How to Make Wealth

****

| Want to start a startup? Get funded by
Y Combinator. |

May 2004

(This essay was originally published in [Hackers
& Painters](http://www.amazon.com/gp/product/0596006624/104-0572701-7443937).)

If you wanted to get rich, how would you do it? I think your best
bet would be to start or join a startup. That's been a
reliable way to get rich for hundreds of years. The word "startup"
dates from the 1960s, but what happens in one is
very similar to the venture-backed trading voyages of the
Middle Ages.

Startups usually involve technology, so much so that the phrase
"high-tech startup" is almost redundant. A startup is a small
company that takes on a hard technical problem.

Lots of people get rich knowing nothing more than that.
You don't have to know physics to be a good pitcher. But
I think it could give you an edge to understand the underlying principles.
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?

The Proposition

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.

Here is a brief sketch of the economic proposition. If you're
a good hacker in your mid twenties, you can
get a job paying about $80,000 per year. So on average
such a hacker must be
able to do at least $80,000 worth of work per year for the
company just to break even. You could probably
work twice as many hours as a corporate employee, and if
you focus you can probably get three times as much done in
an hour.
[1]
You should get another multiple of two, at
least, by eliminating the drag
of the pointy-haired middle
manager who would be your boss in a big company.
Then there is one more multiple: how much smarter are you
than your job description expects you to be?
Suppose another multiple of three. Combine all these multipliers, and I'm
claiming you could be 36 times more
productive than you're expected to be in a random corporate
job.
[2]
If a fairly good hacker is worth $80,000 a year at a
big company, then a smart
hacker working very hard without any corporate
bullshit to slow him down should be able to do work worth about
$3 million a year.

Like all back-of-the-envelope calculations, this one
has a lot of wiggle room. I wouldn't try to
defend the actual numbers. But I stand by the
structure of the calculation. I'm not claiming
the multiplier is precisely 36, but it is certainly more
than 10, and probably rarely as high as 100.

If $3 million a year seems
high, remember that we're talking about the limit case:
the case where you not only have zero leisure time
but indeed work so hard that you endanger your health.

Startups are not magic. They don't change the laws of
wealth creation. They just represent a point at the far end of the curve.
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. You do tend to get a
certain
bulk discount if you buy the economy-size pain,
but you can't evade the fundamental conservation law.
If starting a startup were easy, everyone would do it.

Millions, not Billions

If $3 million a year seems high to some people, it will seem
low to others. Three million?
How do I get to be a billionaire, like Bill Gates?

So let's get Bill Gates out of the way right now. It's not
a good idea to use famous rich people
as examples, because the press only
write about the very richest, and these tend to be outliers.
Bill Gates is a smart, determined, and hardworking man,
but you need more than
that to make as much money as he has. You also need to be
very lucky.

There is a large random
factor in the success of any company. So the guys you end
up reading about in the papers are the ones who are very
smart, totally dedicated, and win the lottery.
Certainly Bill is smart and dedicated, but Microsoft also
happens to have been the beneficiary of one of the most spectacular
blunders in the history of business: the licensing deal for
DOS. No doubt Bill did
everything he could to steer IBM into making that blunder,
and he has done an excellent job of exploiting it, but if
there had been one person with a brain on IBM's side,
Microsoft's future would have been very different.
Microsoft at that stage had little leverage over IBM.
They were effectively a component supplier. If IBM had
required an exclusive license, as they should have, Microsoft
would still have signed the deal. It would still have
meant a lot of money for them, and IBM
could easily have gotten an operating system elsewhere.

Instead IBM ended up using all its power in the market
to give Microsoft control of the PC standard. From
that point, all Microsoft had to do was execute. They
never had to bet the company on a bold decision. All they
had to do was play hardball with licensees and copy more
innovative products reasonably promptly.

If IBM hadn't made this mistake, Microsoft would
still have been a successful company, but it
could not have grown so big so fast.
Bill Gates would be rich, but he'd be somewhere
near the bottom of the Forbes 400 with the other guys his age.

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.

The advantage of creating wealth, as a way to get rich,
is not just that it's more legitimate
(many of the other methods are now illegal)
but that it's more
straightforward. You just have to do something people want.

Money Is Not Wealth

If you want to create wealth, it will help to understand what it is.
Wealth is not the same thing as money.
[3]
Wealth is as old as
human history. Far older, in fact; ants have wealth.
Money is a comparatively recent invention.

Wealth is the fundamental thing. 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.

Wealth is what you want, not money. But if wealth is the important
thing, why does everyone talk about making money? It is
a kind of shorthand: money is a way of moving wealth, and in practice
they are usually interchangeable. But they are not the same thing,
and unless you plan to get rich by counterfeiting, talking about
making money can make it harder to understand how to
make 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.

[...]

Original source