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 PropositionEconomically, 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 BillionsIf $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 WealthIf 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.How do you get the person who grows the potatoes to give you some? By giving him something he wants in return. But you can't get very far by trading things directly with the people who need them. If you make violins, and none of the local farmers wants one, how will you eat?The solution societies find, as they get more specialized, is to make the trade into a two-step process. Instead of trading violins directly for potatoes, you trade violins for, say, silver, which you can then trade again for anything else you need.
The intermediate stuff-- the medium of exchange-- can be anything that's rare and portable. Historically metals have been the most common, but recently we've been using a medium of exchange, called the dollar, that doesn't physically exist. It works as a medium of exchange, however, because its rarity is guaranteed by the U.S. Government.
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