|  
  
|  **Want to start a startup?** Get funded by Y Combinator.  
  
---  
  
May 2004  
  
 _(This essay was originally published inHackers & Painters.) _  
  
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. The word "startup" dates from the 1960s, but what happens
in one is very similar to the venture-backed trading voyages of the Middle
Ages.  
  
Startups usually involve technology, so much so that the phrase "high-tech
startup" is almost redundant. A startup is a small company that takes on a
hard technical problem.  
  
Lots of people get rich knowing nothing more than that. You don't have to know
physics to be a good pitcher. But I think it could give you an edge to
understand the underlying principles. Why do startups have to be small? Will a
startup inevitably stop being a startup as it grows larger? And why do they so
often work on developing new technology? Why are there so many startups
selling new drugs or computer software, and none selling corn oil or laundry
detergent?  
  
**The Proposition**  
  
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. This pays especially
well in technology, where you earn a premium for working fast.  
  
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.  
  
Like all back-of-the-envelope calculations, this one has a lot of wiggle room.
I wouldn't try to defend the actual numbers. But I stand by the structure of
the calculation. I'm not claiming the multiplier is precisely 36, but it is
certainly more than 10, and probably rarely as high as 100.  
  
If $3 million a year seems high, remember that we're talking about the limit
case: the case where you not only have zero leisure time but indeed work so
hard that you endanger your health.  
  
Startups are not magic. They don't change the laws of wealth creation. They
just represent a point at the far end of the curve. There is a conservation
law at work here: if you want to make a million dollars, you have to endure a
million dollars' worth of pain. For example, one way to make a million dollars
would be to work for the Post Office your whole life, and save every penny of
your salary. Imagine the stress of working for the Post Office for fifty
years. In a startup you compress all this stress into three or four years. You
do tend to get a certain bulk discount if you buy the economy-size pain, but
you can't evade the fundamental conservation law. If starting a startup were
easy, everyone would do it.  
  
**Millions, not Billions**  
  
If $3 million a year seems high to some people, it will seem low to others.
Three _million?_ How do I get to be a billionaire, like Bill Gates?  
  
So let's get Bill Gates out of the way right now. It's not a good idea to use
famous rich people as examples, because the press only write about the very
richest, and these tend to be outliers. Bill Gates is a smart, determined, and
hardworking man, but you need more than that to make as much money as he has.
You also need to be very lucky.  
  
There is a large random factor in the success of any company. So the guys you
end up reading about in the papers are the ones who are very smart, totally
dedicated, _and_ win the lottery. Certainly Bill is smart and dedicated, but
Microsoft also happens to have been the beneficiary of one of the most
spectacular blunders in the history of business: the licensing deal for DOS.
No doubt Bill did everything he could to steer IBM into making that blunder,
and he has done an excellent job of exploiting it, but if there had been one
person with a brain on IBM's side, Microsoft's future would have been very
different. Microsoft at that stage had little leverage over IBM. They were
effectively a component supplier. If IBM had required an exclusive license, as
they should have, Microsoft would still have signed the deal. It would still
have meant a lot of money for them, and IBM could easily have gotten an
operating system elsewhere.  
  
Instead IBM ended up using all its power in the market to give Microsoft
control of the PC standard. From that point, all Microsoft had to do was
execute. They never had to bet the company on a bold decision. All they had to
do was play hardball with licensees and copy more innovative products
reasonably promptly.  
  
If IBM hadn't made this mistake, Microsoft would still have been a successful
company, but it could not have grown so big so fast. Bill Gates would be rich,
but he'd be somewhere near the bottom of the Forbes 400 with the other guys
his age.  
  
There are a lot of ways to get rich, and this essay is about only one of them.
This essay is about how to make money by creating wealth and getting paid for
it. There are plenty of other ways to get money, including chance,
speculation, marriage, inheritance, theft, extortion, fraud, monopoly, graft,
lobbying, counterfeiting, and prospecting. Most of the greatest fortunes have
probably involved several of these.  
  
The advantage of creating wealth, as a way to get rich, is not just that it's
more legitimate (many of the other methods are now illegal) but that it's more
_straightforward._ You just have to do something people want.  
  
**Money Is Not Wealth**  
  
If you want to create wealth, it will help to understand what it is. Wealth is
not the same thing as money.  Wealth is as old as human history. Far older,
in fact; ants have wealth. Money is a comparatively recent invention.  
  
Wealth is the fundamental thing. Wealth is stuff we want: food, clothes,
houses, cars, gadgets, travel to interesting places, and so on. You can have
wealth without having money. If you had a magic machine that could on command
make you a car or cook you dinner or do your laundry, or do anything else you
wanted, you wouldn't need money. Whereas if you were in the middle of
Antarctica, where there is nothing to buy, it wouldn't matter how much money
you had.  
  
Wealth is what you want, not money. But if wealth is the important thing, why
does everyone talk about making money? It is a kind of shorthand: money is a
way of moving wealth, and in practice they are usually interchangeable. But
they are not the same thing, and unless you plan to get rich by
counterfeiting, talking about _making money_ can make it harder to understand
how to make money.  
  
Money is a side effect of specialization. In a specialized society, most of
the things you need, you can't make for yourself. If you want a potato or a
pencil or a place to live, you have to get it from someone else.  
  
How do you get the person who grows the potatoes to give you some? By giving
him something he wants in return. But you can't get very far by trading things
directly with the people who need them. If you make violins, and none of the
local farmers wants one, how will you eat?  
  
The solution societies find, as they get more specialized, is to make the
trade into a two-step process. Instead of trading violins directly for
potatoes, you trade violins for, say, silver, which you can then trade again
for anything else you need. The intermediate stuff-- the _medium of exchange_
\-- can be anything that's rare and portable. Historically metals have been
the most common, but recently we've been using a medium of exchange, called
the _dollar_ , that doesn't physically exist. It works as a medium of
exchange, however, because its rarity is guaranteed by the U.S. Government.  
  
The advantage of a medium of exchange is that it makes trade work. The
disadvantage is that it tends to obscure what trade really means. People think
that what a business does is make money. But money is just the intermediate
stage-- just a shorthand-- for whatever people want. What most businesses
really do is make wealth. They do something people want.   
  
**The Pie Fallacy**  
  
A surprising number of people retain from childhood the idea that there is a
fixed amount of wealth in the world. There is, in any normal family, a fixed
amount of _money_ at any moment. But that's not the same thing.  
  
When wealth is talked about in this context, it is often described as a pie.
"You can't make the pie larger," say politicians. When you're talking about
the amount of money in one family's bank account, or the amount available to a
government from one year's tax revenue, this is true. If one person gets more,
someone else has to get less.  
  
I can remember believing, as a child, that if a few rich people had all the
money, it left less for everyone else. Many people seem to continue to believe
something like this well into adulthood. This fallacy is usually there in the
background when you hear someone talking about how x percent of the population
have y percent of the wealth. If you plan to start a startup, then whether you
realize it or not, you're planning to disprove the Pie Fallacy.  
  
What leads people astray here is the abstraction of money. Money is not
wealth. It's just something we use to move wealth around. So although there
may be, in certain specific moments (like your family, this month) a fixed
amount of money available to trade with other people for things you want,
there is not a fixed amount of wealth in the world. _You can make more
wealth._ Wealth has been getting created and destroyed (but on balance,
created) for all of human history.  
  
Suppose you own a beat-up old car. Instead of sitting on your butt next
summer, you could spend the time restoring your car to pristine condition. In
doing so you create wealth. The world is-- and you specifically are-- one
pristine old car the richer. And not just in some metaphorical way. If you
sell your car, you'll get more for it.  
  
In restoring your old car you have made yourself richer. You haven't made
anyone else poorer. So there is obviously not a fixed pie. And in fact, when
you look at it this way, you wonder why anyone would think there was.   
  
Kids know, without knowing they know, that they can create wealth. If you need
to give someone a present and don't have any money, you make one. But kids are
so bad at making things that they consider home-made presents to be a
distinct, inferior, sort of thing to store-bought ones-- a mere expression of
the proverbial thought that counts. And indeed, the lumpy ashtrays we made for
our parents did not have much of a resale market.  
  
**Craftsmen**  
  
The people most likely to grasp that wealth can be created are the ones who
are good at making things, the craftsmen. Their hand-made objects become
store-bought ones. But with the rise of industrialization there are fewer and
fewer craftsmen. One of the biggest remaining groups is computer programmers.  
  
A programmer can sit down in front of a computer and _create wealth_. A good
piece of software is, in itself, a valuable thing. There is no manufacturing
to confuse the issue. Those characters you type are a complete, finished
product. If someone sat down and wrote a web browser that didn't suck (a fine
idea, by the way), the world would be that much richer. [5b]  
  
Everyone in a company works together to create wealth, in the sense of making
more things people want. Many of the employees (e.g. the people in the
mailroom or the personnel department) work at one remove from the actual
making of stuff. Not the programmers. They literally think the product, one
line at a time. And so it's clearer to programmers that wealth is something
that's made, rather than being distributed, like slices of a pie, by some
imaginary Daddy.  
  
It's also obvious to programmers that there are huge variations in the rate at
which wealth is created. At Viaweb we had one programmer who was a sort of
monster of productivity. I remember watching what he did one long day and
estimating that he had added several hundred thousand dollars to the market
value of the company. A great programmer, on a roll, could create a million
dollars worth of wealth in a couple weeks. A mediocre programmer over the same
period will generate zero or even negative wealth (e.g. by introducing bugs).  
  
This is why so many of the best programmers are libertarians. In our world,
you sink or swim, and there are no excuses. 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!_ An experienced programmer would be more likely to think _is that
all?_ The top 5% of programmers probably write 99% of the good software.  
  
Wealth can be created without being sold. Scientists, till recently at least,
effectively donated the wealth they created. We are all richer for knowing
about penicillin, because we're less likely to die from infections. Wealth is
whatever people want, and not dying is certainly something we want. Hackers
often donate their work by writing open source software that anyone can use
for free. I am much the richer for the operating system FreeBSD, which I'm
running on the computer I'm using now, and so is Yahoo, which runs it on all
their servers.  
  
**What a Job Is**  
  
In industrialized countries, people belong to one institution or another at
least until their twenties. After all those years you get used to the idea of
belonging to a group of people who all get up in the morning, go to some set
of buildings, and do things that they do not, ordinarily, enjoy doing.
Belonging to such a group becomes part of your identity: name, age, role,
institution. If you have to introduce yourself, or someone else describes you,
it will be as something like, John Smith, age 10, a student at such and such
elementary school, or John Smith, age 20, a student at such and such college.  
  
When John Smith finishes school he is expected to get a job. And what getting
a job seems to mean is joining another institution. Superficially it's a lot
like college. You pick the companies you want to work for and apply to join
them. If one likes you, you become a member of this new group. You get up in
the morning and go to a new set of buildings, and do things that you do not,
ordinarily, enjoy doing. There are a few differences: life is not as much fun,
and you get paid, instead of paying, as you did in college. But the
similarities feel greater than the differences. John Smith is now John Smith,
22, a software developer at such and such corporation.  
  
In fact John Smith's life has changed more than he realizes. Socially, a
company looks much like college, but the deeper you go into the underlying
reality, the more different it gets.  
  
What a company does, and has to do if it wants to continue to exist, is earn
money. And the way most companies make money is by creating wealth. Companies
can be so specialized that this similarity is concealed, but it is not only
manufacturing companies that create wealth. A big component of wealth is
location. Remember that magic machine that could make you cars and cook you
dinner and so on? It would not be so useful if it delivered your dinner to a
random location in central Asia. If wealth means what people want, companies
that move things also create wealth. Ditto for many other kinds of companies
that don't make anything physical. Nearly all companies exist to do something
people want.  
  
And that's what you do, as well, when you go to work for a company. But here
there is another layer that tends to obscure the underlying reality. In a
company, the work you do is averaged together with a lot of other people's.
You may not even be aware you're doing something people want. Your
contribution may be indirect. But the company as a whole must be giving people
something they want, or they won't make any money. And if they are paying you
x dollars a year, then on average you must be contributing at least x dollars
a year worth of work, or the company will be spending more than it makes, and
will go out of business.  
  
Someone graduating from college thinks, and is told, that he needs to get a
job, as if the important thing were becoming a member of an institution. A
more direct way to put it would be: you need to start doing something people
want. You don't need to join a company to do that. All a company is is a group
of people working together to do something people want. It's doing something
people want that matters, not joining the group.   
  
For most people the best plan probably is to go to work for some existing
company. But it is a good idea to understand what's happening when you do
this. A job means doing something people want, averaged together with everyone
else in that company.  
  
**Working Harder**  
  
That averaging gets to be a problem. I think the single biggest problem
afflicting large companies is the difficulty of assigning a value to each
person's work. For the most part they punt. In a big company you get paid a
fairly predictable salary for working fairly hard. You're expected not to be
obviously incompetent or lazy, but you're not expected to devote your whole
life to your work.  
  
It turns out, though, that there are economies of scale in how much of your
life you devote to your work. In the right kind of business, someone who
really devoted himself to work could generate ten or even a hundred times as
much wealth as an average employee. A programmer, for example, instead of
chugging along maintaining and updating an existing piece of software, could
write a whole new piece of software, and with it create a new source of
revenue.  
  
Companies are not set up to reward people who want to do this. You can't go to
your boss and say, I'd like to start working ten times as hard, so will you
please pay me ten times as much? For one thing, the official fiction is that
you are already working as hard as you can. But a more serious problem is that
the company has no way of measuring the value of your work.  
  
Salesmen are an exception. It's easy to measure how much revenue they
generate, and they're usually paid a percentage of it. If a salesman wants to
work harder, he can just start doing it, and he will automatically get paid
proportionally more.  
  
There is one other job besides sales where big companies can hire first-rate
people: in the top management jobs. And for the same reason: their performance
can be measured. The top managers are held responsible for the performance of
the entire company. Because an ordinary employee's performance can't usually
be measured, he is not expected to do more than put in a solid effort. Whereas
top management, like salespeople, have to actually come up with the numbers.
The CEO of a company that tanks cannot plead that he put in a solid effort. If
the company does badly, he's done badly.  
  
A company that could pay all its employees so straightforwardly would be
enormously successful. Many employees would work harder if they could get paid
for it. More importantly, such a company would attract people who wanted to
work especially hard. It would crush its competitors.  
  
Unfortunately, companies can't pay everyone like salesmen. Salesmen work
alone. Most employees' work is tangled together. Suppose a company makes some
kind of consumer gadget. The engineers build a reliable gadget with all kinds
of new features; the industrial designers design a beautiful case for it; and
then the marketing people convince everyone that it's something they've got to
have. How do you know how much of the gadget's sales are due to each group's
efforts? Or, for that matter, how much is due to the creators of past gadgets
that gave the company a reputation for quality? There's no way to untangle all
their contributions. Even if you could read the minds of the consumers, you'd
find these factors were all blurred together.  
  
If you want to go faster, it's a problem to have your work tangled together
with a large number of other people's. In a large group, your performance is
not separately measurable-- and the rest of the group slows you down.  
  
**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.  
  
Measurement alone is not enough. An example of a job with measurement but not
leverage is doing piecework in a sweatshop. Your performance is measured and
you get paid accordingly, but you have no scope for decisions. The only
decision you get to make is how fast you work, and that can probably only
increase your earnings by a factor of two or three.  
  
An example of a job with both measurement and leverage would be lead actor in
a movie. Your performance can be measured in the gross of the movie. And you
have leverage in the sense that your performance can make or break it.  
  
CEOs also have both measurement and leverage. They're measured, in that the
performance of the company is their performance. And they have leverage in
that their decisions set the whole company moving in one direction or another.  
  
I think everyone who gets rich by their own efforts will be found to be in a
situation with measurement and leverage. Everyone I can think of does: 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.  
  
But you don't have to become a CEO or a movie star to be in a situation with
measurement and leverage. All you need to do is be part of a small group
working on a hard problem.  
  
**Smallness = Measurement**  
  
If you can't measure the value of the work done by individual employees, you
can get close. You can measure the value of the work done by small groups.  
  
One level at which you can accurately measure the revenue generated by
employees is at the level of the whole company. When the company is small, you
are thereby fairly close to measuring the contributions of individual
employees. A viable startup might only have ten employees, which puts you
within a factor of ten of measuring individual effort.  
  
Starting or joining a startup is thus as close as most people can get to
saying to one's boss, I want to work ten times as hard, so please pay me ten
times as much. There are two differences: you're not saying it to your boss,
but directly to the customers (for whom your boss is only a proxy after all),
and you're not doing it individually, but along with a small group of other
ambitious people.  
  
It will, ordinarily, be a group. Except in a few unusual kinds of work, like
acting or writing books, you can't be a company of one person. And the people
you work with had better be good, because it's their work that yours is going
to be averaged with.  
  
A big company is like a giant galley driven by a thousand rowers. Two things
keep the speed of the galley down. One is that individual rowers don't see any
result from working harder. The other is that, in a group of a thousand
people, the average rower is likely to be pretty average.  
  
If you took ten people at random out of the big galley and put them in a boat
by themselves, they could probably go faster. They would have both carrot and
stick to motivate them. An energetic rower would be encouraged by the thought
that he could have a visible effect on the speed of the boat. And if someone
was lazy, the others would be more likely to notice and complain.  
  
But the real advantage of the ten-man boat shows when you take the ten _best_
rowers out of the big galley and put them in a boat together. They will have
all the extra motivation that comes from being in a small group. But more
importantly, by selecting that small a group you can get the best rowers. Each
one will be in the top 1%. It's a much better deal for them to average their
work together with a small group of their peers than to average it with
everyone.  
  
That's the real point of startups. Ideally, you are getting together with a
group of other people who also want to work a lot harder, and get paid a lot
more, than they would in a big company. And because startups tend to get
founded by self-selecting groups of ambitious people who already know one
another (at least by reputation), the level of measurement is more precise
than you get from smallness alone. A startup is not merely ten people, but ten
people like you.  
  
Steve Jobs once said that the success or failure of a startup depends on the
first ten employees. I agree. If anything, it's more like the first five.
Being small is not, in itself, what makes startups kick butt, but rather that
small groups can be select. You don't want small in the sense of a village,
but small in the sense of an all-star team.  
  
The larger a group, the closer its average member will be to the average for
the population as a whole. So all other things being equal, a very able person
in a big company is probably getting a bad deal, because his performance is
dragged down by the overall lower performance of the others. Of course, all
other things often are not equal: the able person may not care about money, or
may prefer the stability of a large company. But a very able person who does
care about money will ordinarily do better to go off and work with a small
group of peers.  
  
**Technology = Leverage**  
  
Startups offer anyone a way to be in a situation with measurement and
leverage. They allow measurement because they're small, and they offer
leverage because they make money by inventing new technology.  
  
What is technology? It's _technique_. It's the way we all do things. And when
you discover a new way to do things, its value is multiplied by all the people
who use it. It is the proverbial fishing rod, rather than the fish. That's the
difference between a startup and a restaurant or a barber shop. You fry eggs
or cut hair one customer at a time. Whereas if you solve a technical problem
that a lot of people care about, you help everyone who uses your solution.
That's leverage.  
  
If you look at history, it seems that most people who got rich by creating
wealth did it by developing new technology. You just can't fry eggs or cut
hair fast enough. What made the Florentines rich in 1200 was the discovery of
new techniques for making the high-tech product of the time, fine woven cloth.
What made the Dutch rich in 1600 was the discovery of shipbuilding and
navigation techniques that enabled them to dominate the seas of the Far East.  
  
Fortunately there is a natural fit between smallness and solving hard
problems. The leading edge of technology moves fast. Technology that's
valuable today could be worthless in a couple years. Small companies are more
at home in this world, because they don't have layers of bureaucracy to slow
them down. Also, technical advances tend to come from unorthodox approaches,
and small companies are less constrained by convention.  
  
Big companies can develop technology. They just can't do it quickly. Their
size makes them slow and prevents them from rewarding employees for the
extraordinary effort required. So in practice big companies only get to
develop technology in fields where large capital requirements prevent startups
from competing with them, like microprocessors, power plants, or passenger
aircraft. And even in those fields they depend heavily on startups for
components and ideas.  
  
It's obvious that biotech or software startups exist to solve hard technical
problems, but I think it will also be found to be true in businesses that
don't seem to be about technology. McDonald's, for example, grew big by
designing a system, the McDonald's franchise, that could then be reproduced at
will all over the face of the earth. A McDonald's franchise is controlled by
rules so precise that it is practically a piece of software. Write once, run
everywhere. Ditto for Wal-Mart. Sam Walton got rich not by being a retailer,
but by designing a new kind of store.  
  
Use difficulty as a guide not just in selecting the overall aim of your
company, but also at decision points along the way. At Viaweb one of our rules
of thumb was _run upstairs._ Suppose you are a little, nimble guy being chased
by a big, fat, bully. You open a door and find yourself in a staircase. Do you
go up or down? I say up. The bully can probably run downstairs as fast as you
can. Going upstairs his bulk will be more of a disadvantage. Running upstairs
is hard for you but even harder for him.  
  
What this meant in practice was that we deliberately sought hard problems. If
there were two features we could add to our software, both equally valuable in
proportion to their difficulty, we'd always take the harder one. Not just
because it was more valuable, but _because it was harder._ We delighted in
forcing bigger, slower competitors to follow us over difficult ground. Like
guerillas, startups prefer the difficult terrain of the mountains, where the
troops of the central government can't follow. I can remember times when we
were just exhausted after wrestling all day with some horrible technical
problem. And I'd be delighted, because something that was hard for us would be
impossible for our competitors.  
  
This is not just a good way to run a startup. It's what a startup is. Venture
capitalists know about this and have a phrase for it: _barriers to entry._ If
you go to a VC with a new idea and ask him to invest in it, one of the first
things he'll ask is, how hard would this be for someone else to develop? That
is, how much difficult ground have you put between yourself and potential
pursuers?  And you had better have a convincing explanation of why your
technology would be hard to duplicate. Otherwise as soon as some big company
becomes aware of it, they'll make their own, and with their brand name,
capital, and distribution clout, they'll take away your market overnight.
You'd be like guerillas caught in the open field by regular army forces.  
  
One way to put up barriers to entry is through patents. But patents may not
provide much protection. Competitors commonly find ways to work around a
patent. And if they can't, they may simply violate it and invite you to sue
them. A big company is not afraid to be sued; it's an everyday thing for them.
They'll make sure that suing them is expensive and takes a long time. Ever
heard of Philo Farnsworth? He invented television. The reason you've never
heard of him is that his company was not the one to make money from it. 
The company that did was RCA, and Farnsworth's reward for his efforts was a
decade of patent litigation.  
  
Here, as so often, the best defense is a good offense. If you can develop
technology that's simply too hard for competitors to duplicate, you don't need
to rely on other defenses. Start by picking a hard problem, and then at every
decision point, take the harder choice.   
  
**The Catch(es)**  
  
If it were simply a matter of working harder than an ordinary employee and
getting paid proportionately, it would obviously be a good deal to start a
startup. Up to a point it would be more fun. I don't think many people like
the slow pace of big companies, the interminable meetings, the water-cooler
conversations, the clueless middle managers, and so on.  
  
Unfortunately there are a couple catches. One is that you can't choose the
point on the curve that you want to inhabit. You can't decide, for example,
that you'd like to work just two or three times as hard, and get paid that
much more. When you're running a startup, your competitors decide how hard you
work. And they pretty much all make the same decision: as hard as you possibly
can.  
  
The other catch is that the payoff is only on average proportionate to your
productivity. There is, as I said before, a large random multiplier in the
success of any company. So in practice the deal is not that you're 30 times as
productive and get paid 30 times as much. It is that you're 30 times as
productive, and get paid between zero and a thousand times as much. If the
mean is 30x, the median is probably zero. Most startups tank, and not just the
dogfood portals we all heard about during the Internet Bubble. It's common for
a startup to be developing a genuinely good product, take slightly too long to
do it, run out of money, and have to shut down.  
  
A startup is like a mosquito. A bear can absorb a hit and a crab is armored
against one, but a mosquito is designed for one thing: to score. No energy is
wasted on defense. The defense of mosquitos, as a species, is that there are a
lot of them, but this is little consolation to the individual mosquito.  
  
Startups, like mosquitos, tend to be an all-or-nothing proposition. And you
don't generally know which of the two you're going to get till the last
minute. Viaweb came close to tanking several times. Our trajectory was like a
sine wave. Fortunately we got bought at the top of the cycle, but it was
damned close. While we were visiting Yahoo in California to talk about selling
the company to them, we had to borrow a conference room to reassure an
investor who was about to back out of a new round of funding that we needed to
stay alive.  
  
The all-or-nothing aspect of startups was not something we wanted. Viaweb's
hackers were all extremely risk-averse. If there had been some way just to
work super hard and get paid for it, without having a lottery mixed in, we
would have been delighted. We would have much preferred a 100% chance of $1
million to a 20% chance of $10 million, even though theoretically the second
is worth twice as much. Unfortunately, there is not currently any space in the
business world where you can get the first deal.  
  
The closest you can get is by selling your startup in the early stages, giving
up upside (and risk) for a smaller but guaranteed payoff. We had a chance to
do this, and stupidly, as we then thought, let it slip by. After that we
became comically eager to sell. For the next year or so, if anyone expressed
the slightest curiosity about Viaweb we would try to sell them the company.
But there were no takers, so we had to keep going.  
  
It would have been a bargain to buy us at an early stage, but companies doing
acquisitions are not looking for bargains. A company big enough to acquire
startups will be big enough to be fairly conservative, and within the company
the people in charge of acquisitions will be among the more conservative,
because they are likely to be business school types who joined the company
late. They would rather overpay for a safe choice. So it is easier to sell an
established startup, even at a large premium, than an early-stage one.  
  
**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. 
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.  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.  
  
  
  
**