I recently was pointed to a wonderful essay by technologist and start up founder Paul Graham. For those of you running in software circles, Paul Graham pursued LISP and even tried to build his own dialect of it, “Arc”. He has been involved in startup companies, which are a bit of a rage amongst software geeks, especially in the Bay Area.
In his essay, How To Make Wealth, Paul discusses some core points developers should understand before they dive into a startup company. While coming to grips with joining a technological startup, he sprinkles this essay with key elements of wealth building that stretch to any business. If you are reading this blog and are not a software developer, every word of this essay is still of high value for you to read.
Let’s visit some of the highlights.
Paul discusses how a fresh, young software developer working for a big corporation could probably average $80,000/year in salary. If you worked at a startup, it is not unreasonable to assume your work would be better valued at around $3 million. This may sound ridiculous, but when you move into a startup environment, a lot of barriers are removed, empowering you to build a lot more wealth than you ever imagined was possible.
But the demands rise as well. As I mentioned before, when you trade up for higher performance, it’s possible to move a bigger load. That is the nature of leverage. And no lever is of any value if it’s not used. So don’t expect that you can join a startup and not be expected to carry much more than a typical corporate job. The other half of that coin that Paul points out is that no one expects you to work at that rate forever. The idea is to generate enough value and growth that your company is either acquired, goes IPO, or some other aspect where you ultimately get paid off and possibly catapulted into better prospects.
Money is not wealth
Moving beyond the subject of software startup companies, Paul makes several powerful points. One of the biggest is the fact that money is not wealth. Money is simply a medium we use to exchange with other people. Wealth is what you build. There are strong opinions on what is and isn’t wealth. If you dig deep into the arguments that are out there, many of these boil down to two opposing viewpoints: either there is a fixed amount of money/wealth in the world, or there is a variable amount.
Would you would like to be the richest person in the 1600s or a relatively poor person in today’s age? Most people quickly answer they would prefer what we have now. The reason is that we have more now than people have ever had before. This is the result of generations of people building new wealth, not simply moving existing wealth around between different people.
There is a great inertial force at work. Each person that is born will work a certain amount of time, generating a certain amount of wealth for society. One big criticism from fixed wealth believers is that a new invention, like the cotton gin, is invented, it puts existing laborers out of work, essentially rerouting the wealth they were generating. But these people don’t simply go home and stop working forever. Instead, they find new jobs, new pursuits, and redirect their existing energy into other places, continuing to create wealth in other places.
Work smarter, not harder
It’s really interesting that every now and then, I pick up some amazing insights from my daughter’s favorite cartoon: Duck Tales. In one episode, Scrooge McDuck is explaining to his nephews how he got wealthy. He repeats several times, “worker smarter, not harder.” There is no harm in working hard, but spinning your wheels and not creating much isn’t going to be effective in your wealth building plan. A critical factor in growing wealth is building something people actually want and working strategically to get that product into as many hands as will buy it with as much efficiency as possible. Your first instinct may be to double your hours of assembling your product, but it may be better leverage to automate some or all of the process. There is risk in that you may need a loan or entertain bringing on board an investor. But if you can succeed at building more without burning more hours, your time may better serve at visiting more stores to develop more sales.
Another type of leverage are the tools you use, and the means you employ to reach as far as possible. One of the reasons Facebook was so successful is because it a) provided something people wanted (socializing with current friend and finding past ones), b) it was free, c) ran on any computer with no effort, and d) sold ads to companies that wanted to get inserted into all this networking we as humans enjoyed. We already mentioned that more physical labor may not the best step to take. Technological leverage like developing a web site to market and sell your business is of undeniable benefit in today’s society.
Wrapping it up
One of the most interesting things I found in Paul’s essay towards the end was comparing small businesses with big ones. Paul compares this to a big person chasing a small one. When you reach a decision on what to add to your business, consider it as a choice to either run downstairs (easier) or upstairs (harder). In all likelihood, the small guy can run faster than the big guy upstairs. This creates a bigger lead for the little guy, which can materialize as wealth your business creates that your big competitors can’t keep up with.
Yes, this essay may be long, but it is definitely worth a read if you are thinking about running your own business or joining a new, small startup. If you are working on your wealth building plan, consider this essay a valuable lesson plan as well. Perhaps it will inspire you start your own business.