Getting Rich by Generating Wealth
Posted by Frugal on February 22nd, 2008
I came across an excellent article while web surfing on How to Make Wealth. The article is extremely long, but the author is very impressive and had such a good understanding of the money matter.
Here are some key excerpts from his article:
1. Why is joining a start-up or starting up a company a good way to get rich? In a big company, you can’t get paid 10 times more if you work 10 times harder. Start-up is a place where you can work extremely hard and have an impact and possibly get rewarded.
Here is a brief sketch of the economic proposition. If you’re a good hacker in your mid twenties, you can get a job paying about $80,000 per year. So on average such a hacker must be able to do at least $80,000 worth of work per year for the company just to break even. You could probably work twice as many hours as a corporate employee, and if you focus you can probably get three times as much done in an hour. You should get another multiple of two, at least, by eliminating the drag of the pointy-haired middle manager who would be your boss in a big company. Then there is one more multiple: how much smarter are you than your job description expects you to be? Suppose another multiple of three. Combine all these multipliers, and I’m claiming you could be 36 times more productive than you’re expected to be in a random corporate job. 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.
2. Money is not Wealth: According to the author’s explanation, wealth is the stuff we want. Money is only a medium for exchange. The amount of money may be fixed (theoretically), but one can create new wealth (stuffs that people want) that is not already there.
3. Measurement and Leverage:
To get rich you need to get yourself in a situation with two things, 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, in the sense that the decisions you make have a big effect.
The jobs that can be easily measured for the performance and have an impact are CEOs, movie stars, hedge fund managers, professional athletes. A good hint to the presence of leverage is the possibility of failure. Upside must be balanced by downside, so if there is big potential for gain there must also be a terrifying possibility of loss. CEOs, stars, fund managers, and athletes all live with the sword hanging over their heads; the moment they start to suck, they’re out. If you’re in a job that feels safe, you are not going to get rich, because if there is no danger there is almost certainly no leverage.
I’m going to stop quoting directly. This article is extremely powerful in its messages. And it really makes me want to do my own start-up company. I’m one of those workalcolics who can work 48 hours straight if necessary, and produce at least 3 times in quality output per hour. I once coded so many lines of codes in a couple of months, such that my small baby finger was hurting because of skin abrasion from too much typing.
Anyway, if you get a chance, I strongly suggest you to read over the article. There is quite a wealth of information on How to Make Wealth.
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February 22nd, 2008 at 9:35 am
That is a very intersting article. It makes me want to work out a startup or at a company where being compensated is based on the quantity/quality of the work.
http://milesmakesamillion.blogspot.com/
February 22nd, 2008 at 2:24 pm
Great post! haven’t had a chance to read the article yet, but it makes a lot of sense: seek opportunities with asymmetric payoffs (and big upside).
I usually think of wealth as the CAPACITY to produce and consume. This is a bit different than the stuff itself. By focusing on capacity, rather than an inventory of stuff, we take into consideration the key factor of time. Given enough time, one could get rich earning $80k/year (provided one saved dilligently and reinvested the proceeds), but becoming very rich this way would take a very long time.
February 22nd, 2008 at 2:26 pm
I’m pretty sure you would do very well with your own business. If you approach that with the same dedication with which you approach this blog, you will be fine.
February 22nd, 2008 at 4:37 pm
I agree with this article. Any person who isn’t their own boss is underpaid. That’s how people who own businesses make money. Owning your own business is absolutely the only way to actually get paid what your worth.
February 23rd, 2008 at 10:19 am
Heheheh… Perfect timing. I just accepted an offer as an executive team member of a venture capital backed start-up. Guess I’ll be making some wealth now…
February 23rd, 2008 at 7:16 pm
good article but i find it almost impossible to believe that 1 person can earn earn $3 million a year doing MORE OF THE SAME job he/she is paid $80k for.
his multiple of 36 is such a stretch. twice as productive for not having a boss? 3 times more productive for working on your own? either the example employee isnt putting forth much effort at his current job or management is clueless.
just playing a little devil’s advocate here…. id say that once established for a few years, this employee could make $250k-1M a year if he busted his butt in his own business. its a dream to think much more than that though
February 23rd, 2008 at 9:10 pm
Brian, I share your skepticism. Once you are your own boss, there are lots of other things you need to do apart from just the job. Marketing, generating business, dealing with clients, dealing with lawyers. These things take time, effort and energy.
How much does that reduce one’s effectiveness?
February 25th, 2008 at 7:09 am
Start ups and small businesses might have a great deal more earning potential but they also come with risks. If I had a family to feed and money was tight I would be far happier putting in a 40 hour week and getting 80K than more time with more risk. Start ups are the way to make money in the long run; I’ve seen it done a few times but they’re not for the risk averse.
February 25th, 2008 at 8:40 am
Paul Graham is an excellent essayist, I suggest you read some of his other articles on his site.
Just remember that working in a tech startup company is an easy decision when you’re a poor student in his early twenties with no mortgage, car payments, stock portfolio and hungry family. If you have all of these, can you really afford to gamble on getting nothing if your startup company fails? Are you willing to work for twice as long as you’re working now?
The way Graham describes it, you would be putting your entire life on hold for however many years it takes to get rich or have your company fail (90 percent chance). Is that something that appeals to anyone reading this blog who is over age 25?
February 25th, 2008 at 12:20 pm
Interesting points – I will take some time tonight to read the full article. Also just discovered your blog which has some very interesting posts. I will be linking to it from my blog .
Cheers,
Andy.
February 26th, 2008 at 2:41 am
Good points Matt and Jasonp -
It’s worth noting that Graham is not exactly a neutral commentator. He has a “startup school” so he is obviously trying to make an appeal to his target market for the school.
I am also not convinced that it is possible to have an internal job market such as he suggests, where everyone is paid according to the seemingly meritocratic approach of individual value creation. A company is simply not a collection of people who happen to be working on the same project and many “value creating” lines of code only do so because they happen to be part of a much larger entity. How much of the value creation should be credited to the entity itself.
Finally, if 5% of programmers are really generating 99% of good code, doesn’t that suggest that most programmers are overpaid, so that even if is multiples made sense, the base of $80k is really way too high.
February 28th, 2008 at 4:12 pm
I finished my grad school at 26 and started working for a start up… The company could not get enough funding and we had to shut down… Joined another start up.. after working for few months I quit (100 hours per week, every week including weekends)… 5 years after I quit this company goes public… I was the 5th employee and could have earned close to $10M… However since I quit only after few months my stocks were not vested… Worked for 2 big companies and then joined a start up when I saw my old company go public… Despite 3 years of sweat and tears company closed doors…. couple months back joined another start up… I am 35 now, overworked and frustrated… The start up path is not an easy one… You have to sacrifice your life for it and there are still no guarantees!!
February 29th, 2008 at 12:23 am
Manny, thanks for the reminder: working for a startup is not the same as working for a large company just with more pay, which is largely what the author suggests. Greater inputs are required. Because the outputs are leveraged, they can be much greater or much lower than those at a large company.
Then again, in checking out his site, I see he runs a “school for startups” so its clear that he’s not publishing a disinterested public service message – he’s selling his program.
March 4th, 2008 at 6:07 am
show me a startup that will pay an employee 3 million a year. there are none. they will work you to death, for a less-than market salary. if you get options, they are probably C or D class options. and IF the company is successful, and IF they go public, or IF they get bought out, you will be LUCKY if your stock is worth much of anything at all in today’s market. The people who get rich at startups are the VCs, and the executives and board members at the top. THEY ALL HAVE EXIT STRATEGIES. 6 years ago the statistics were that 1 in 30 startups were successful. I don’t know what the statistics are today but I doubt they are any better than 1 in 30. This guy may be a great essayist, but I think this article is his opinion (we know about opinions, they are like you-know-what, and everyone has one). I think his views are biased because he is trying to sell a course on startups. He’s got the right idea- give a free course on startups then sell his services on how to start a startup. But all this other dribble about how to creat wealth is just a bunch of manure.
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