Tuesday, August 12, 2008

Small is Beautiful

When it comes to creating wealth, small is beautiful. Although when it comes to owning wealth, a corporate structure gives you much better tax benefits.

So how to combine the best of both worlds?

If you intend to become wealthy, its unlikely that you will achieve that end as the employee of a large corporation or government agency. What you will do in a corporate environment is work at low intensity for your career, say 40 years, in exchange for being paid just enough to keep you from leaving - assuming that what you do provides more benefit to the corporation than what they are paying you. This is assuming no graft, corruption, bribes, or other illegal ways of obtaining money from your working environment. The corporation will try to provide ways of improving your productivity with tools like a desk, telephone, and computer. Sadly, the corporate environment, with rare exception, also provides far too many "force de-multipliers" that sap your productivity. "Active sound damping" is one that has pushed many employees to the edge of homicide by shutting down all reasoning capability in the higher levels of brain functioning.

At the other extreme is the very small, high tech startup. Economically, you can think of a startup as a way to compress your whole working life into a few years. You work as hard as you possibly can for about four year. Trim out the pointy-haired boss, the staff meetings, the constant interruptions by slacker coworkers, mind-numbing "active sound damping," sick time, vacation time, human resources issues, annual performance reviews, and commuting time and we can assume you have maximized productivity. This can be a "force-multiplier" of maybe as much as 30 times. So instead of the $60,000 to $80,000 a year of productivity your corporate employer expects, your actual productivity may be as much as $2million to $3million a year.

Assuming you have, indeed, created a product the customer wants, and can sell it at a price the customer is willing to pay, we begin to see where wealth is created.

But it isn't just magic. Never forget that if you want to make a million dollars, you have to endure a million dollars' worth of pain. The question becomes: Do it the hard way, or the reaaaallly haaard way?