Four types of money

I identified four types of money a person or organisation can earn.

The criteria and indicators laid out below are not fully shaped yet, but the model has already proved useful enough in conversations with prospective employers and while analysing business opportunities. Because sometimes, understanding how a company earns its money helps to understand what’s cooking without taking the heat of hanging out around the kitchen.

Survival money ⏳ → 💸

Survival money doesn’t scale. Someone contracted for forty hours a week for the same salary for the foreseeable future is selling the only resource they have: the time of their life. And they’re not getting any more of that.

People and organisations earning survival money live for the day and can look only at the past.

Survival money is by far the most emotionally “safe” money, and that makes them compelling.

Skill money 🏇 → 🪙

Skill money comes to people and organisations that can process resources they have into something more valuable.

On the personal level that might be consulting when a specialist can set a price of engagment and the contragent will pay because they want their skills.

Skill money skills logarithmically: to earn more money, an organisation has to bring in more people with desired skills (and/or train them). Eventually, coordination costs kick in and flatten out the growth. One prominent indicator of that process is when bringing in a new team member increases overall productivity but decreases productivity per person.

One of the components of unlocking skill money is being able to look into the future. Currently I suspect that one of compnents for that is accumulating enough survival experience.

Smart money 🧠 → 📈

Smart money happens when an actor finds a force multiplier aka leverage that grants superlinear returns. It’s something in the evnironment, sometimes a combination of factors, that amplifies invested efforts by orders of magnitude.

Smart money largely became possible for common folks with the advent of commercial Internet. This is what 10x and 100x software engineering is about. It’s not about about writing 100x lines of code, it’s about having 100x impact on a single written line of code.

Startup stories involving Smart money are well known - early Instagram, Google and Amazon are probably most well known ones.

Another fascinating example is Basecamp, serving millions of customers with a team of less than a sixty people while working four days during summer. In fact, individuals can also earn Smart money, as Peter Levels, Alex West, and other indie hackers within the “build in public” movement have successfully demonstrated.

One of the major difficulties with transitioning to Smart money is that earning them requires living in the “now”. It’s much easier to dwell on the past or dream about getting rich and famous one day than to go through market research and see an idea being rejected and deemed not worthy.

Living through that experience made me understood what Alberto Brandolini meant by “Software development is a learning process, working code is a side effect” . Since that moment I started to approach ANY software development iniciative as an experiment.

In reality there are many clues out there pointing in the same direction. Here are the most influential that I came accross.

Bussiness-related:

Superlinear Returns by Paul Graham . Before reading Paul’s essay, I used to say that Smart money scales “almost exponentially”, but “superlinear” is the more precise definition, and I’m happy to “borrow” it.
Leverage Points: Places to Intervene in a System by Donella Meadows
GROWTH LEVERS AND HOW TO FIND THEM by Matt Lerner

Software development-related:

I find it ironic that tech founders mobilise all their resources to find business leverage and then miss out on fostering the exact same mindset within their engineering teams. Yes, your developers may feel uncomfortable in the beginning, but they’re not the first to walk down that road. Other developers who faced that problem before them paved the road with Agile , eXtreme Programming and later Event Sourcing . The latter is a state management pattern that enables the learning that Paul wrote about in his “Superlinear Returns” essay.

Money as an act of God ✨ → 🧧

I cant’ say much about Money as an act of God yet. Just a couple of examples I can think of:

Money as a birthday present. A kid gets extra cash without putting any effort just because they exist.
Dubai’s oil-based budget. Again, I can’t say much about the rest of the country, but I was constantly blown away in Dubai by how people handle wealth in a way that inspires others to reach similar heights instead of hiding it like in Europe.

Acknowledgments

Thanks to:

Stephen Tung for helping with the name for the fourth type of money - “Money as an act of God”.
Dave Thomas for pointing out that Skill money has a logarithmic scaling factor instead of a linear

And all other people who contributed to the model through continuous discussions.

Yevhenii's explorations