I just read an absolutely brilliant, and ridiculously long, essay by Paul Graham. I decided to edit the essay, however, the full version, titled How to Make Wealth, is available online.
Startups date back to 1960’s, and they often involve a challenging technology. Instead of working at a corporation at an average pace for several years, you can choose to startup your own company by compressing your effort and concentrating on one difficult aspect. Startups are the best way to get rich.
When working for an established firm you are limited by your job title, and are constantly interrupted by your supervisors and co-workers. The company determines your worth, and you usually do not get paid according to the profit you generate. On the other hand, startups have less red tape, and therefore productivity is increased dramatically. In addition, startups consist of smaller teams and clearly defined individual contributions, resulting in an accurate allocation of profit. While startups reward hard working individuals with greater wealth within a shorter time span, the effort involved is very taxing.
There are many ways to get rich, but getting paid through wealth creation is the most simple and valid method. The key is creating value.
The distinction between wealth and money is important to note. Money is a new concept, and is simply a medium of exchange. On the other hand, wealth is what people want. One does not need to have money in order to be wealthy. Money came about to improve trading, people may now obtain wealth using money.
Businesses create wealth by creating value within their market. A startup should not solely center on your personal interests; it should utilize your skills and expertise to cater to people’s wants and needs. Successful startups create wealth by giving people what they want.
The pie theory is widely known, and used to explain distribution and limits in society. While the pie theory can be used for money, it does not apply to wealth. Wealth creation does not happen at the expense of others. Startups actually increase the size of the overall pie, as wealth is unlimited. For example, repairing your broken car won’t result in a broken car for your neighbor.
People belong to institutions for the majority of their lives. At first you pay money to belong to a college, and then you are paid to belong to a company. The company creates wealth as many individuals work together to please their customers. However, there is no need to join a company in order to add value.
A large company may provide you with job security and stability, but your work is averaged. Companies expect you to be working at your best all the time, and do not reward you when you decide to increase your productivity. Your performance is averaged against many of your co-workers and other departments, and a lazy co-worker often offsets your hard work. The amount of the wealth generated cannot be tracked back to your individual efforts, as they are many factors in the equation (such as the design, manufacturing, and marketing department needed to launch a new product). Sale agents are the exception as they receive commissions for successful sales. In addition, CEOs are also paid according to their success as they are considered to be directly responsible for a company’s success (or failure).
The best position is one with measurement and leverage. When your performance can be measured easily, your productivity is rewarded (i.e. sales agent’s earned commission). However, leverage is essential to optimize your gain. The individuals with the most power and influence, benefit the most from the company’s success (such as CEO’s). Since startups comprise of small teams individual contribution can be easily measured, and subsequently rewarded. In addition, the team is increasingly dependent on each member, which increases individual leverage.
The difference between a large company and a startup can be explained by comparing the employees to rowers. The large company has many rowers, both strong and weak. Each rower’s efforts are balanced against one another, and the each individual’s affect on the overall speed is overlooked. On the other hand, a startup has fewer rowers. Each individual is motivated to row harder, as they can clearly see their influence on their effect on the overall speed. A slower rower is easily detected, and is encouraged to work harder. The best scenario would involve 10 of the best rowers from the large company in a smaller boat. Therefore, successful startups involve few, but very talented and hard working, individuals. These individuals have all chosen to work at their best, as they are directly rewarded for their contribution. High performing individuals will have an exceedingly satisfying life, if they join a startup.
Technology increases leverage as one solution can be used for numerous customers. Innovative software satisfies many people’s needs, unlike a single quiche that is made and sold in a small bakery. Startups have the advantage as they can act faster than large companies, and are increasingly creative. They are not bound to processes and are flexible in their activities, which allows them to better discover and create new technology. In addition, it is important to challenge the startup team.
Startups are comprised of highly motivated and talented individuals, and are therefore more capable of solving tough problems. Choosing the challenging route will increase competitive advantage, as big companies will be discouraged as they find it harder to imitate the process.
Venture Capitalists refer to the phenomenon as barrier to entry. Startups who wish to obtain investment from a VC, must articulate their superiority over competitors as well as the means to sustain the advantage. Large competitors are not afraid to be sued, and will find a way to duplicate startups and capitalize on their effort. The best way to deter competitors is by only pursuing that which is difficult.
Starting a business is not for everybody, and before deciding to pursue an idea it is important to acknowledge that most good deals have a catch (or two). The first catch is the commitment to productivity. Your competitors are the only measure of how hard you must work in order to be successful. The best way to compete, and guarantee your startup’s survival, is by giving it your absolute all. The second catch is that higher productivity does not always result in high rewards. Working harder, within a startup, only increases the potential payout. The actual payout depends on several other random variables, some of which may increase the possibility of failure.
Founders might choose to sell their startups early on in order to minimize risk, however, buyers might be hard to find. Big companies are often risk-averse, and would prefer to pay a high premium for a safer choice. While you may regret the sale of a startup that proves to be extremely successful after it is sold, it may be wise to step back. Establishing a startup is completely different than growing a business. Large companies have experience with large companies, and your skill set (and as it appears your passion) is small startups. In addition, selling one startup will allow you to pursue another idea and diversify to ensure success.
There is a limited amount of buyers interested in startups, and interested parties must be convinced. Buyers are looking for profitable ventures, and prefer to take as much time available to thoroughly consider the purchase. Appealing to buyers’ sense of fear can speed up the acquisition process. Buyers will decide to purchase sooner if they have reason to believe that their competitor might also be an interested party or if the startup is growing rapidly. They will act if they fear that the growing startup will cost more to purchase or may pose a threat as a future competitor.
The key factor when selling your startup is the number of users. A company’s success is measure by wealth creation, and the users reflect the value of your products and services. Users are obtained by addressing their needs and solving problems they actually care about.
The idea for a startup is not worth anything without execution. The startup requires a hard working team devoted to a challenging concept that many avoid. The startup is the best way to generate wealth for individuals and their economy.
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2 thoughts on “Wealth Creation”
Good to hear of another fan of Paul Graham’s essays! I find his writing on the value of location (like the “Milanese Leonardo”) to be particularly interesting.
Location definitely seems to matter, did that essay make you think of moving? I don’t plan on moving to San Fran anytime soon, but the move to Toronto was one of my best decisions.