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After listening to DHH speak at Startup School a few years ago I came to the conclusion that for an entrepreneur a "lifestyle business" is a much more probable path to getting rich than the grow-fast-and-flip approach demanded by VCs and angel investors.

In retrospect, it seems pretty obvious, but previously I had really only been exposed to entrepreneurship through PG's blog. I had never heard of 37 Signals before. I appreciate PG's writing because it made me realize that starting my own business was a realistic option, but I wish I had been introduced to entrepreneurship by 37 Signals instead. I wasted more than a half a year building free web services before I figured out I should specifically be building things that I could charge customers money for.

Embarrassing to admit, but true.




Investors want the companies they fund to grow fast, but they don't want to "flip" them. They'd much prefer that they grew into large, independent companies, like Google and Facebook. When companies get sold at earlier stages, it's more often because the founders wanted to than the investors.

I would never claim that starting a startup (= a company designed to grow very fast) was the only way to get rich. Anyone can see that's not how most people get rich. Most people who get rich from starting companies do it by patiently building slow growing service or niche product businesses.

A startup is the extreme end of the spectrum. It's not for everyone. It's not for 99% of people probably. But if you're Steve Jobs, or Larry Page, or Mark Zuckerberg, it turns out that you can do better than the guys patiently building service or niche product businesses.


Buying lottery tickets is the extreme end of the spectrum. It's not for everyone. It's not for 99% of people probably. But if you're Andrew Whittaker or Geraldine Williams or Harold and Helen Lerner[1], it turns out that you can do better than the guys patiently working at startups.

[1] http://en.wikipedia.org/wiki/Lottery_jackpot_records


The expected value of working on a startup is positive. The social value is also positive. And I don't think anyone would argue that, on the margin, you can't do something extra to raise your odds of winning disproportionate to the extra contribution.

So lotto tickets appear to be a terrible counterpoint.


Explaining jokes is usually an unsatisfactory business for everyone involved, but:

What's in question is not the value of working in a startup rather than doing nothing at all, but the value of working in a startup relative to the sort of business that DHH founded. So far as I know, it's an open question whether that is positive or negative -- whether you look at the founder's own interests, or those of society, or the amount by which the founder's extra skill and efforts can improve the chances of success.

Of course I was not suggesting, and do not believe, that founding a startup is exactly like buying lottery tickets. I was suggesting that "for such-and-such people, identified in hindsight by the fact that they were very successful, founding a startup appears to have been a tremendous success" -- which I took to be the point PG was making -- is a poor argument for the superiority-for-some-people of founding a startup over founding a "lifestyle business", since there may be no good way to know in advance which people they are, and it may largely come down to luck.

(Which is not the same as saying that there's nothing at all you can do to help your chances of success. Rather, what making a heroic effort does might be to move you from the "almost certain to fail" category to the "quite likely to fail, and some tiny chance of huge success" category, after which it's a matter of luck. And it's perfectly possible -- and I don't profess to know whether it's true -- that on the whole you're likely to do better in a "lifestyle business" in a startup even in that second category.)


My point was that lotto tickets are a bad decision that works out well for some people. Starting a startup is a good decision that works out poorly for some people.

It's just not helpful to draw the comparison; it's like hearing someone say they like a comedian, and then pointing out that John Wayne Gacy was a popular party performer. The fact that distribution A contains outliers from Distribution B doesn't mean that A and B are even roughly comparable.


It's like you didn't even read what I wrote.

1. The relevant question is not "startup versus nothing", it's "startup versus lifestyle business". How do you know that choosing a startup in that context is a good decision?

2. I wasn't claiming that startups and lottery tickets are at all the same sort of thing. I was making a point about saying "X, Y and Z founded startups and it worked really well for them": that just isn't good evidence that startups are good in general, or even for any particular (however rare) sort of person, unless you can say what's special about X, Y and Z other than that their startups happened to succeed.


The expected value of working on a startup is positive? Can you support that argument with evidence?


I hesitated when writing "grow-fast-and-flip", but went ahead because ultimately owners of large funded companies tend to sell a large percentage of their company to the general public via an IPO. But you're right, characterizing an IPO as a "flip" is a stretch.

The component of your writing I'm referring to is in How to Make Wealth: "If you wanted to get rich, how would you do it? I think your best bet would be to start or join a startup." Your other writings had really resonated with me, and you had described Viaweb's hackers as really risk-averse, so I assumed that I was among the "you" comprising your target demographic. But, having been exposed to other methods of getting rich, I no longer believe my best bet is to start a startup. I would also guess that it is not the best bet of the majority of your readers. It is possible that I am underestimating the prowess of your readerbase, or that you are not writing to the majority of your readers.

I'm happy that you provided an alternative viewpoint at Startup School - I'd love to hear you address the possibility of getting rich via a 37 Signals model on your blog. I know you've mentioned why you don't invest in software companies in order to obtain dividends (despite the fact that people do invest in things like restaurants and banks in order to obtain dividends, and, as an investor, I think I'd rather own shares in a profitable software company than in a profitable restaurant). Maybe you could tie it all together into a blog post at some point. The topic appears here frequently.


I don't think there actually is any difference between what I call a startup and what you call the 37signals model.

A startup is a company that creates wealth rapidly by creating technology a lot of people need. While I don't know the details of 37signals' finances, it seems likely that they'd count as one by my definition.

I think the thing that makes people think 37signals is not a startup is that they currently seem to have no interest in selling the company, but instead pay themselves a lot of the revenues as dividends. That's a matter of personal preference, but as I explained here,

http://www.paulgraham.com/prcmc.html

they amount to the same thing.


For YC, is E(IPO) > E(quick acquisition). The latter obviously being more likely, but less valuable. How do you have enough data to know?


Keep in mind that to become as rich as the partners at 37Signals you have to be just as much of an outlier as the people who found your average high growth startup and have a successful exit. The average SaaS business makes nowhere close to 8 figures a year. Venture backed startups certainly have higher variance, but I wouldn't agree that its black-and-white that starting a SaaS small business is a more reliable way to become wealthy enough to never have to work again.


This sounds like a strange non sequitur to me; you needed 37 Signals to tell you that you need to charge for stuff to make money, and could not possibly have arrived at this conclusion without their particular received insight on this very matter?

It seems to me one could have concluded that just by looking at the nature and history of commerce.

Now, it may be that you did not realise this, and that when you did, it was at 37 Signals' encouragement to do so. But from this it does not follow that the single thing that could've happened that would have been better for you would have been to be introduced to entrepreneurial thought by 37 Signals.




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