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How to Make Wealth

http://paulgraham.com/wealth.html

paulgraham.com

How to Make Wealth
Want to start a startup? Get funded by Y Combinator.

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What Is A Startup

What Is A Startup

A startup is a small company that takes on a hard technical problem.

Economically, you can think of a startup as a way to compress your whole working life into a few years. Instead of working at a low intensity for forty years, you work as hard as you possibly can for four. 

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The Difference Between Wealth And Money

The Difference Between Wealth And Money
  • Wealth is the collection of resources we can use. You can have wealth without having money. Money is a way of moving wealth, and in practice they are usually interchangeable.
  • Money intermediates transactions.  In a specialized society, most of the things you need, you can't make for yourself and you might not have what the other person wants to trade directly for. Thus the use of money to intermediate transactions.

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On The Creation Of Wealth

There is a limited amount of money in the world but wealth is unlimited. Wealth can be created through work and new ideas.

Companies aim to create wealth and so do you when you join one. In a company your work is averaged with that of others so it obscures your actual contribution.

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Individual Power In The Creation Of Wealth

Joining a company is not the only way to create wealth. As long as you can create something that people want you can create wealth and for that you don’t need a company as an intermediary.

Working hard has a high individual cost but creates the opportunity to earn more wealth than one would have by working less hard. Companies are normally not set up to reward people who do this and they often lack a way of measuring individual contribution.

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To get rich...

To get rich...

...you need to get yourself in a situation with measurement and leverage. You need to be in a position where your performance can be measured, or there is no way to get paid more by doing more. And you have to have leverage, as in your decisions having a big effect in the final product you’re working on.

The smaller the group involved in a project the easier it is to measure the value of an individual’s contribution. That’s why startups are ideal for hard workers.

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Technology As Leverage

Technology As Leverage

Technology is technique, the way we do things. New technology has its value multiplied by all those who use it. Solving a technical problem that affects many gives you leverage.

Technology changes fast, and small companies are better suited to this pace as they have less bureaucracy to slow them down and are less constrained by convention.

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The Role Of Big Companies In Technology Development

The Role Of Big Companies In Technology Development

Big companies develop technology, but not quickly. Their size makes them slow and prevents them from rewarding employees appropriately.

They are better suited to develop technology in fields where large capital requirements prevent startups from competing. And even in those fields they depend heavily on startups for components and ideas.

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How To Choose A Technology To Develop

How To Choose A Technology To Develop

Seek to solve the harder problems as they are more valuable and give your company an edge over the competition. It also increases the barrier to entry. That’s how hard it is for another company to duplicate what you’ve done.

If you can develop technology that's simply too hard for competitors to duplicate, you don't need to rely on less effective defenses, like patents.

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The Issues With Running Startups

  1. Your competitors decide how hard you work. And that’s often as hard as you possibly can.
  2. Payoff is only on average proportionate to your productivity. You might end up earning as much or less than you would in a big company if the endeavor fails, and failures are common in startups.
  3. Startups tend to be an all-or-nothing proposition. And it takes a leap of faith to find out which side a startup stands on.

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Tips On Selling A Startup

  1. Minimize risks by selling your startup in the early stages, giving up upside for a smaller but guaranteed payoff. Unfortunately, big companies tend to be risk-averse, so it is easier to sell an established startup than an early-stage one.
  2. Selling allows you to diversify away from the volatility of the startup.
  3. Being profitable is the best way to make your company worthy of buying.
  4. A great motivator for a big company to buy a startup is their competition trying to do the same.
  5. The user count is one of the best measures of a company. This tells the buyers if the company is focused on quickly creating a desirable product or just on solving a technical problem.

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Wealth and Power

Wealth and Power

Without the incentive of wealth, people would only work on projects that brought them personal satisfaction or social status, no one would want to develop mundane technologies like light bulbs or semiconductors.

The power to be re-compensated for working hard and keep wealth is what gave rise to startup culture and what powers our technological revolutions.

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Observations On Startups

Observations On Startups
  • One advantage of startups is that they don't yet have any of the people who interrupt you. There is no personnel department, and thus no form nor anyone to call you about it.
  • Theoretically a big company could implement a startup culture and maximize profits if employees are paid in proportion to the wealth they generate.
  • If you want to create wealth, then you should be especially skeptical about any plan that centers on things you like doing. 
  • Establishing a company in a country that has a less interventionist government is ideal for the company’s health.

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SIMILAR ARTICLES & IDEAS:

Taking off

Startups take off because the founders make them take off.

Generally, startups take a push to get them going. Once they are on the track, they will usually keep going, but there is a s...

Recruiting users

Nearly all startups have to recruit their users manually. You can't wait for users to come to you. You have to go out and get them.

  • At least one founder will have to spend a lot of time on sales and marketing. Don't succumb to shyness and laziness.
  • Even if numbers may seem small at first, don't underestimate the power of compound growth. 
  • At some point, growth has to slow down. If the market exists, you can gradually switch to less manual methods.

Initial vulnerability

Almost all startups are vulnerable initially, like a newborn baby. It's harmless if know-it-alls dismiss your startup. Thinking "there's no way this tiny creature could even accomplish anything" is faulty thinking.

The danger is when you dismiss your startup yourself and fail to see the full potential of what you're building.

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Hire Originals at Startups

  • To develop a resilient culture. An environment with people who think differently will put you into much better position to continuous innovation.
  • To anticipate market movemen...

Originals and Where to Find Them

  • Unsung Heroes. For each major innovation or movement, there are catalysts that fade into the background of what they create.
  • Insubordinates. It's important to triage troublemakers, but in doing so, don't miss an original in your midst.
  • Those who have been fired. The ones who do not worry about pleasing others or fitting in.
  • Inward-facing innovators. People that even though work privately, create extreme impact.

Adam Grant

Adam Grant

“Values over rules are key for encouraging originality.”

Create a Spending Plan

The wealthy see money as a resource and a tool to help them build wealth over time.

Know your income, your expenses, how much is earmarked for additional expenses and how much for other f...

Spend Wisely

Learn how to spend on the things that matter to you. 

Consider your values and priorities when you draw up your spending plan. If going on vacation or giving to a charity is important to you, include those items in your spending plan.

Pay Off High-Interest Debt

Pay down your high-interest debt as quickly as possible. 

While some types of low-interest or tax-deductible debt can help you along the way, high-interest debt rarely has a good purpose.