How to earn a billion dollars, according to Paul Graham

In an essay published in June, Y Combinator co-founder Paul Graham set out to answer a question he says some politicians get wrong: whether it is possible to become a billionaire without cheating. The text, "How to Earn a Billion Dollars", is based on a talk he gave at the Oxford Union.

Two numbers

Graham, who started Y Combinator with Jessica Livingston in 2005 and says the firm has since funded about 6,500 companies, argues that how big a startup gets depends on just two numbers: its growth rate and how long that growth continues. Everything else, he writes, follows from them.

To make the point concrete, he asks readers to calculate the log base 1.93 of 500 in a search engine. The answer, about 9.45, is the number of months a company growing 93% a month needs to go from $2m to $1bn — roughly nine and a half months. At a more conservative 15% a month, he continues, five years of growth multiplies revenue by about 4,384 (1.15 to the 60th power): a business earning $10,000 a month today would be earning some $526m a year, enough for a founder with a typical stake to be a billionaire.

Where growth comes from

That growth, Graham says, comes from making something users like so much that they tell their friends. Growth rates also work as a diagnostic: he opens meetings with founders by asking for theirs, because it shows whether they have built the right thing.

His advice on finding such an idea is counterintuitive: do not go looking for startup ideas deliberately, because that makes founders too conservative and pushes them to discard the outliers. The best ideas often sound weak at first — he recalls that Y Combinator funded Airbnb while thinking the idea was bad, simply because it liked the founders. Instead he suggests working on projects with friends, which is how Apple, Google and Facebook began. One funded company, Justin.TV, consisted of a founder streaming his life from a camera on his head; it later became Twitch.

Empathy, not exploitation

The essay is also an argument about how wealth is created. Graham's reply to the claim that great fortunes must involve wrongdoing is that the mechanism he describes requires empathy rather than exploitation: understanding a group of users well enough to make exactly what they want. About 30 Y Combinator alumni have become billionaires so far, he notes, with more in the pipeline.