to get rich
- Smallness = Measurement
- Technology = Leverage
- It’s a good idea to get bought, if you can
Startup is a way to compress your whole working life into a few years
Imagine the stress of working as a software engineer for your whole life, and saving every penny of your salary, and retiring with a million dollars. In a startup, instead of working at a low intensity for 40 years, you compress all this stress, work as hard as you possibly can for 4 years. At the end of the day, to make a million dollars, you have to endure a million dollars’ worth of pain.
Money is not wealth
Wealth is stuff we want: food, clothes, houses, cars, gadgets, travel to interesting places, and so on. You can have wealth without having money. If you had a magic machine that could on command make you a car or cook you dinner or do your laundry, or do anything else you wanted, you wouldn’t need money. Whereas if you were in the middle of Antarctica, where there is nothing to buy, it wouldn’t matter how much money you had.
Money is a way of moving wealth. It is a side effect of specialization, where most of the things you need, you can’t make it yourself but to get it from someone else using money as a medium of exchange. Now, people think that what a business does is make money but what it really does is to make wealth. They do something people want.
The people most likely to make wealth are the ones who are good at making things, the craftsmen
A programmer can sit down in front of a computer and create wealth by making good software. There are also variations in the rate at which wealth is created. A great programmer could create a million dollars worth of wealth in a couple weeks while a mediocre one over the same period will generate zero or even negative wealth introducing bugs.
You don’t need to join a company to make something people want
In a company, the work you do is averaged together with a lot of other people’s. You may not even be aware you’re doing something people want. Your contribution may be indirect. But the company as a whole must be giving people something they want, or they won’t make any money. And if they are paying you x dollars a year, then on average you must be contributing at least x dollars a year worth of work, or the company will be spending more than it makes, and will go out of business.
A company is a group of people working together to do something people want. Doing something people want is what matters, not joining the group.
Measurement and leverage are 2 keys things to get rich
Since ordinary employee’s performance can’t usually be measured effectively, it’s hard to start working 10x harder and get paid 10x as much. Salesmen are an exception because it’s easy to measure how much revenue they generate. Same with top management jobs as they are held responsible for the performance of the entire company. That said, to get rich, you need to be in a position where your performance can be measured and you have to have leverage, in the sense that the decisions you make have a big effect. For example, a lead actor in a movie’s performance can be measured in the gross of the movie and they can have leverage as their performance can make/break it. Similar to CEO of a company as their performance is the company’s performance and they have the ultimate leverage over the company.
A good hint to the presence of leverage is the possibility of failure as if there is big potential for gain there must also be a terrifying possibility of loss. If there is no danger there is almost certainly no leverage.
Smallness = Measurement
You don’t have to become a CEO or movie star to be in a situation with measurement and leverage. All you need to do is be part of a small group working on a hard problem, and that is a startup.
When the startup is small, you are thereby fairly close to measuring the contributions of individual employees. The result of working 10x harder is noticeable, measurable and can get paid with 10x as much. And because startups tend to get founded by self-selecting groups of ambitious people who already know one another, the level of measurement is more precise than you get from smallness alone. A startup is not merely ten people, but ten people like you.
Technology = Leverage
Startups offer leverage because they make money by inventing new technology/technique. When you solve a technical problem that a lot of people care about, you help everyone who uses your solution, its value is multiplied. That’s leverage.
There is a natural fit between smallness and solving hard problems. Technology moves fast as it could be worthless in a couple years. Small companies don’t have layers of bureaucracy to slow them down. Technical advances tend to come from unorthodox approaches while small companies are less constrained by convention. In contrast, big companies can develop technology but can’t do it fast nor reward appropriately for their employee’s effort. However, it’s possible that big companies can take your market away overnight. In order to prevent that from happening, you must always seek hard problems.
Here, as so often, the best defense is a good offense. If you can develop technology that’s simply too hard for competitors to duplicate, you don’t need to rely on other defenses. Start by picking a hard problem, and then at every decision point, take the harder choice.
There’s still more hard things to come. One of which is that you can’t choose the point on the curve that you want to inhabit. When you’re running a startup, your competitors decide how hard you work. The other is that the payoff is only on average proportionate to your productivity. Let’s say you’re 10x as productive. In reality, it is not that get paid 10x as much, but between zero and a thousand times as much. If the mean is 10x, the median is probably zero.
It’s a good idea to get bought, if you can
Running a business is different from growing one. It is just as well to let a big company take over once you reach cruising altitude. It’s also financially wiser, because selling allows you to diversify. What would you think of a financial advisor who put all his client’s assets into one volatile stock?
Getting bought is also an art in its own right. The hard part is getting potential buyers to act. For most people, the most powerful motivator is not the hope of gain, but the fear of loss, that is the prospect that one of their competitors will buy you. The second worry is that, if they don’t buy you now, you’ll grow rapidly and cost more to acquire latter, or even become a competitor.
In both cases, what it all comes down to is users. They don’t care about how valuable your technology is but the number of users you have. Users are the only real proof that you’ve created wealth. If no one uses your software, you haven’t made what they want. Again, you’re not just solving problems. You’re solving problems that that users care about.
Tagged: #blog, #startup, #wealth