How to Make Wealth

http://paulgraham.com/wealth.html

by mofeeta • 15 years ago

155 69 15 years ago

paulgraham.com

solipsist• 15 years ago

Just out of curiosity, is pg a millionaire? A billionaire?

JoachimSchipper• 15 years ago

He's not on http://www.forbes.com/forbes-400/; no billionaire. Did you expect otherwise?

fraserharris• 15 years ago

Using the data in Founder's at Work, and making some reasonable assumptions about the dilution of each round, his Viaweb exit was personally worth (before-tax) ~$10M in June, 1998. The exit was in Yahoo stock, which would gain ~17x, reaching a high of $118.75 a year and 1/2 later. So, anywhere from $10M - 170M from Viaweb.

pathik• 15 years ago

The way YC is growing, PG could very well become a billionaire in the coming years.

chalst3• 15 years ago

At 3% equity, he would need either a really, really big hit or a lot of big successes to become a billionaire. From YC's modus operandum, I think pg cares more about shaking up Silicon Valley than he does about maximising return on investment.

RandyHelzerman1• 15 years ago

He's slipping. Marx is wrong, there's no labor theory of value. If working 24/7 was the ticket to riches then every mother would be a billionaire. The Mexicans who now your lawn and harvest your food work way harder than a 20-something at a startup. What's more, you can do all that work, and 9 times out of 10 you end up with nothing.

invalidOrTaken• 15 years ago

The essay is about how to make wealth, not capture it. Know the difference.

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.

tbourdon• 15 years ago

Here, here.

_delirium• 15 years ago

Marx's take on the labor theory of value doesn't argue that everyone is compensated according to the labor they put in. In fact his whole point is sort of the opposite, closer to yours, arguing that workers are not typically able to capture as income the value of the labor they produce, and in fact it's quite possible to produce a lot of value and get nothing out of it, depending on the way your labor is used within modern capital.

cousin_it2• 15 years ago

But the labor theory of value is still bunk. It's not just a matter of capture. 8 hours of digging a ditch with a shovel is more exhausting and creates less wealth than 8 hours of digging the same ditch with an excavator. 8 hours of programming Microsoft Excel creates more value for humanity than 80 hours of programming Duke Nukem Forever. Hard work can sometimes be directly proportional to wealth created, but only if everything else is equal, which it never is.

ashishgandhi2• 15 years ago

PG also goes on to say it's not just hard-work. But hard-work AND leverage. Leverage being making decisions that have an impact.

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.

mmcconnell1618• 15 years ago

I've always found arguments about fixed-pie vs. variable interesting. Let's assume that each person has a limited potential value they can create. We'll all die at some point (unless the singularity is near) and we can boost our potential limit with things like technology, education, bio-tech, etc. But, in the end, each person has a limit to the value they can create. You could also argue that when people collaborate they can increase their potential yet again but there are limits.

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.

nwhitehead• 15 years ago

It's interesting that in this older essay pg suggests focusing on number of users as a good metric for adding value. Nowadays this is called a vanity metric and everyone is looking for actionable metrics based on cohort analysis etc. It shows how fast the best practices for startups are evolving.

asknemo• 15 years ago

"If you're a good hacker in your mid twenties, you can get a job paying about $80,000 per year."

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.

robryan• 15 years ago

Wouldnt the equivalent non top of the range amount be around 120k now? And it seems the dev market is a fair bit tighter than 6 years ago?

achompas6• 15 years ago

What do you mean by "tighter"?

kitsune_• 15 years ago

I think the problem with such essays is that the authors extrapolate their own experience and think it can be used as a template for everyone. We are told how to get rich, become successful, date a beautiful women, write the best programs, influence people and so on.

nikcub• 15 years ago

I don't buy the argument that Gates became rich because of IBM's "blunder" with DOS. When Windows was released Microsoft almost had to start over again. They had both a good product and the right business model by horizontally integrating with ODM's and realizing that the value in software is in platform. Then he went and did it again with Microsoft Office.

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.

danssig• 15 years ago

>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.

mgkimsal4• 15 years ago

Thank you.

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.

_airh• 15 years ago

I don't think PG is arguing that Gates is rich because of IBM's failure. I think he is arguing that Gates is fantastically rich because of IBM's failure. PG states in the essay that someone like Gates who is smart and hard working will be successful. ...but being successful and being a multi-billionaire are two different things. Being a multi-billionaire requires luck.

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.

davidw• 15 years ago

One of my favorite, fun reads about this era, with a lot of insight, is "20 years of high tech marketing disasters":

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.

ashishgandhi2• 15 years ago

Spooky coincidence: This is exactly the chapter I read yesterday in Hacker and Painters.

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.

nadam3• 15 years ago

I liked these essays when I was young, because these were so encouraging. It treated us programmers as special snow flakes, and advertised us the romantic super exciting world of startups. Now as I got older and more experienced I find these essays trivial, boring or simply not true. I realized I no longer gain anything 'usable' for my life from such essays. (I find less and less interesting most essays from Joel and others also. I am more and more interested in actual business opportunities and connections, and less and less interested in general essays about enterpreneurship and programming.)

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.

chalst3• 15 years ago

pg's multiple comes first from how the programmer is deployed, and only then from the talent edge. His example of a programmer deployed in a lacklustre way is maintaining and tweaking a piece of software.

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.

dfsdafsdf• 15 years ago

sorry to burst your bubble but Page and Brin are computer scientist and much less "programmers". The reason Google succeeded was because they had a great idea, and not because they had the best programmers.

Being programmer alone is of little use, one must be an innovator to create wealth.

pg5• 15 years ago

Can you give me an example of a specific sentence or passage in the essay that you believe is false?

jules3• 15 years ago

One doesn't need to look very far. The first paragraph:

> 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.

nadam3• 15 years ago

I have problem with this:

"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.

gallerytungsten• 15 years ago

"When those far removed from the creation of wealth-- undergraduates, reporters, politicians-- hear that the richest 5% of the people have half the total wealth, they tend to think injustice!"

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.

JoeAltmaier2• 15 years ago

Summarizes neatly the mental distinction between corporate employee and potential startup founder.

nadam3• 15 years ago

I do not think it is black and white. I myself sometimes have taken risks in my life, but I do not take huge risks all the time. I had to decide on this when I had my family and children. I am creating wealth by creating my Html5 Canvas based UI system on the side, but currently my family eats because of the money I get from a 'corporate job'.

joshklein• 15 years ago

I think the nugget of wisdom here is your point about technically deep startups being quite rare. I can't remember who said it - Steve Blank? - but the startup world is currently dominated by companies who have marketing challenges, not technical challenges. If you go to a startup event, the people who need to figure out how to build what they want to build are vastly outnumbered by those who need to figure out how to get people to pay them for what they want to build. It seems like most companies are essentially building niche CRUD websites, with varying levels of sophistication.

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.

mgkimsal4• 15 years ago

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.

pmorici2• 15 years ago

I think you are under estimating the stench of corporate bullshit. Take how ever bad you think it is and multiply it by 10 then add a little bit and it's worse than that at the really bad places.

mgkimsal4• 15 years ago

Show me people that were $80k corp developers who left, did nothing else except the exact same things they did as corp devs (minus corp redtape) who made millions. No one does. To function, more stuff than just programming needs to happen.

mr_luc• 15 years ago

It's been a while since I've read this essay -- and I'm surprised by some of the reactions I'm reading in these comments!

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.

achompas6• 15 years ago

The underlying ideas are not only correct, they're being actively validated in the increase in salaries for good programmers.

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.

drblast• 15 years ago

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.

outside1234• 15 years ago

two comments:

* 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.

achompas6• 15 years ago

After spending over a year on HN, I really have to disagree with assertions about "corporate bullshit" for one reason:

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?

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