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 alt.i.tude. 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 a.s.sets 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 compet.i.tors 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 compet.i.tor.
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 a.s.sume 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 compet.i.tors 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.
6.13. 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 acc.u.mulate a fortune, the ruler or his henchmen would find a way to steal it. But in medieval Europe something new happened. A new cla.s.s 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 acc.u.mulating 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 acc.u.mulate 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 a.s.s. 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 s.e.xy 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 cla.s.s 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.
Chapter 7. Mind the Gap.
When people care enough about something to do it well, those who do it best tend to be far better than everyone else. There"s a huge gap between Leonardo and second-rate contemporaries like Borgognone. You see the same gap between Raymond Chandler and the average writer of detective novels. A topranked professional chess player could play ten thousand games against an ordinary club player without losing once.
Like chess or painting or writing novels, making money is a very specializedskill. But for some reason we treat this skill differently. No one complains when a few people surpa.s.s all the rest at playing chess or writing novels, but when a few people make more money than the rest, we get editorials saying this is wrong.
Why? The pattern of variation seems no different than for any other skill. What causes people to react so strongly when the skill is making money? I think there are three reasons we treat making money as different: the misleading model of wealth we learn as children; the disreputable way in which, till recently, most fortunes were acc.u.mulated; and the worry that great variations in income are somehow bad for society. As far as I can tell, the first is mistaken, the second outdated, and the third empirically false. Could it be that, in a modern democracy, variation in income is actually a sign of health?
7.1. The Daddy Model of Wealth
When I was five I thought electricity was created by electric sockets. I didn"t realize there were power plants out there generating it. Likewise, it doesn"t occur to most kids that wealth is something that has to be generated. It seems to be something that flows from parents.
Because of the circ.u.mstances in which they encounter it, children tend to misunderstand wealth. They confuse it with money. They think that there is a fixed amount of it. And they think of it as something that"s distributed by authorities (and so should be distributed equally), rather than something that has to be created (and might be created unequally).
In fact, wealth is not money. Money is just a convenient way of trading one form of wealth for another. Wealth is the underlying stuff-the goods and services we buy. When you travel to a rich or poor country, you don"t have to look at people"s bank accounts to tell which kind you"re in. You can see wealth -in buildings and streets, in the clothes and the health of the people.
Where does wealth come from? People make it. This was easier to grasp when most people lived on farms, and made many of the things they wanted with their own hands. Then you could see in the house, the herds, and the granary the wealth that each family created. It was obvious then too that the wealth of the world was not a fixed quant.i.ty that had to be shared out, like slices of a pie. If you wanted more wealth, you could make it.
This is just as true today, though few of us create wealth directly for ourselves (except for a few vestigial domestic tasks). Mostly we create wealth for other people in exchange for money, which we then trade for the forms of wealth we want.
Because kids are unable to create wealth, whatever they have has to be given to them. And when wealth is something you"re given, then of course it seems that it should be distributed equally. As in most families it is. The kids see to that. "Unfair," they cry, when one sibling gets more than another.
In the real world, you can"t keep living off your parents. If you want something, you either have to make it, or do something of equivalent value for someone else, in order to get them to give you enough money to buy it. In the real world, wealth is (except for a few specialists like thieves and speculators) something you have to create, not something that"s distributed by Daddy. And since the ability and desire to create it vary from person to person, it"s not made equally.
You get paid by doing or making something people want, and those who make more money are often simply better at doing what people want. Top actors make a lot more money than B-list actors. The B-list actors might be almost as charismatic, but when people go to the theater and look at the list of movies playing, they want that extra oomph that the big stars have.
Doing what people want is not the only way to get money, of course. You could also rob banks, or solicit bribes, or establish a monopoly. Such tricks account for some variation in wealth, and indeed for some of the biggest individual fortunes, but they are not the root cause of variation in income. The root cause of variation in income, as Occam"s Razor implies, is the same as the root cause of variation in every other human skill.
In the United States, the CEO of a large public company makes about 100 times as much as the average person. Basketball players make about 128 times as much, and baseball players 72 times as much. Editorials quote this kind of statistic with horror. But I have no trouble imagining that one person could be 100 times as productive as another. In ancient Rome the price of slaves varied by a factor of 50 depending on their skills. And that"s without considering motivation, or the extra leverage in productivity that you can get from modern technology.
Editorials about athletes" or CEOs" salaries remind me of early Christian writers, arguing from first principles about whether the Earth was round, when they could just walk outside and check. How much someone"s work is worth is not a policy question. It"s something the market already determines.
"Are they really worth 100 of us?" editorialists ask. Depends on what you mean by worth. If you mean worth in the sense of what people will pay for their skills, the answer is yes, apparently.
A few CEOs" incomes reflect some kind of wrongdoing. But are there not others whose incomes really do reflect the wealth they generate? Steve Jobs saved a company that was in a terminal decline. And not merely in the way a turnaround specialist does, by cutting costs; he had to decide what Apple"s next products should be. Few others could have done it. And regardless of the case with CEOs, it"s hard to see how anyone could argue that the salaries of professional basketball players don"t reflect supply and demand.
It may seem unlikely in principle that one individual could really generate so much more wealth than another. The key to this mystery is to revisit that question, are they really worth 100 of us? Would a basketball team trade one of their players for 100 random people? What would Apple"s next product look like if you replaced Steve Jobs with a committee of 100 random people? These things don"t scale linearly. Perhaps the CEO or the professional athlete has only ten times (whatever that means) the skill and determination of an ordinary person. But it makes all the difference that it"s concentrated in one individual.
When we say that one kind of work is overpaid and another underpaid, what are we really saying? In a free market, prices are determined by what buyers want. People like baseball more than poetry, so baseball players make more than poets. To say that a certain kind of work is underpaid is thus identical with saying that people want the wrong things.
Well, of course people want the wrong things. It seems odd to be surprised by that. And it seems even odder to say that it"s unjust that certain kinds of work are underpaid. Then you"re saying that it"s unjust that people want the wrong things. It"s lamentable that people prefer reality TV and corndogs to Shakespeare and steamed vegetables, but unjust? That seems like saying that blue is heavy, or that up is circular.
The appearance of word "unjust" here is the unmistakable spectral signature of the Daddy Model. Why else would this idea occur in this odd context? Whereas if the speaker were still operating on the Daddy Model, and saw wealth as something that flowed from a common source and had to be shared out, rather than something generated by doing what other people wanted, this is exactly what you"d get on noticing that some people made much more than others.
When we talk about "unequal distribution of income," we should also ask, where does that income come from? Who made the wealth it represents? Because to the extent that income varies simply according to how much wealth people create, the distribution may be unequal, but it"s hardly unjust.
7.2. Stealing It
The second reason we tend to find great disparities of wealth alarming is that for most of human history the usual way to acc.u.mulate a fortune was to steal it: in pastoral societies by cattle raiding; in agricultural societies by appropriating others" estates in times of war, and taxing them in times of peace.
In conflicts, those on the winning side would receive the estates confiscated from the losers. In England in the 1060s, when William the Conqueror distributed the estates of the defeated Anglo-Saxon n.o.bles to his followers, the conflict was military. By the 1530s, when Henry VIII distributed the estates of the monasteries to his followers, it was mostly political. But the principle was the same. Indeed, the same principle is at work now in Zimbabwe.
In more organized societies, like China, the ruler and his officials used taxation instead of confiscation. But here too we see the same principle: the way to get rich was not to create wealth, but to serve a ruler powerful enough to appropriate it.
This started to change in Europe with the rise of the middle cla.s.s. Now we think of the middle cla.s.s as people who are neither rich nor poor, but originally they were a distinct group. In a feudal society, there are just two cla.s.ses: a warrior aristocracy, and the serfs who work their estates. The middle cla.s.s were a new, third group who lived in towns and supported themselves by manufacturing and trade.
Starting in the tenth and eleventh centuries, petty n.o.bles and former serfs banded together in towns that gradually became powerful enough to ignore the local feudal lords. Like serfs, the middle cla.s.s made a living largely by creating wealth. (In port cities like Genoa and Pisa, they also engaged in piracy.) But unlike serfs they had an incentive to create a lot of it. Any wealth a serf created belonged to his master. There was not much point in making more than you could hide. Whereas the independence of the townsmen allowed them to keep whatever wealth they created.
Once it became possible to get rich by creating wealth, society as a whole started to get richer very rapidly. Nearly everything we have was created by the middle cla.s.s. Indeed, the other two cla.s.ses have effectively disappeared in industrial societies, and their names been given to either end of the middle cla.s.s. (In the original sense of the word, Bill Gates is middle cla.s.s.) But it was not till the Industrial Revolution that wealth creation definitively replaced corruption as the best way to get rich. In England, at least, corruption only became unfashionable (and in fact only started to be called "corruption") when there started to be other, faster ways to get rich.
Seventeenth-century England was much like the third world today, in that government office was a recognized route to wealth. The great fortunes of that time still derived more from what we would now call corruption than from commerce. By the nineteenth century that had changed. There continued to be bribes, as there still are everywhere, but politics had by then been left to men who were driven more by vanity than greed. Technology had made it possible to create wealth faster than you could steal it. The prototypical rich man of the nineteenth century was not a courtier but an industrialist.
With the rise of the middle cla.s.s, wealth stopped being a zero sum game. Jobs and Wozniak didn"t have to make us poor to make themselves rich. Quite the opposite: they created things that made our lives materially richer. They had to, or we wouldn"t have paid for them.
But since for most of the world"s history the main route to wealth was to steal it, we tend to be suspicious of rich people. Idealistic undergraduates find their unconsciously preserved child"s model of wealth confirmed by eminent writers of the past. It is a case of the mistaken meeting the outdated.
"Behind every great fortune, there is a crime," Balzac wrote. Except he didn"t. What he actually said was that a great fortune With no apparent cause was probably due to a crime well enough executed that it had been forgotten. If we were talking about Europe in 1000, or most of the third world today, the standard misquotation would be spot on. But Balzac lived in nineteenthcentury France, where the Industrial Revolution was well advanced. He knew you could make a fortune without stealing it. After all, he did himself, as a popular novelist.
Only a few countries (by no coincidence, the richest ones) have reached this stage. In most, corruption still has the upper hand. In most, the fastest way to get wealth is by stealing it. And so when we see increasing differences in income in a rich country, there is a tendency to worry that it"s sliding back toward becoming another Venezuela. I think the opposite is happening. I think you"re seeing a country a full step ahead of Venezuela.
7.3. The Lever of Technology
Will technology increase the gap between rich and poor? It will certainly increase the gap between the productive and the unproductive. That"s the whole point of technology. With a tractor an energetic farmer could plow six times as much land in a day as he could with a team of horses. But only if he mastered a new kind of farming.
I"ve seen the lever of technology grow visibly in my own time. In high school I made money by mowing lawns and scooping ice cream at Baskin-Robbins. This was the only kind of work available at the time. Now high school kids could write software or design web sites. But only some of them will; the rest will still be scooping ice cream.
I remember very vividly when in 1985 improved technology made it possible for me to buy a computer of my own. Within months I was using it to make money as a freelance programmer. A few years before, I couldn"t have done this. A few years before, there was no such thing as a freelance programmer. But Apple painters created wealth, in the form of powerful, inexpensive computers, and programmers immediately set to work using it to create more.
As this example suggests, the rate at which technology increases our productive capacity is probably polynomial, rather than linear. So we should expect to see ever-increasing variation in individual productivity as time goes on. Will that increase the gap between rich and the poor? Depends which gap you mean.
Technology should increase the gap in income, but it seems to decrease other gaps. A hundred years ago, the rich led a different kind of life from ordinary people. They lived in houses full of servants, wore elaborately uncomfortable clothes, and travelled about in carriages drawn by teams of horses which themselves required their own houses and servants. Now, thanks to technology, the rich live more like the average person.
Cars are a good example of why. It"s possible to buy expensive, handmade cars that cost hundreds of thousands of dollars. But there is not much point. Companies make more money by building a large number of ordinary cars than a small number of expensive ones. So a company making a ma.s.s-produced car can afford to spend a lot more on its design. If you buy a custom-made car, something will always be breaking. The only point of buying one now is to advertise that you can.
Or consider watches. Fifty years ago, by spending a lot of money on a watch you could get better performance. When watches had mechanical movements, expensive watches kept better time. Not any more. Since the invention of the quartz movement, an ordinary Timex is more accurate than a Patek Philippe costing hundreds of thousands of dollars. Indeed, as with expensive cars, if you"re determined to spend a lot of money on a watch, you have to put up with some inconvenience to do it: as well as keeping worse time, mechanical watches have to be wound.
The only thing technology can"t cheapen is brand. Which is precisely why we hear ever more about it. Brand is the residue left as the substantive differences between rich and poor evaporate. But what label you have on your stuff is a much smaller matter than having it versus not having it. In 1900, if you kept a carriage, no one asked what year or brand it was. If you had one, you were rich. And if you weren"t rich, you took the omnibus or walked. Now even the poorest Americans drive cars, and it is only because we"re so well trained by advertising that we can even recognize the especially expensive ones.
The same pattern has played out in industry after industry. If there is enough demand for something, technology will make it cheap enough to sell in large volumes, and the ma.s.s-produced versions will be, if not better, at least more convenient. And there is nothing the rich like more than convenience. The rich people I know drive the same cars, wear the same clothes, have the same kind of furniture, and eat the same foods as my other friends. Their houses are in different neighborhoods, or if in the same neighborhood are different sizes, but within them life is similar. The houses are made using the same construction techniques and contain much the same objects. It"s inconvenient to do something expensive and custom.
The rich spend their time more like everyone else too. Bertie Wooster seems long gone. Now, most people who are rich enough not to work do anyway. It"s not just social pressure that makes them; idleness is lonely and demoralizing.
Nor do we have the social distinctions there were a hundred years ago. The novels and etiquette manuals of that period read now like descriptions of some strange tribal society. "With respect to the continuance of friendships. . . " hints Mrs. Beeton"s Book of Household Management (1880), "it may be found necessary, in some cases, for a mistress to relinquish, on a.s.suming the responsibility of a household, many of those commenced in the earlier part of her life." A woman who married a rich man was expected to drop friends who didn"t. You"d seem a barbarian if you behaved that way today. You"d also have a very boring life. People still tend to segregate themselves somewhat, but much more on the basis of education than wealth.
Materially and socially, technology seems to be decreasing the gap between the rich and the poor, not increasing it. If Lenin walked around the offices of a company like Yahoo or Intel or Cisco, he"d think communism had won. Everyone would be wearing the same clothes, have the same kind of office (or rather, cubicle) with the same furnishings, and address one another by their first names instead of by honorifics. Everything would seem exactly as he"d predicted, until he looked at their bank accounts. Oops.
Is it a problem if technology increases that gap? It doesn"t seem to be so far. As it increases the gap in income, it seems to decrease most other gaps.
7.4. Alternative to an Axiom
One often hears a policy criticized on the grounds that it would increase the income gap between rich and poor. As if it were an axiom that this would be bad. It might be true that increased variation in income would be bad, but I don"t see how we can say it"s axiomatic.
Indeed, it may even be false, in industrial democracies. In a society of serfs and warlords, certainly, variation in income is a sign of an underlying problem. But serfdom is not the only cause of variation in income. A 747 pilot doesn"t make 40 times as much as a checkout clerk because he is a warlord who somehow holds her in thrall. His skills are simply much more valuable.
I"d like to propose an alternative idea: that in a modern society, increasing variation in income is a sign of health. Technology seems to increase the variation in productivity at faster than linear rates. If we don"t see corresponding variation in income, there are three possible explanations: (a) that technical innovation has stopped, (b) that the people who would create the most wealth aren"t doing it, or (c) that they aren"t getting paid for it.
I think we can safely say that (a) and (b) would be bad. If you disagree, try living for a year using only the resources available to the average Frankish n.o.bleman in 800, and report back to us. (I"ll be generous and not send you back to the stone age.) The only option, if you"re going to have an increasingly prosperous society without increasing variation in income, seems to be (c), that people will create a lot of wealth without being paid for it. That Jobs and Wozniak, for example, will cheerfully work 20-hour days to produce the Apple computer for a society that allows them, after taxes, to keep just enough of their income to match what they would have made working 9 to 5 at a big company.
Will people create wealth if they can"t get paid for it? Only if it"s fun. People will write operating systems for free. But they won"t install them, or take support calls, or train customers to use them. And at least 90% of the work that even the highest tech companies do is of this second, unedifying kind.