What is wealth?
Money is not wealth. Wealth is the thing we want, and money is a method of moving wealth. Most businesses make wealth by giving people something they want.
How do you create wealth?
There is not a finite amount of wealth in the world, we can always create more. How? Be a craftsman—make something that people want.
Everyone in a company works together to create wealth, some create the product e.g. programmers; some work one level removed from product-making e.g. personnel department.
What is a job?
For a company to exist, it must earn money by selling something that people want i.e. creating wealth. And this is what a job is—you, helping a company to create wealth so they can earn money, and you get paid for your contribution.
How is your contribution measured?
In a large company, your work is averaged together with other people’s. Collectively, all the employees in a company must be generating at least what collectively they are paid, or else the company will collapse.
Can you get rich in a job?
A large company cannot pay you based on the true value you bring, because it cannot measure the value of your work. Your contribution is averaged with everyone else’s, it is too tangled up together to analyse.
(There are exceptions – salesmen and top management jobs can have the value of their work measured, via number of sales, and performance of a company.)
How to get rich?
To get rich, you need to be in a place with both measurement and leverage. If your performance can be measured, you can get paid more by doing more; having leverage means the decisions you make have a big effect, so good decisions can increase your earnings by X factors.
Examples of jobs with measurement and leverage—CEOs, movie stars, hedge fund managers, professional athletes.
Measurement and leverage
You can also be in a job with measurement and leverage by joining a small group working on a hard problem i.e. a start-up.
In a (small) start-up, you can measure the revenue generated by employees at the level of the whole company. In a start-up, you can work ten times as hard, and get paid ten times as much. And you are not asking the company boss this as an individual, but you are asking the users of your product this as a group. The larger a group, the more likely its average member will be to the population average, so a top performer will be dragged down by the overall lower performance of others e.g. a large company.
In a start-up, you get leverage because you make money by inventing new technology.
Technology is a tool – if you solve a problem that a lot of people care about, you help everyone who uses your technology.
Technology / System
Small companies develop new technologies the fastest because they are not constrained by bureaucracy and convention. Big companies can develop technology, slowly.
You do not have to be in a technology or biotech start-up to solve problems e.g. McDonald’s developed a franchise system that can be reproduced anywhere; its precise rules makes it almost a piece of software – write once, run everywhere.
What type of start-up?
Join one that takes on a difficult problem, i.e. barrier to entry.
How hard would this idea be for someone else to develop? How much ground have you put between yourself and potential pursuers?
A start-up that takes on a difficult problem makes it harder for its competitors to catch-up.
If it is easy to duplicate your technology, some big company will make their own and take away your market.
Patents as barriers to entry?
This does not always work because competitors find ways around a patent—big companies violate patents and make suing them expensive and time-consuming.
The solution is to develop technology that is too difficult for competitors to duplicate, and that starts with picking a hard problem.
When running a start-up, you must work incredibly hard. The intensity is decided by your competitors, who are also working as hard as they can.
Start-ups tend to be all-or-nothing. You do not know which of the two you’ll be until the last minute. Many start-ups have a great product but take too long to do it and run out of money.
It is a good idea to get bought, if possible. Here is why:
- Because after you reach a point where you are no longer growing, just running, it is a different business.
- Selling allows you to diversify financially.
How do you get to sell? By being profitable.
Potential buyers will delay buying unless they fear the following:
- One of their competitors will buy you.
- You will grow and will cost more to acquire later, or even become a competitor.
How to be profitable? Get more users. Potential buyers look at your user numbers to determine a start-up’s value.
Wealth is what people want. If you have no users, maybe you haven’t made something they want, so you haven’t created wealth.
Remember, a start-up is trying to solve problems that people care about.
Make the number of users your performance measurement. It is what acquirers care about, what revenues depend on, what makes competitors unhappy, what impresses reporters and potential new users.
And don’t take too long to develop a product! Get something out there, so you can have some users to measure, otherwise you are optimising based on guesses.
The underlying principle: wealth is what people want.