[HOW] How to Make Wealth (Part 4 - Last)

Get Users

I think it's a good idea to get bought, if you can. Running a business is different from growing one. It is just as well to let a big company take over once you reach cruising altitude. It's also financially wiser, because selling allows you to diversify. What would you think of a financial advisor who put all his client's assets into one volatile stock?

How do you get bought? Mostly by doing the same things you'd do if you didn't intend to sell the company. Being profitable, for example. But getting bought is also an art in its own right, and one that we spent a lot of time trying to master.

Potential buyers will always delay if they can. The hard part about getting bought is getting them to act. For most people, the most powerful motivator is not the hope of gain, but the fear of loss. For potential acquirers, the most powerful motivator is the prospect that one of their competitors will buy you. This, as we found, causes CEOs to take red-eyes. The second biggest is the worry that, if they don't buy you now, you'll continue to grow rapidly and will cost more to acquire later, or even become a competitor.

In both cases, what it all comes down to is users. You'd think that a company about to buy you would do a lot of research and decide for themselves how valuable your technology was. Not at all. What they go by is the number of users you have.

In effect, acquirers assume the customers know who has the best technology. And this is not as stupid as it sounds. Users are the only real proof that you've created wealth. Wealth is what people want, and if people aren't using your software, maybe it's not just because you're bad at marketing. Maybe it's because you haven't made what they want.

Venture capitalists have a list of danger signs to watch out for. Near the top is the company run by techno-weenies who are obsessed with solving interesting technical problems, instead of making users happy. In a startup, you're not just trying to solve problems. You're trying to solve problems that users care about.

So I think you should make users the test, just as acquirers do. Treat a startup as an optimization problem in which performance is measured by number of users. As anyone who has tried to optimize software knows, the key is measurement. When you try to guess where your program is slow, and what would make it faster, you almost always guess wrong.

Number of users may not be the perfect test, but it will be very close. It's what acquirers care about. It's what revenues depend on. It's what makes competitors unhappy. It's what impresses reporters, and potential new users. Certainly it's a better test than your a priori notions of what problems are important to solve, no matter how technically adept you are.

Among other things, treating a startup as an optimization problem will help you avoid another pitfall that VCs worry about, and rightly-- taking a long time to develop a product. Now we can recognize this as something hackers already know to avoid: premature optimization. Get a version 1.0 out there as soon as you can. Until you have some users to measure, you're optimizing based on guesses.

The ball you need to keep your eye on here is the underlying principle that wealth is what people want. If you plan to get rich by creating wealth, you have to know what people want. So few businesses really pay attention to making customers happy. How often do you walk into a store, or call a company on the phone, with a feeling of dread in the back of your mind? When you hear "your call is important to us, please stay on the line," do you think, oh good, now everything will be all right?

A restaurant can afford to serve the occasional burnt dinner. But in technology, you cook one thing and that's what everyone eats. So any difference between what people want and what you deliver is multiplied. You please or annoy customers wholesale. The closer you can get to what they want, the more wealth you generate.

Wealth and Power

Making wealth is not the only way to get rich. For most of human history it has not even been the most common. Until a few centuries ago, the main sources of wealth were mines, slaves and serfs, land, and cattle, and the only ways to acquire these rapidly were by inheritance, marriage, conquest, or confiscation. Naturally wealth had a bad reputation.

Two things changed. The first was the rule of law. For most of the world's history, if you did somehow accumulate a fortune, the ruler or his henchmen would find a way to steal it. But in medieval Europe something new happened. A new class of merchants and manufacturers began to collect in towns. [10] Together they were able to withstand the local feudal lord. So for the first time in our history, the bullies stopped stealing the nerds' lunch money. This was naturally a great incentive, and possibly indeed the main cause of the second big change, industrialization.

A great deal has been written about the causes of the Industrial Revolution. But surely a necessary, if not sufficient, condition was that people who made fortunes be able to enjoy them in peace.[11] One piece of evidence is what happened to countries that tried to return to the old model, like the Soviet Union, and to a lesser extent Britain under the labor governments of the 1960s and early 1970s. Take away the incentive of wealth, and technical innovation grinds to a halt.

Remember what a startup is, economically: a way of saying, I want to work faster. Instead of accumulating money slowly by being paid a regular wage for fifty years, I want to get it over with as soon as possible. So governments that forbid you to accumulate wealth are in effect decreeing that you work slowly. They're willing to let you earn $3 million over fifty years, but they're not willing to let you work so hard that you can do it in two. They are like the corporate boss that you can't go to and say, I want to work ten times as hard, so please pay me ten times a much. Except this is not a boss you can escape by starting your own company.

The problem with working slowly is not just that technical innovation happens slowly. It's that it tends not to happen at all. It's only when you're deliberately looking for hard problems, as a way to use speed to the greatest advantage, that you take on this kind of project. Developing new technology is a pain in the ass. It is, as Edison said, one percent inspiration and ninety-nine percent perspiration. Without the incentive of wealth, no one wants to do it. Engineers will work on sexy projects like fighter planes and moon rockets for ordinary salaries, but more mundane technologies like light bulbs or semiconductors have to be developed by entrepreneurs.

Startups are not just something that happened in Silicon Valley in the last couple decades. Since it became possible to get rich by creating wealth, everyone who has done it has used essentially the same recipe: measurement and leverage, where measurement comes from working with a small group, and leverage from developing new techniques. The recipe was the same in Florence in 1200 as it is in Santa Clara today.

Understanding this may help to answer an important question: why Europe grew so powerful. Was it something about the geography of Europe? Was it that Europeans are somehow racially superior? Was it their religion? The answer (or at least the proximate cause) may be that the Europeans rode on the crest of a powerful new idea: allowing those who made a lot of money to keep it.

Once you're allowed to do that, people who want to get rich can do it by generating wealth instead of stealing it. The resulting technological growth translates not only into wealth but into military power. The theory that led to the stealth plane was developed by a Soviet mathematician. But because the Soviet Union didn't have a computer industry, it remained for them a theory; they didn't have hardware capable of executing the calculations fast enough to design an actual airplane.

In that respect the Cold War teaches the same lesson as World War II and, for that matter, most wars in recent history. Don't let a ruling class of warriors and politicians squash the entrepreneurs. The same recipe that makes individuals rich makes countries powerful. Let the nerds keep their lunch money, and you rule the world.

Notes

[1] One valuable thing you tend to get only in startups isuninterruptability. Different kinds of work have different time quanta. Someone proofreading a manuscript could probably be interrupted every fifteen minutes with little loss of productivity. But the time quantum for hacking is very long: it might take an hour just to load a problem into your head. So the cost of having someone from personnel call you about a form you forgot to fill out can be huge.

This is why hackers give you such a baleful stare as they turn from their screen to answer your question. Inside their heads a giant house of cards is tottering.

The mere possibility of being interrupted deters hackers from starting hard projects. This is why they tend to work late at night, and why it's next to impossible to write great software in a cubicle (except late at night).

One great 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.

[2] Faced with the idea that people working for startups might be 20 or 30 times as productive as those working for large companies, executives at large companies will naturally wonder, how could I get the people working for me to do that? The answer is simple: pay them to.

Internally most companies are run like Communist states. If you believe in free markets, why not turn your company into one?

Hypothesis: A company will be maximally profitable when each employee is paid in proportion to the wealth they generate.

[3] Until recently even governments sometimes didn't grasp the distinction between money and wealth. Adam Smith (Wealth of Nations, v:i) mentions several that tried to preserve their "wealth" by forbidding the export of gold or silver. But having more of the medium of exchange would not make a country richer; if you have more money chasing the same amount of material wealth, the only result is higher prices.

[4] There are many senses of the word "wealth," not all of them material. I'm not trying to make a deep philosophical point here about which is the true kind. I'm writing about one specific, rather technical sense of the word "wealth." What people will give you money for. This is an interesting sort of wealth to study, because it is the kind that prevents you from starving. And what people will give you money for depends on them, not you.

When you're starting a business, it's easy to slide into thinking that customers want what you do. During the Internet Bubble I talked to a woman who, because she liked the outdoors, was starting an "outdoor portal." You know what kind of business you should start if you like the outdoors? One to recover data from crashed hard disks.

What's the connection? None at all. Which is precisely my point. If you want to create wealth (in the narrow technical sense of not starving) then you should be especially skeptical about any plan that centers on things you like doing. That is where your idea of what's valuable is least likely to coincide with other people's.

[5] In the average car restoration you probably do make everyone else microscopically poorer, by doing a small amount of damage to the environment. While environmental costs should be taken into account, they don't make wealth a zero-sum game. For example, if you repair a machine that's broken because a part has come unscrewed, you create wealth with no environmental cost.

[5b] This essay was written before Firefox.

[6] Many people feel confused and depressed in their early twenties. Life seemed so much more fun in college. Well, of course it was. Don't be fooled by the surface similarities. You've gone from guest to servant. It's possible to have fun in this new world. Among other things, you now get to go behind the doors that say "authorized personnel only." But the change is a shock at first, and all the worse if you're not consciously aware of it.

[7] When VCs asked us how long it would take another startup to duplicate our software, we used to reply that they probably wouldn't be able to at all. I think this made us seem naive, or liars.

[8] Few technologies have one clear inventor. So as a rule, if you know the "inventor" of something (the telephone, the assembly line, the airplane, the light bulb, the transistor) it is because their company made money from it, and the company's PR people worked hard to spread the story. If you don't know who invented something (the automobile, the television, the computer, the jet engine, the laser), it's because other companies made all the money.

[9] This is a good plan for life in general. If you have two choices, choose the harder. If you're trying to decide whether to go out running or sit home and watch TV, go running. Probably the reason this trick works so well is that when you have two choices and one is harder, the only reason you're even considering the other is laziness. You know in the back of your mind what's the right thing to do, and this trick merely forces you to acknowledge it.

[10] It is probably no accident that the middle class first appeared in northern Italy and the low countries, where there were no strong central governments. These two regions were the richest of their time and became the twin centers from which Renaissance civilization radiated. If they no longer play that role, it is because other places, like the United States, have been truer to the principles they discovered.

[11] It may indeed be a sufficient condition. But if so, why didn't the Industrial Revolution happen earlier? Two possible (and not incompatible) answers: (a) It did. The Industrial Revolution was one in a series. (b) Because in medieval towns, monopolies and guild regulations initially slowed the development of new means of production.

Credit to : http://www.paulgraham.com/wealth.html