How to Make Wealth
paulgraham.com
paulgraham.com
Bill Gates created some of the most profitable and efficient business units that the world has ever seen, and he did it more than once.
It just happens that he took advantage of IBM's naivety the first time, but that was only a blunder with hindsight.
To add, I think being rich is overrated, and that it isn't a coincidence that the biggest influencers and successes in our industry don't care about money.
The biggest influences and successes in our industry don't care about money after they have their FU money. I wouldn't either! Ironically, this tells me that being rich is absolutely not overrated but really important if you ever want to be able to forget about money.
I find very few poor or middle class people who continuously hold the belief that "money isn't important" or they "don't care about money". Once you've got that FU money - you can say FU - that's why it's called FU money!
The few that do may do so because of religious/spiritual beliefs, but almost everyone without enough money cares about it, because a) it's scarce and b) necessary to live.
And, yeah, it’s pretty clear that IBM dropped the ball on this one. There was a good 10 - 15 year period where IBM could have easilly crushed (or bought) Microsoft.
http://www.amazon.com/gp/product/B001C6MQA8?ie=UTF8&tag=...
The 'conclusion' is that the most successful companies aren't necessarily all that brilliant, it's just that they screw up less than the competition.
-Steven Brust, from Dragon
Creating wealth is relatively easy, but I don't care about it anymore (except as a hobby), I care about creating money, which is much harder. All the stuff about programmer productivity in this essay is first not true but more importantly not really important anymore in my opinion. At most startups and big companies programming is a commodity. By 2011 we programers are good enough, programming became matrue enough that it is really a commodity now. Not a cheap commodity, but a commodity: a $100.000 per year commodity. I argue that in 2011 (maybe not in 2004) you can find really good people for $100.000 per year if you know how to find these people. You can find much cheaper in Eastern Europe (where I live) if you are not so snob that you think programmers in the West are so special. So unless you work on something very deeply technical or technicall revolutionary (so you are not John Carmack working on the fastest rendering engine on the planet or you are not the engineer behind Gogle's superfast javascript engine) your value as a programmer is someting like $100.000 or something. There is no '36x multiplier because of programmer productivity.' I think if the market is quasy efficient that means if your startup would be about programming then the expected value of your earnings would be sometinng like this value ($100.000) in your startup. What kind of multipliers there really are:
- There can be a multiplier because of your idea, your product, your marketing, and your connections. But not programming (in case of not technically deep startups. Technically deep startups are quite rare.) - There is a factor which is related to how popular it is to create a startup. If it is super popular because of marketing essays like this, then it is possible that there are too much startups of constant sized markets, so that your expected value of earning could be even less than $100.000. At the time of this essay, when starting-up was not that popular we could not really speak of saturated markets, so that your expected value of earning was probably more than $100.000. The more people start-up the less attractive it will be to start-up. So the more successful PG's essays will be the less true they will be.
Look at it this way. Before Google, there were plenty of very smart people working on improving search. Page & Brin might have had a valuable talent edge, but what made them able to jump ahead of the other, far better resourced, search companies is that they were applying their skills to the right problem, namely, how can we best analyse the whole corpus of data, rather than how can we tweak HTML content extraction to support indexing. There's luck in Google's success, but it is clear that there is a big difference in deployment.
Being programmer alone is of little use, one must be an innovator to create wealth.
You possibly did not read my comment properly: I was arguing that pg invested less into the super-productive programmer idea than your description. He's elsewhere argued that programmers (even if they are called Computer Scientists or Solid-State Physicists) are better placed to turn great ideas into successful start-ups than MBAs.
If by idea you mean something like "the bulk of the pagerank algorithm" then yes, that counted for a lot, but I think fleshing out that algorithm from the concept of "automating indexing" is part of what most people would call execution and even part of what a lot of people would call programming (developping the algorithm is often a key step of writing the program), and even then they executed the details like their page design and UI choices well.
They succeeded largely because they were hardworking people who executed well on a hard problem, though as PG says in the essay there was also a luck factor in play as there is in most of life.
> 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.
Startups are not a reliable way to get rich. Or what failure rate would you still consider reliable?
That said, I do agree that working at a startup can mean that you can contribute more. That is not always the case however. Just like smart technology is leverage, a big company is leverage too. Even assuming that you'll be 36x less productive at a big company, you'll probably reach 36x more users simply because you're working on a product by a big company.
For this equality to hold:
E(Wall Street hacker's earnings) == E(startup founder's earnings) E(startup founder's earnings) == P(startup success) * payoff of startup.
Everyone on HN needs to be honest with themselves: this kind of high payoff almost never happens, in aggregate. And I haven't even included a risk premium, which would make the required payoff higher!
If wealth capture is a main concern, you're better off building a nest egg at a hedge fund or large corporation for 10 years. If you want to start a startup, do it for the culture and technological freedom. From a statistical view, however, a startup is not the optimal way to become rich.
EDIT: mynegation reminded me of risk-adjusted returns. Thanks!
P(becoming rich | working at a startup) != P(worked at a startup | is rich)
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EDIT: Above, I'm trying to point out how the fraction of rich entrepreneurs vs. rich employees provides us with no information by itself.
However, we can develop a distribution of probabilities for becoming rich based on the career you chose, using the careers of those who are already rich. I'd suppose this is PG's real point, and while I can't verify it right now I'd bet entrepreneurs become rich at a higher frequency than non-entrepreneurs.
Also, apologies for my rude tone. :(
This is clearer if you consider a statement like "10% of men are over 6 feet tall." There's no one who has actually has a 10% chance of being over 6 feet tall. 10% of people have a 100% chance, and the remaining 90% have a 0% chance.
For the sort of person who has sufficient drive to get rich at all, starting a startup is a much more reliable way to do it than the overall success rate implies.
As it turns out there is an easy way to know which group you're in: ask us. Like all venture investors, it's our job to answer that question, and we work very hard to try to do it well.
"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."
I am not sure though that it is false. It is just not very well defined. (I don't know what it means. What actionable advice can be concluded from it.) You say wealth is different than money. This implies that wealth cannot be measured with the money you can gain from it. But you somehow measure wealth with money. You somehow convert between the two using the ratio used at big companies.
What can be said in my opinion is this:
At a big company you are paid 100.000 per year to improve someone else's huge shitty code. You are paid to fight with buerocracy. You are paid well for it.
In a small company you are paid to create new programs fast. Much faster than in big companies. But this small company either has huge risks or have much smaller income than the big company. You programming does not worth more just because you can create more lines of code or nicer code. Your programming here also worth only $100.000
Maybe I misunderstood you, but I read you as you stated that the expected value of the earning of a programmer founded startup is 36x$80.000
I think it is more close to 2x$80.000 The 2 multiplier comes from you work 2x more time in a week.
But of course I have no data to back it up.
It sounds like what you're saying is that although you may be able to get code written (and thus wealth created) faster in a small company, you don't automatically get paid in proportion.
If that's what you're saying, I agree, and in fact I said so later in the same essay:
"The other catch is that the payoff is only on average proportionate to your productivity. There is, as I said before, a large random multiplier in the success of any company. So in practice the deal is not that you're 30 times as productive and get paid 30 times as much. It is that you're 30 times as productive, and get paid between zero and a thousand times as much. If the mean is 30x, the median is probably zero."
Your comments preceding and following this sentence suggest that injustice doesn't enter into the equation.
But on the contrary, anyone who's paid attention the past 30 years is well aware that inequality has increased greatly, and that the main reasons are various forms of carefully calculated injustice, such as:
1. Regressive tax policies shifting the tax burden from the wealthy and the corporations to the middle class.
2. Mass wealth transfer scams such as the housing bubble and the S&L scams of the 1980s.
3. Massive spending on foreign wars which benefits a very narrow slice of weapons companies and related businesses - that money could have gone to build up the wealth of the nation, in the form of infrastructure, education, etc.
4. Massive deregulation of the financial industry, which allowed many Wall St. scams to proceed without hindrance.
The glib thinking exemplified by the quoted sentence is typical of "libertarian" ideology that doesn't expend much energy on thinking about the problems cited above.
This is why I ask people who think they disagree with something I've written to find something I actually wrote and refute it. Otherwise more often than not they are (as you are here) arguing against something they mistakenly believe I said rather than something I actually did say.
What I said in the sentence you quote is that a lot of people automatically assume that economic inequality is due to injustice. I never claimed it never is, and in fact it's pretty clear from e.g. this passage I think it often is:
"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."
Starving is not really an option for software types. The real dichotomy is between living well and tightening the belt. The mental division is, Is taking a job risk worth sacrificing Anything At All?
The corporate job is lucrative, easy to get and keep, and if there is any stress you can blame it on the boss etc. Some folks crave a combination of those things. Others don't give a flying flip about them.
I think it is pretty black-and-white actually. I tell this story: Some folks are playing in the surf, paddling around, rowing small boats, diving for pearls. A tanker passes by, and folks are seen hanging over the rail yelling "Get out of the water! The tide is coming in! The waves are frightening! You're getting all wet!"
"It's ok!" we say. "I don't mind getting wet! If it storms, I'll capsize but I can swim."
All this is taken as hubris, arrogance, foolishness by those aboard the tanker. They leave the rail, shaking their heads and blogging about how their life is surely the best.
But to defend the nature of this piece a bit; it is excerpted from Hackers & Painters, a book as much about culture and inspiration in technology as anything else. Once you find your groove - and you're not 21 anymore - I don't think anyone can blame you for moving on.
Wow, in hindsight this seems way too hacker-centric and elitist. The assumption is that all that other corporate stuff creates no value. I don't think that's true. I think that marketing, sales, etc., can be what enables the $80,000 salary and the combination of everything can be an overall multiplier. Otherwise, the proposition that a marketing firm can help you increase sales would not be true.
Contrast with Joel Spolsky's article about how managers are there to abstract away everything but the hacking problem at hand. There is value created there, and a good manager can multiply the value of a good hacker.
I'm not sure whether this was meant tongue-in-cheek or not, but ...
If someone's worth $80k to company X, they're worth $80k in the context of the value the provide to company working as part of the whole. At least some of the "corporate bullshit" is at least partially necessary to make the company run.
A developer "programming" outside the context of company X might be able to provide more value to a wider audience, but not without some level of "corporate bullshit" (legal, financial, etc). And they're not going to create $3m of directly accessible money without a decent amount of "corporate bullshit".
The same skills that are worth $80k to company X might have nearly $0 value to anyone outside the context of company X.
The essay is just as good now as it was then.
The underlying ideas are not only correct, they're being actively validated in the increase in salaries for good programmers.
Someone in this thread says that programming is a commodity. Well, sure. Isn't everything?
But the key point in the essay is about making value directly, by making something people want.
Has that somehow become a dated notion? Isn't it, rather, being validated with every single startup that enriches its value-creating founders?
There's no 'magic' in the essay, of course. No secret key to success, no fairy dust; I'm sorry for anyone who felt there was, but such is youth.
The essay never said that all programmers will become millionaires.
What it said was that if you wanted to become rich, and you're a programmer, probably your best shot is to make a product that people want.
Google and Facebook and Twitter and more, they're all validating that argument by raising salaries for their best talent, to make creating value directly for the customer a less attractive option.
Then why do people complain about low wages and poor equity offers? Not everyone is a Google employee making $250k in salary + benefits.
But the key point in the essay is about making value directly, by making something people want. Has that somehow become a dated notion? Isn't it, rather, being validated with every single startup that enriches its value-creating founders?
Where are all of these startups that magically print money for their founders? All I see on HN are people grinding away on their MVPs (or pushing a landing page as their MVP) while we discuss the same hot-shot startups (Square, Twitter, FB, etc.) over and over again.
The importance of capture is skimmed over a bit too much in pg's essay, in my opinion. He writes "for much of human history... the only ways to acquire [wealth] rapidly [was] by inheritance, marriage, conquest, or confiscation. Naturally wealth had a bad reputation."
Wealth-by-confiscation is far from dead, and is in fact alive and kicking. Excepting the government, no one can print money; hence, the only way to get it is from other people, who don't part with it willingly. The separation of others from their money is the real business, and those who specialize in it or aid others in it (salesmen, advertisers [Google, Facebook], lawyers, marketers, those who provide marketplaces [Amazon, eBay, Viaweb], payment facilitators [PayPal, banks]) will find themselves much better paid than those who "merely" create wealth. The same is true for those who guard wealth against those who would take it: tax accountants, lawyers, security system vendors (one of the more lucrative jobs in my town is sales for a security systems company---double whammy), and defense contractors (on a national level).
Today I threw a kill switch on work I'd done for a client that was seemingly impervious to invoices. In two hours I had an email titled "Urgent Matter," and two hours later I had a check in hand (five minutes later the client's software was working just fine again, if you're curious).
So while I would much prefer to think of myself as a developer, today I got paid for being an extortioner instead.
1. Marx says that this must be the "socially necessary" labor; that is, the labor required on average to dig a hole. In an area where mini-excavators are available, this would probably be factored in as capital input for digging holes. 2. Marx says that value is constantly changing, such as due to changes in efficiency (mini-excavators).
As such, Marx would agree that there is a difference between using an excavator and using a bunch of people, whether they have shovels or spoons (and shovels vs spoons would be a difference in capital input, also). Furthermore, this increase in efficiency causes the value of the hole to decrease, which is why you'd probably just rent an excavator as opposed to having a bunch of people try and dig through asphalt.
To return to your example of Excel vs DNF, consider the following from Capital: "The value of a commodity, therefore, varies directly as the quantity, and inversely as the productiveness, of the labor incorporated in it." While spreadsheet programs and first person shooters are different commodities, I think we can all agree that DNF did not receive the most productive labor! On the other hand, the excavator both decreases the labor involved and increases productivity. Yes, the excavator had to be designed and built, which required labor, but even with that the labor savings over time for a reproducible capital input are greater than if we had every hole in the world being dug by groups of people.
In terms of "wealth creation," Marx notes that there is a difference between the value of a commodity in use (its utility) and the value of a commodity in trade, and that these values are generally not the same. That is why Marx talks about labor in the first place: if utility is not the connecting factor whereby different commodities are traded for one another, then what connects them? He claims that the only thing left outside of utility (a commodities physical properties) is the labor input involved.
I was reading through Hackers and Painters just yesterday and I did read this very essay then. I'm not sure if the above concept was part of this essay or any other that I might have read then.
If there are limits to the total potential a person can create then I would argue that fixing up a car in your yard is creating value but it is only the difference between what your true potential value contribution is and what you're actually doing (i.e. watching TV instead).
To me, it seems like the only way the pie gets bigger is through population growth or the multipliers I described earlier (tech, education). I would argue that although in the long term wealth is growing, in the short term it acts very much like a fixed-pie game. If the richest 1% are capturing wealth >= the rate of increase in the pie then those who aren't capturing it feel as though things are fixed and they are losing out.
* this only applies if you are the FOUNDER or early employee. joining later and making your 0.14% of the company is good for learning a small part of how startups work, but it is unlikely to get you rich, especially after the discount you take for not working at Googlesoft (where salaries are at least 40% higher than startups). This essay is part of the story that early employees spin to convince you to work like crazy so they take home the majority of the rewards.
* the best way to make wealth consistently is to save money from your paycheck at a young age, invest it in low to moderate risk investments, and let it compound. this would actually argue for taking the higher paycheck from Googlesoft.
* getting rich isn't everything and work isn't everything. you'll be a much more interesting guy (and probably more effective, including at work) and you'll have a better chance of seeing something that is broken and needs a startup.
Advertising.
Look at how HN is inundated with "Show HNs" for everyone's new web app. Many of these people bootstrap their own company and can't afford advertising. They're all fighting for attention in a market saturated with novel apps (Instapaper for videos! another iOS photo sharing app!). Many of these apps create wealth, and many won't survive into next June.
Now compare these tiny startups with any larger startup or corporation. Facebook, Twitter, Foursquare have a lot of users, and they need to build out bizdev teams to continue growing (marginal cost and all that). They need HR departments to build out those teams--now we're halfway down the road to internal hierarchies and politics. Ugh, corporate bullshit!
However, these startups can also advertise and market like crazy and watch as their growth charts show exponential behavior.
Traction and user retention are economies of scale. As much as we hate corporate bullshit, that bullshit lets a company grow enough to trivialize all those marketing + bizdev concerns. Otherwise, how can you advertise your wealth creation when consumers are too busy looking at Tumblr or tweeting to pay attention to you?
Wow, things change fast. Isn't there a thread talking about certain mid twenties in Google having $250k per year lately? It was written only 6 years ago.
Blunder or not, and as much as I love Apple; like Steve said, "They've earned their success, for the most part."
On the other hand, because MS grew so big I feel people started taking software more seriously. It may have shaped how the industry looks at software now. This is only a hunch as I wasn't even around when it was the 80s.
either way, that would be cool to see pg become a billionaire. I wonder how he would shake up philanthropy? He might be able to find a better charity model than what currently exists today..
And, with the standard Malcolm Gladwell disclaimer, http://www.gladwell.com/2006/2006_02_13_a_murray.html seems to indicate than most homeless people aren't homeless for very long.