Kinfolk features articles from individuals across the globe whose perspectives we consider significant. Our aim is to make the process of establishing enduring technology businesses more accessible for African founders and leaders. In this blog post, Paul Graham discusses the concept of getting rich through startups. It highlights the historical context of startups and their association with technological advancements. The post emphasizes that startups require hard work and the compression of effort into a shorter period, leading to potential economic rewards.
Key takeaways:
Startups have been a reliable way to get rich for centuries, and they typically involve solving complex technical problems.
Wealth is not the same as money, and startups focus on creating value and fulfilling people's desires rather than solely pursuing monetary gains.
Measurement and leverage are crucial for achieving financial success in startups, and having a strong user base is often a determining factor for potential acquirers.
If you wanted to get rich, how would you do it? Your best bet is 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 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 complex 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 it could give you an edge in understanding 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 so many startups selling new drugs or computer software and none selling corn oil or laundry detergent?
The Proposition
Economically, a startup can be a way to compress your working life into a few years. Instead of working at a low intensity for forty years, you work as hard as you can for four. This pays incredibly well in technology, where you earn a premium for working fast.
Startups are not magic and don’t change the laws of wealth creation. There is a conservation law at work here: if you want to make a million dollars, you must endure a million dollars worth of pain. For example, one way to make a million dollars would be to work for the Post Office 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 by working tirelessly and consistently. If starting a startup were easy, everyone would do it.
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. Wealth is as old as human history.
Wealth is fundamental: food, clothes, houses, cars, gadgets, travel to exciting places, etc. You can have wealth without having money. If you had a magic machine that could, on command, make you a car, cook you dinner, 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 essential, why does everyone talk about making money? It is a kind of shorthand: money is a way of moving wealth; in practice, they are usually interchangeable. But they are different, and unless you plan to get rich by counterfeiting, talking about making money can make it harder to understand how to make money.
Craftsmen
The people most likely to grasp that wealth can be created are the artisans who are good at making things. Their hand-made objects become store-bought ones. But with the rise of industrialization, there are fewer and fewer craftsmen. One of the most prominent remaining groups is the computer programming community.
A programmer can sit down in front of a computer and create wealth. A good piece of software is, in itself, valuable. There is no manufacturing to confuse the issue. Those characters you type are a complete, finished product. If someone sat down and wrote a web browser that didn’t stink (a fine idea, by the way), the world would be much more prosperous.
What a Job Is
In industrialized countries, people belong to one institution or another for at least until their twenties. After all those years, you get used to 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, and institution.
If you have to introduce yourself or someone else describes you, it will be as something like John Smith, age 10, a student at such an elementary school, or John Smith, age 20, a student at such and such a college. When John Smith finishes school, the next stage is to get a job, and what getting a job seems to mean is joining another institution.
Superficially, it’s a lot like college. You pick the companies you want to work for and apply to join them. If one likes you, you become a member of this new group. You get up in the morning, go to a new set of buildings, and do things that you ordinarily do not enjoy doing.
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. If wealth means what people want, companies that move things also create wealth, and nearly all companies exist to do something people want.
Working Harder
That averaging gets to be a problem. The single biggest problem afflicting large companies is the difficulty of assigning a value to each person’s work. For the most part, they punt. In a big company, you get paid a reasonably predictable salary for working somewhat hard, so you shouldn’t be incompetent or lazy, nor are you expected to devote your whole life to your work.
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? For one thing, the official fiction is that you are already working as hard as you can. But the more severe problem is that the company needs a way of measuring the value of your work.
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 you can measure your performance, or there is no way to get paid more by doing more. And you have to have leverage because your decisions have a significant effect.
Measurement alone is not enough. An example of this is doing piecework in a sweatshop. Your performance is measured, and you get paid accordingly, but you have no scope for decisions. The only decision you get to make is how fast you work, which can only increase your earnings by a factor of two or three. An example of a job with both measurement and leverage would be the lead actor in a movie, whose performance can be measured in the movie’s gross. And you have leverage because 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. Everyone who gets rich through their efforts will be found to be in a situation with measurement and leverage.
The Catch(es)
If it were simply working harder than an ordinary employee and getting paid proportionately, it would be a good deal to start a startup. Unfortunately, there are a couple of catches. One is to choose the point on the curve you want to inhabit. You can only decide if you’d like to work just two or three times as hard and get paid that much more. When running a startup, your competitors choose how hard you work. And they all make the same decision: as hard as you can. The other catch is that the payoff is only, on average, proportionate to your productivity.
Get Users
It’s a good idea to get one if you can. How do you get bought? Primarily by doing the same things you’d do if you didn’t intend to sell the company. Being profitable, for example. But getting bought is also an art in its own right, one that we spent a lot of time trying to master.
Potential buyers will always delay if they can. The hard part is getting them to act. For most people, the most powerful motivator is not the hope of gain but the fear of loss. For potential acquirers, the most powerful motivator is the prospect that one of their competitors will buy them. This, as we found, causes CEOs to take a red pill. The second biggest is the worry that you’ll continue to increase and cost more to acquire later, or even become a competitor if they don’t accept you now.
In both cases, what it all comes down to is the user. You would 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 customers know who has the best technology. And this is not as stupid as it sounds. Users are the only actual proof that you’ve created wealth. People want wealth, and if people aren’t using your software, maybe it's because you need to improve at marketing. Perhaps it’s because you still need to give them what they want.
Wealth and Power
Making wealth is one of many ways to get rich. It has been the least common for most of human history. Until a few centuries ago, the primary sources of wealth were mines, enslaved people and serfs, land, and cattle. The only ways to acquire these rapidly were by inheritance, marriage, conquest, or confiscation. Naturally, wealth has a bad reputation.
Remember that a startup is economically a way of saying, I want to work faster. Instead of accumulating money slowly by being paid a regular wage for fifty years, I want to get it over with as soon as possible.
Startups have not just happened in Silicon Valley in the last few decades. Since it became possible to get rich by creating wealth, everyone who has done it has used the same recipe: measurement and leverage, where measurement comes from working with a small group and leverage comes from developing new techniques. The recipe was the same in Florence in 1200 as it is today in Santa Clara.
Once you’re allowed to do that, people who want to get rich can generate wealth instead of stealing it. The resulting technological growth translates not only into wealth but also into military power, and this same recipe that makes individuals rich makes countries powerful.