Why It’s Easier to Create a Tech Startup

Picture this. You are a new biology PhD, and you have a great idea for a new drug that will cure a disease. It will be revolutionary and improve the life of millions. You will have complete monopoly of the market and you’ll be able to charge astronomical prices. You work hard, spending years of nonstop research, jumping through FDA hoops, and all the time attracting little funding and earning little money for your efforts. Finally your efforts are rewarded and you cash out in stock after twenty long years.

The opposite story is that you are an unemployed tech worker laid off in the 2008 recession. You team up with one of your college roommates to launch a new social media platform or sharing economy app. You attract incredible venture attention, get to siphon off six figures for yourself in income, and even though the product isn’t profitable, you have enough “eyeballs” to get bought out by a big company like Google or Facebook.

This isn’t too far from reality. The first story is roughly that of Gilead Sciences, a pharmaceutical company behind sofosbuvir, a revolutionary treatment for hepatitis C. Though the company was founded way back in 1987, it took them until 1992 to go public, and they only got $86.25 million in IPO proceeds. Many decades of slogging through developing later they finally got to their big moneymaker, only for it to make headlines for being too expensive, gaining FDA and legislator scrutiny.

The second is pretty much any moderately successful tech startup. YouTube probably fits the bill the best, but Uber and Airbnb are comparable as well, both of which are valued in the tens of billions.

It’s a headscratcher. Innovation in biology and medicine is tough. There’s a lot of man hours spend pursuing potential drugs, some of which don’t pan out. And then when you finally do discover something, gain FDA approval, and expect to make a reasonable profit, you are blasted by the media for price gouging. Why would any budding entrepreneur focus on bioscience, when there are faster and cheaper ways to wealth in tech? In contrast, tech is capital-light, valued highly by the market, and doesn’t take much expertise to get going.

Think about it this way. Any unemployed guy in his family’s basement can bust open a coding book, learn how to make apps, and start a company. It takes true skill and deep expertise to do the same in the biosciences. Innovations in biology arguably add more to human happiness and lifespan than a new app that remembers where you parked your car.

One is true innovation, the other is mere banality. But when it comes to making money for the lowest investment, there’s no comparison.

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Want to Make Money? Work in Health Care

Marketwatch has an article about the latest U.S. News rankings for various jobs (side note: since when has U.S. News ever seen something that they didn’t want to rank into a list?). Guess what? Health care jobs dominate. Let’s take a look:

  1. Dentist: $152,700
  2. Nurse practitioner: $98,190
  3. Physician assistant: $98,180
  4. Statistician: $80,110
  5. Orthodontist: $187,200
  6. Nurse anesthetist: $157,140
  7. Pediatrician: $170,300
  8. Computer systems analyst: $85,800
  9. Obstetrician and gynecologist: $187,200
  10. Oral and maxillofacial surgeon: $187,200

I’ve highlighted in bold the health-related jobs on there. Wow. That’s a whopping 8/10 on the list! And they all make or come close to 6 digits. In fact, the only two non-health jobs are the lowest in average salary. The secret to easy wealth from a standard job in the U.S. is in the protected fields of health care and state/local government. Read my book on wealth for more details. Mind you, this list neglects other great health care jobs that don’t require a lot of schooling, such as regular registered nurse, physical therapy, and respiratory therapy. Though they don’t make it quite as high on this list due to lower pay, they can be great options if you like a stable job with great security, flexible schedules, and good pay.

What about those of us who heeded the call of STEM? Well, I have a low opinion of straight up science fields. Biologists and chemists have a hard time findings employment due to the surplus of graduates, many of whom had starry-eyed dreams of medical school. Tech is ok, and it makes it onto this list at #8 but doesn’t feature more prominently because of its boom and bust nature. If you’re a programmer and times are good, you can do well at a big company, or you can make it big in an IPO. However, there’s little barrier to entry and you’re always facing competition from H1B workers. When there’s a bust you can be laid off quite easily.

How about other engineering fields? You can generally get good security in nuclear, civil, mechanical, chemical, or petroleum engineering, but those fields are quite niche and there’s not a lot of job opportunities. The schooling is also quite demanding.

I hope you’ve boned up on your math, because the best STEM job on here is #4 at statistician. Statistics is the red headed step child. Not quite as applied as engineering but also not quite as theoretical as pure math. It’s actually the best of the bunch because it’s relevant to so many fields. Whether we’re in research, government, business, think tank, or NGO, chances are there will be need for someone with good understanding of probability and running comparisons for large pools of data. Especially now with the new trend being “big data”, there’s increasing need for someone with the aptitude to sift through that data and find significant correlations.

So if I have a child who doesn’t want to do health care, my next recommendation would be a double degree in statistics and economics. That’s a good mix of versatile fields, one more mathy, and one sorta leaning towards the social sciences, to prepare one for any career. Oh, don’t forget about languages either. Those can be your final oomph to get you over the hump and into a job.

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Yellen’s Wisdom

As revealed to University of Baltimore graduates, was essentially what I wrote in my book on wealth. See for yourself:

“Like technological change, globalization has reinforced the shift away from lower-skilled jobs that require less education to higher-skilled jobs that require college and advanced degrees,” she said. “The jobs that globalization creates in the United States, serving a global economy of billions of people, are more likely to be filled by those who, like you, have secured the advantage of higher education.”

In short, in a competitive world, to just tread water, we need to reach a higher level of education and rack up more student loans. No wonder everyone is so stressed.

Even as she acknowledged higher debt levels, Ms. Yellen said the benefits of a college degree outweigh the costs.

“Some of you may be worried about paying off loans you have taken out to pay for your education,” she said. “The good news is that the vast majority of student borrowers who complete their degrees find work that allows them to keep up with their payments and pay off their loans.”

That’s great, as long as you graduate and do so in a field that’s employable. There’s a world of difference in being a chemical engineer vs say an art history major.

Yellen does throw a bone to those being left behind.

“It concerns me, as it should concern all of us, that many are falling behind,” she said. “Improvements in elementary and secondary education can help prepare more people for college and the opportunities college makes available, but for those who do not attend college, we must find other ways to extend economic opportunity to everyone in America.”

The problem is that people are fundamentally lazy and entitled. Those who work hard and hustle do so quietly. They get an education, move to the big cities where the jobs are, and start climbing the ranks. Or they start their own small business. Those who yell a bit louder want more freebies handed to them. Just look at what Trump promised (to bring the old high paying manufacturing jobs back) vs what Clinton promised (to subsidize retraining programs in new areas like nursing and IT). How many old fat miners and truckers with chronic back pain addicted to opioids are willing to go through the rigours of retraining?

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Making Out Like a Bandit While Your Startup Burns

That’s what skewered shareholders are accusing of Theranos founder and CEO Elizabeth Holmes of doing.

Funny, this whole thing reminds me of that Futurama episode when Fry is convinced by a snazzy partner to launch a startup with all pizzazz and show and no actual substance. The goal of course is to angle for a buyout/cashout while eventually jilting the investors. This is really what Theranos has done.

Let’s look at the facts behind the situation:

  1. Elizabeth Holmes assembles a prestigious group of people more for their credential and connections than for actual talent and knowledge of the industry
  2. She dresses like and bills herself as the female Steve Jobs, leveraging her Stanford professor and school name
  3. The company says it has a secret technology that will disrupt and revolutionalize the lab testing industry (if this were real, the 800 lb gorillas like Medtronic, which is making continuous glucose monitors for diabetics, and Quest, which processes many lab specimens, would have jumped on it already and innovated themselves or bought the technology from Stanford)
  4. The company actually ran some specimens on Quest machines and sent the results on as their own
  5. Internal dissenters who warned and tried to whistleblow were fired, bought out, or otherwise silenced

What can we learn from this? Well, the company is likely bankrupt from shareholders and the FDA bombarding it with lawsuits. The stock is worthless. The big question that remains is whether Holmes gets to keep any of her salary and already cashed out stock, or if there’s some attempt to claw it back by shareholders. If the clawback is unsuccessful, this will set a precedent for future entrepreneurs that selling the idea is more important than having an actual product.

So go ahead and try it at home. Craft a pitch of a zany idea backed by data that makes it plausible. Hype it up, attract investors, grow the userbase (easy to do in tech) or hire enough big name people to generate enough buzz, and then cash out or sell out.

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Is Social Media Conducive to Success?

I’m shaking my head at young kids these days, stuck on their phones, obtaining (and believing) all their information from the internet and social media, regardless of how authoritative the sources. At times, I feel like an old fart, stuck with dialup and landline phones, grumbling about the decline of Usenet and email, and not yet adopting the new technology.

But really, more often than not, social media makes you dumb. It’s a time waster where friends tempt you seemingly glamorous lifestyles, which are in reality carefully cultivated slices of their life. Being exposed to those things can lead to depression and endless peer competition. By focusing too much on the virtual life, we lose track of reality. Tangible things like reading, studying, exercising, and connecting with people in the real world become lost. We lose motivation and don’t spend time doing productive things.

However, given the large audience base, it’s unavoidable for big companies to have a presence on social media. This also applies to small businesses that we start, where viral marketing can really enhance growth. After all, who can turn down free advertising.

The best balance that I’ve found is to have accounts on Facebook and Twitter, and have them be driven by bots. Automatically post articles and such on these sites, automatically add people, accept all friend requests/follows, but minimize the temptation of actually personally opening the app or site to send messages to others.

Maybe if enough people adopt this strategy, the entire Twitterverse will be filled with bots spamming other bots!

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Newsflash: Clickbait Beats Real News

So much for making an honest buck the old fashioned way. Teenagers in Macedonia have cashed in on the Trump craze by creating sensationalist but false news articles and then sharing them virally on social media. By all accounts, this was a lucrative arrangement, with some top performers grossing $10,000 per month from AdSense revenue.

From the perspective of the educated elite, it can be disheartening that people are dumber than before, so much so that they believe what they read. For these people, the more outrageous the news, the more clicks and donations are generated. Real news by contrast just doesn’t have the same appeal.

However, on this site here we are politically agnostic. So what’s the take home message from the success of fake news? Sensationalism sells (by generating clicks and eyeballs, and get shared virally due to the outrage they generate). In contrast, bland and boring rarely gets one very far. You know what else sells? Sex. Just take a look at the average Yahoo news article. A cursory glance at the sidebar shows the following ads:

  • She Hid the Truth Until This Photo Appeared (black/white photo of a half naked actress)
  • She Didn’t Notice And The Fans Began to Cheer (photo of skimpy female sports player on the ground)
  • McKayla Maroney is Completely Unrecognizeable Today (photo of young gymnast smiling)
  • United Airlines Furious After Crew Revealed This (flattering angle shot of smiling flight attendant, emphasizing her smile, figures, and tights)
  • Jim Cramer: Homeowners Must Move Fast On Rebate (photo of a shrugging Jim Cramer)
  • It May Be the End of Social Security (RIP tombstone of Social Security)
  • Federal “Mortgage Payback” Goes Into Effect Today (businessman in a suit)

The overriding theme is: how to make easy money, pictures of skimpy women, and threats of easy money being taken away. Empirically, this is what the audience is interested in. Does this erode trust in institutions and authority? Are businesses promoting bad behaviour by appealing to base instincts, or are they simply catering to their customers? You decide.

Regardless of your opinion on the ethics of this type of advertising, the conclusion that we may draw here is that targeted sensationalist messaging can really enhance revenue. As the successful fake news sites can attest, this can be a self-contained business idea in itself. For example, if you’re unscrupulous, you can start a website (for very low cost) aimed at exposing the truth behind prescription drugs and how natural remedies are so much better. Then write fake news articles with studies showing how ___ vitamin beats a common prescription drug for ___ common diagnosis. You can throw in there a few snippets or quotes from prestigious doctors. Then add another article about how there is a mainstream medical conspiracy trying to cover up these cheap cures. Then advertise with sensationalist message on Yahoo (so desperate for revenue they are that they can’t afford to cut off clickbait, unlike Google and Facebook).

Shifting gears, if we want to be a bit more ethical, we can still adopt this style of marketing but still maintain our integrity by posting well-researched articles grounded in reality. Look at the most successful personal finance bloggers and travel bloggers out there today:

  • Young Adventuress – young attractive female living life of leisure
  • Mr Money Mustache – outrageous claims of financial independence early
  • Legal Nomads – young attractive female living life of leisure
  • Nomadic Matt – I live a leisurely life of travel at a young age, and you can too

All of them employ clickbait tactics in some aspect. The female bloggers may not realize it, but the fact that they are young attractive females contributes significantly to their readership.

The technique is yours. Whether you use it for good or ill is up to you.

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Can You Pay Taxes Like Donald Trump?

Donald Trump’s 1995 tax return revelations are all over the news. Some think it’s a smart play, while others think are incredulous that he can get away with paying so little. I’m not here to judge morality or try to sway you with respect to politics. Instead, there are things we can learn from the man in how to structure our own taxes so that we can only pay as much as we’re legally required to, as many defend him for doing. Many of these tips are covered in detail in my book, if you’re interested.

  1. Earn your income from capital gains and dividends, rather than from wages. Working doesn’t pay anymore. Returns from existing wealth and investments are taxed at much lower rates, with a cap of 15-20%, with a surcharge for high earners. Oh, there are no payroll taxes charged on investment income.
  2. Write off “business” expenses and losses and take advantage of generous categorizations of housing depreciation as losses. Offset as much business income with expenses and deductions as possible.
  3. Take advantage of legal tax shelters like IRAs and 401ks. In this category I would also include HSAs and 527 plans. Remember that if you’re self-employed, you can shelter up to $53,000 in income rather than the $18,000 401k limit.
  4. Use the backdoor Roth. I’ve written about it before.

Lest you forget, Mitt Romney used these very tricks to pay a 14% income tax. To do the same, you have to earn your money in the same fashion and from the same sources as these billionaires.

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Another One Bites The Dust

Another hedge fund, that is. Despite the market being up more than 200% since the depths of the financial crisis, some hedge fund managers have somehow managed their billions of investments into the ground.

Richard Perry will shutter his hedge-fund firm after billions of dollars in investment losses and client defections.

The longtime hedge-fund manager told clients in a letter Monday “the industry and market headwinds against us have been strong, and the timing for success in our positions too unpredictable.”

Perry’s eponymous firm has lost more than 60% of its assets under management since November 2014, when it managed $10.4 billion. Its main fund lost more than 12% last year, much of it from a bad bet on Fannie Mae and Freddie Mac, and was down 1.3% this year through August, said a person familiar with the matter.

Perry won’t give back all of the remaining money immediately. He committed in the letter only to returning “a substantial amount of the fund’s capital” starting next month. Some of the remainder won’t be cashed out for more than a year, the letter said. Bloomberg News earlier reported Perry’s shutdown plans.

Ahem, notice how he excuses his own poor actions by claiming that headwinds arrayed against him were too strong, even though the overall market was up. Also note that he doesn’t have plans to return all the investors’ money. Why would anyone pay these guys in the first place, given this kind of performance?

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Compromising Values for Profit

If you want to stay true to your morals and values, stay small. That’s the lesson from Nate Silver’s successful FiveThirtyEight blog/platform for election predictions.

There may also be a second major issue with FiveThirtyEight, which we will describe as one of economy. We start this part of the discussion by noting that every one of us who is writing about politics this year benefits from a horse race. “Things are the same as they were yesterday” is not a story. “Clinton extends her lead” and “Trump makes up ground on Clinton” are. Similarly, we also benefit from finding things that are new and different to talk about. Sen. Bernie Sanders (I-VT) and his rallies tended to get relatively little media coverage; not because of any particular bias against him, but because they were all the same. You can only write, “10,000 young, mostly white people show up to cheer Sanders” so many times. Hillary Clinton, evenhanded and cautious as she is, also tends to give us relatively little to talk about much of the time. With Donald Trump, on the other hand, it’s several new and outrageous and previously unheard of things almost every day. Hence his dominance of the headlines.

Point is, all the political sites have a certain bias towards “dog bites man.” However, there is reason to believe the bias is unusually strong for Silver and his crew. Many political sites and prognosticators—NBC News, the Wall Street Journal, Fox News, Bloomberg Politics—are part of organizations for whom political coverage is part of their core mission. Others—Sabato’s Crystal Ball, the Harvard Political Review—are part of (and are supported by) universities. Still others—HuffPo, Breitbart, Politico, The Hill—are already stable, self-sustaining businesses. And a few—this site, Sam Wang’s Princeton Election Consortium—are side projects of academics who already have day jobs. The point is that while we all like page views and clicks, none of these sites is—as far as we know—facing an immediate existential crisis. Page views could go up or down by 50%, and most or all of the above would keep on trucking.

In short, the article accuses Nate Silver of selling out for money rather than maintain purity of form with insightful and articulate wonky coverage of elections. This is why the most profitable ads that you see on sidebars of major sites are Outbrain specials with outrageous sounding taglines like: “The cameraman kept rolling when she did this” and a picture of a half naked woman. Or how about, “You won’t believe what Donald Trump’s daughter looks like now.” Unfortunately for humanity, insightful blogs like this one and Marginal Revolution can only hope to get half the number of clicks and views, because we cater to the intelligentsia rather than to the lowest common denominator.

Unfortunately, the business mantra of know your audience and know your customer apply to online as well. Just like in the real world, sex, celebrities, and controversy are what draw customers and eyeballs. Eventually, in order to make money, businesses have to bow to reality and cater to this crowd. The alternative to retain control is to remain small and niche (and by extension less profitable), without an overlord or owner to dictate content based on productivity.

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A Profitable Protected Franchise

Surprised to know how profitable auto dealership are? So was I.

Franchise laws include prohibiting manufacturers from terminating existing dealers without “good  cause,” requiring the manufacturers to sell through franchised dealers, and protecting dealers from competition by awarding exclusive territories.

These laws favor the dealers so much that when General Motors GM, -0.22% eliminated its Oldsmobile brand it coughed up $1 billion to compensate dealers, and still couldn’t avoid becoming embroiled in lawsuits. Adding to the dealers’ advantage, some states make it illegal to circumvent the dealers by selling cars online.

Dealers are profitable even when manufacturers are floundering because the dealers make money on servicing old cars and selling used ones. One reason servicing cars is so lucrative is because dealers mark up parts by as much as 80%. For example, a dealer may charge $1,800 for a turbocharger that costs around $1,000. So the dealer pockets $800 before adding labor expenses.

Yeah, there’s a reason Warren Buffett wants to get into this business. When you generate a big proportion of state sales tax revenue, you have incredible leverage to get your favoured bills through to protect your business, at the expense of the average man. How can the rest of us avoid paying tax to this cartel? Move to a place with better public transportation and never drive again.

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