If you wanted to get rich, how would you do it? I think your best bet would be to start or join a startup.
A startup is a small company that takes on a hard technical problem.
Why do startups have to be small? Will a startup inevitably stop being a startup as it grows larger? And why do they so often work on developing new technology? Why are there so many startups selling new drugs or computer software, and none selling corn oil or laundry detergent?
Startups are not magic.
They don’t change the laws of wealth creation.
Economically, you can think of a startup as a way to compress your whole working life into a few years. Instead of working at a low intensity for forty years, you work as hard as you possibly can for four. This pays especially well in technology, where you earn a premium for working fast.
There are a lot of ways to get rich, and this essay is about only one of them. This essay is about how to make money by creating wealth and getting paid for it. There are plenty of other ways to get money, including chance, speculation, marriage, inheritance, theft, extortion, fraud, monopoly, graft, lobbying, counterfeiting, and prospecting. Most of the greatest fortunes have probably involved several of these.
Wealth is not the same thing as money.
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 do anything you wanted, you wouldn’t need money.
Wealth is what you want, not money. But if wealth is the important thing, why does everyone talk about making money?
Money is a side effect of specialization. In a specialized society, most of the things you need, you can’t make for yourself. If you want a potato or a pencil or a place to live, you have to get it from someone else.
The advantage of a medium of exchange is that it makes trade work. The disadvantage is that it tends to obscure what trade really means. People think that what a business does is make money.
The Pie Fallacy
A surprising number of people retain from childhood the idea that there is a fixed amount of wealth in the world. If you plan to start a startup, then whether you realize it or not, you’re planning to disprove the Pie Fallacy.
Money is not wealth. It’s just something we use to move wealth around.
Wealth has been getting created and destroyed (but on balance, created) for all of human history.
The people most likely to grasp that wealth can be created are the ones who are good at making things, the craftsmen.
But with the rise of industrialization there are fewer and fewer craftsmen. One of the biggest remaining groups is computer programmers.
Wealth can be created without being sold. Scientists, till recently at least, effectively donated the wealth they created. We are all richer for knowing about penicillin, because we’re less likely to die from infections. Hackers often donate their work by writing open source software that anyone can use for free.
What a company does, and has to do if it wants to continue to exist, is earn money. And the way most companies make money is by creating wealth. Companies can be so specialized that this similarity is concealed, but it is not only manufacturing companies that create wealth. A big component of wealth is location.
All a company is is a group of people working together to do something people want. It’s doing something people want that matters, not joining the group.
A job means doing something people want, averaged together with everyone else in that company.
In the right kind of business, someone who really devoted himself to work could generate ten or even a hundred times as much wealth as an average employee.
Companies are not set up to reward people who want to do this. You can’t go to your boss and say, I’d like to start working ten times as hard, so will you please pay me ten times as much?
Salesmen are an exception. It’s easy to measure how much revenue they generate, and they’re usually paid a percentage of it.
There is one other job besides sales where big companies can hire first-rate people: in the top management jobs. And for the same reason: their performance can be measured.
If you want to go faster, it’s a problem to have your work tangled together with a large number of other people’s. In a large group, your performance is not separately measurable– and the rest of the group slows you down.
Measurement and Leverage
To get rich you need to get yourself in a situation with two things, measurement and leverage. You need to be in a position where your performance can be measured, or there is no way to get paid more by doing more. And you have to have leverage, in the sense that the decisions you make have a big effect.
An example of a job with both measurement and leverage would be lead actor in a movie. Your performance can be measured in the gross of the movie. And you have leverage in the sense that your performance can make or break it.
CEOs also have both measurement and leverage. They’re measured, in that the performance of the company is their performance. And they have leverage in that their decisions set the whole company moving in one direction or another.
But you don’t have to become a CEO or a 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.
Smallness = Measurement
If you can’t measure the value of the work done by individual employees, you can measure the value of the work done by small groups.
That’s the real point of startups. Ideally, you are getting together with a group of other people who also want to work a lot harder, and get paid a lot more, than they would in a big company.
Technology = Leverage
Startups allow measurement because they’re small, and they offer leverage because they make money by inventing new technology.
Big companies can develop technology. They just can’t do it quickly. Their size makes them slow and prevents them from rewarding employees for the extraordinary effort required.
McDonald’s, for example, grew big by designing a system, then franchise it, almost like a programing a replicable software.
Ditto for Wal-Mart. Sam Walton got rich not by being a retailer, but by designing a new kind of store.
Use difficulty as a guide not just in selecting the overall aim of your company, but also at decision points along the way. So, search for difficult problems that big corporations cannot compete with you in the research phase.
I can remember times when we were just exhausted after wrestling all day with some horrible technical problem. And I’d be delighted, because something that was hard for us would be impossible for our competitors.
This is not just a good way to run a startup. It’s what a startup is.
Venture capitalists know about this and have a phrase for it: barriers to entry. If you go to a VC with a new idea and ask him to invest in it, one of the first things he’ll ask is, how hard would this be for someone else to develop?
It’s common for a startup to be developing a genuinely good product, take slightly too long to do it, run out of money, and have to shut down.
A startup is like a mosquito. A bear can absorb a hit and a crab is armored against one, but a mosquito is designed for one thing: to score. No energy is wasted on defense. The defense of mosquitos, as a species, is that there are a lot of them, but this is little consolation to the individual mosquito.
Startups, like mosquitos, tend to be an all-or-nothing proposition.
The all-or-nothing aspect of startups was not something we wanted.
We would have much preferred a 100% chance of $1 million to a 20% chance of $10 million, even though theoretically the second is worth twice as much.
The closest you can get is by selling your startup in the early stages, giving up upside (and risk) for a smaller but guaranteed payoff.
How do you get bought? Mostly by doing the same things you’d do if you didn’t intend to sell the company. Being profitable.
Potential buyers will always delay if they can. The hard part about getting bought is getting them to act.
For potential acquirers, the most powerful motivator is the prospect that one of their competitors will buy you. This, as we found, causes CEOs to take red-eyes. The second biggest is the worry that, if they don’t buy you now, you’ll continue to grow rapidly and will cost more to acquire later, or even become a competitor.
In both cases, what it all comes down to is users.
What they go by is the number of users you have.
In a startup, you’re not just trying to solve problems. You’re trying to solve problems that users care about.
Number of users may not be the perfect test, but it will be very close.
It’s what impresses reporters, and potential new users.
Wealth and Power
Making wealth is not the only way to get rich.
Until a few centuries ago, the main sources of wealth were mines, slaves and serfs, land, and cattle, and the only ways to acquire these rapidly were by inheritance, marriage, conquest, or confiscation. Naturally wealth had a bad reputation.
Two things changed. The first was the rule of law.
Together they were able to withstand the local feudal lord. So for the first time in our history, the bullies stopped stealing the nerds’ lunch money. This was naturally a great incentive, and possibly indeed the main cause of the second big change, industrialization.
So governments that forbid you to accumulate wealth are in effect decreeing that you work slowly.
The problem with working slowly is not just that technical innovation happens slowly. It’s that it tends not to happen at all. It’s only when you’re deliberately looking for hard problems, as a way to use speed to the greatest advantage.
Engineers will work on sexy projects like fighter planes and moon rockets for ordinary salaries, but more mundane technologies like light bulbs or semiconductors have to be developed by entrepreneurs.
Startups are not just something that happened in Silicon Valley and Florence in 1200. Why Europe and now USA grew so powerful. Was it something about the geography of Europe? Was it that Europeans are somehow racially superior? Was it their religion? The answer (or at least the proximate cause) may be that the Europeans rode on the crest of a powerful new idea: allowing those who made a lot of money to keep it.
Once you’re allowed to do that, people who want to get rich can do it by generating wealth instead of stealing it.
In that respect the Cold War teaches the same lesson as World War II and, for that matter, most wars in recent history. Don’t let a ruling class of warriors and politicians squash the entrepreneurs. The same recipe that makes individuals rich makes countries powerful. Let the nerds keep their lunch money, and you rule the world.
This is a good plan for life in general. If you have two choices, choose the harder. If you’re trying to decide whether to go out running or sit home and watch TV, go running. Probably the reason this trick works so well is that when you have two choices and one is harder, the only reason you’re even considering the other is laziness. You know in the back of your mind what’s the right thing to do, and this trick merely forces you to acknowledge it.