Paul Graham on Getting Rich: The Two Things You Need
There are many ways to get rich.
But, in my mind, there’s only one real way:
“Want to become a billionaire? Then help a billion people.” -Peter Diamandis
Paul Graham knows all about getting rich this way. He did it in 1998, when his company, Viaweb, sold to Yahoo! for $49.6 million.
Now, he helps others do the same at Y Combinator, which helps “incubate” promising new startups. The combined value of YC companies is over $65 billion dollars.
In his book Hackers & Painters, Paul Graham has a chapter titled “How to Make Wealth” that shares the principles behind getting rich.
Let’s take a look.
The Weight of the Average
First, let’s clarify something.
Money and wealth are not the same. Money — be it pieces of paper or numbers on a screen — is a store of value. Wealth, on the other hand, is value itself.
Businesses, says Graham, aren’t about making money:
“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.”
Now, there’s a downside to working for a company. Whenever you’re part of a whole, you can become burdened with the “weight of the average”:
“In a company, the work you do is averaged together with a lot of other people’s. … 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.”
These days, people throw around the word “equality.” But let us not confuse equality of opportunity with equality of outcome.
Graham mentions how two programmers (getting the same salary) can be entirely different in effect:
“…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).”
Put another way:
“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.”
This explains why it’s hard to get rich in big, slow-moving companies:
“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.”
The Two Conditions for Riches
At a company, if your work helps a million people, you probably won’t become a millionaire. That’s because you aren’t directly paid for wealth created.
So the first step to riches is to step away from this to a system where you are directly rewarded for your contribution.
Paul Graham calls this quality measurement:
“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.”
An example of this is software development. If I develop software on my own, selling it to 10,000 people instead of 100 people gives me 100 times the payoff. I get paid for doing more and reaching further.
There’s a second piece to the puzzle, though. How are you going to help a million people in the first place?
People that do this, says Paul Graham, are in positions with leverage:
“…you have to have leverage, in the sense that the decisions you make have a big effect.”
Everyone who gets rich of their own efforts has both of these qualities, says Graham:
“I think every one 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.”
I’m not big on “riches for riches” sake.
I’m more interested in the wealth side of things. I want help as many people as possible and only then be rewarded for it.
That’s why I love writing.
My writing income is set up (via Patreon and other sources) is that I only make money when I am doing well. If I don’t get results, I don’t get to eat. A perfectly executed article can go on to reach 100k or even 1M people — maximum leverage. A poor article may only reach 1000.
This type of work is not for everyone. There is safety among the average…
But if you want the challenge, if you want to have a bigger impact on the world, and you enjoy the idea of getting paid for your contribution perhaps a measurable, high-leverage occupation is what’s right for you.