How to make wealth

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Your best bet to get rich would be to start or join a startup. A startup is a small company that takes on a hard technical problem.

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.

There is a conservation law at work here: if you want to make a million dollars, you have to endure a million dollars’ worth of pain. For example, one way to make a million dollars would be to work for the Post Office your whole life, and save every penny of your salary. Imagine the stress of working for the Post Office for fifty years. In a startup you compress all this stress into three or four years.

Wealth. People think that what a business does is make money. But money is just the intermediate stage for whatever people want. What most businesses really do is make wealth. Money is not wealth. Wealth is stuff we want: food, clothes, houses, cars, and so on. You can have wealth without having money. Money is a way of moving wealth. It works as a medium of exchange.

The Pie Fallacy. You can make more wealth. A programmer can sit down in front of a computer and create wealth. A good piece of software is, in itself, a valuable thing. So there is obviously not a fixed pie.

Pareto. When those far removed from the creation of wealth– undergraduates, reporters, politicians– hear that the richest 5% of the people have half the total wealth, they tend to think injustice! An experienced programmer would be more likely to think is that all? The top 5% of programmers probably write 99% of the good software.

Institutions. In industrialized countries, people belong to one institution or another at least until their twenties. After all those years you get used to the idea of belonging to a group of people who all get up in the morning, go to some set of buildings, and do things that they do not, ordinarily, enjoy doing. Belonging to such a group becomes part of your identity: name, age, role, institution. When John Smith finishes school he is expected to get a job. And what getting a job seems to mean is joining another institution.

Job inertia. A job means doing something people want, averaged together with everyone else in that company. 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. 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?

Get rich. 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. You can get both if you’re part of a small group working on a hard problem. Startups offer anyone a way to be in a situation with measurement and leverage. They allow measurement because they’re small, and they offer leverage because they make money by inventing new technology.

Smallness = Measurement. One level at which you can accurately measure the revenue generated by employees is at the level of the whole company. When the company is small, you are thereby fairly close to measuring the contributions of individual employees. And the people you work with had better be good, because it’s their work that yours is going to be averaged with. A startup is not merely ten people, but ten people like you.

Averages. The larger a group, the closer its average member will be to the average for the population as a whole. So all other things being equal, a very able person in a big company is probably getting a bad deal, because his performance is dragged down by the overall lower performance of the others.

Technology = Leverage. What is technology? It’s technique. It’s the way we all do things. And when you discover a new way to do things, its value is multiplied by all the people who use it. It is the proverbial fishing rod, rather than the fish. That’s the difference between a startup and a restaurant or a barber shop. You fry eggs or cut hair one customer at a time. Whereas if you solve a technical problem that a lot of people care about, you help everyone who uses your solution. That’s leverage.

Speed. The leading edge of technology moves fast. Technology that’s valuable today could be worthless in a couple years. Small companies are more at home in this world, because they don’t have layers of bureaucracy to slow them down. Big companies can develop technology. They just can’t do it quickly.

Run upstairs. Suppose you are a little, nimble guy being chased by a big, fat, bully. You open a door and find yourself in a staircase. Do you go up or down? I say up. The bully can probably run downstairs as fast as you can. Going upstairs his bulk will be more of a disadvantage. What this meant in practice was that we deliberately sought hard problems. If there were two features we could add to our software, both equally valuable in proportion to their difficulty, we’d always take the harder one.

Barriers to entry. Start by picking a hard problem, and then at every decision point, take the harder choice. How much difficult ground have you put between yourself and potential pursuers?

Catches. Unfortunately there are a couple catches. (1) When you’re running a startup, your competitors decide how hard you work. (2) In practice the deal is not that you’re 30 times as productive and get paid 30 times as much. It is that you’re 30 times as productive, and get paid between zero and a thousand times as much. If the mean is 30x, the median is probably zero.

Mosquitoes. 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.

Sell. I think 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?

Users. You’d think that a company about to buy you would do a lot of research and decide for themselves how valuable your technology was. Not at all. What they go by is the number of users you have. In effect, acquirers assume the customers know who has the best technology. And this is not as stupid as it sounds. Users are the only real proof that you’ve created wealth.

Optimization problem. So you should make users the test, just as acquirers do. Treat a startup as an optimization problem in which performance is measured by number of users. As anyone who has tried to optimize software knows, the key is measurement. When you try to guess where your program is slow, and what would make it faster, you almost always guess wrong.

The underlying principle is that wealth is what people want. If you plan to get rich by creating wealth, you have to know what people want.

Remember what a startup is, economically: a way of saying, I want to work faster.