What is money?

Being a CEO and founder of a startup, I’ve been concerned with money in a variety of contexts. A company exists to make money and indeed that was one of the drivers in the days of starting Wingify.  Money is equivalent to freedom for me.

I wanted to make money by myself and was pretty happy when people paid for the first version of VWO. I remember my goal was to make roughly USD 1000 (equivalent of the last monthly salary I had drawn at my employer). VWO ended up making me multiple times my initial goal.

Last month at Wingify, we hit a million dollars of recurring revenue. I’m very happy that the team has been able to achieve this milestone, especially because we’re entirely bootstrapped and haven’t raised any outside investment. There has been a lot of enthusiasm about the million-dollar-a-month figure, and all Wingifighters are pumped up to convert the ‘m’ into a ‘b’. Amidst all this, I want to take a moment to reflect on what really is money.

Is billion dollars enough money? How about a trillion dollars?

This question sounds strange because common sense immediately tells us: ‘of course, a trillion dollars is a big amount’. Imagine all the things one could buy with a trillion dollars – islands, space ships and perhaps even Switzerland. It’s indeed a lot of money.

Money, lots of it
Money, lots of it. Photo by Tom Simpson

Let’s pause for a moment and think how fascinating it is that the world will let you buy stuff and anything else you want just because your conversion rate optimization platform and website push notifications system exist. I realize that I’m stretching the point a bit, but hang on with me for a moment.

What amazes me is this: if you had a billion dollars, you’d most probably never have a physical sensation of that money. You can’t keep it in your drawer, you can’t hold it, you can’t physically posses it. In fact, it is very likely that your billion dollars don’t even exist. Nobody has it. US Fed (as of 2016) says $1.46 trillion of cash is in circulation, while debt in US is more than $19 trillion (as of 2016). If everyone in US decides to physically possess the money they have, they will fall short of more than $17 trillion.

What’s happening here?


Money is a promise that in future you will be able to claim the equivalent of value that you’ve created today

Who makes this promise? The government (but any mutually trusted 3rd party can do that; like in case of bitcoins where people put trust in blockchain).

Why we need a future promise in terms of money?

We require the idea of money because of two reasons:

  • Simple barter works where I make shoes and you make wheat. We exchange those objects and each one of us is happy. However, money is needed because a single individual is typically able to create far more value than s/he can consume personally. Larry Page and Sergey Brin created far more value in the world with the PageRank algorithm than their personal lifetime wheat and food requirements. Money is required for a fair exchange of value.
  • Simple barter may also work when I have a need for shoes right now and I’m willing to give you wheat. But what if I had a blockbuster wheat production this season, but don’t really want equivalent-value 10 pairs of shoes? In such cases, money is needed to store the value so the possessor is able to utilize it in future for something else.

Where does money derive its worth? Why is 1 dollar same for everyone?

One way to answer this question is to ask: ‘when does the other person decide to give you one dollar’. You get one dollar from others when you provide one dollar of value to them. Seems cyclical, but it isn’t. Imagine that you have a roadside stand with a banner that says: ‘Stuff for $1’. First, you put out a piece of crumbled paper on that stand and wait for customers. People come and go, they notice, but nobody buys. You wonder why is that so. After all, $1 is not a lot of money. You get frustrated and are just about to throw the crumbled paper into the trash before you spot an art collector running towards you with a $100 bill. She begs you to sell this piece of art to her and you, amazed, say why not. Being generous, you ask her if he wants 2 more crumbled papers free with that and he immediately backs off and asks you to sign an agreement that you will never make any more crumbled papers.

All this amazes you. Nobody wanted to pay $1 for a crumbled paper, but before you almost gave up, someone came up and bought it for $100. Not just that, she said she won’t buy it unless you promise not to create any more crumbled papers.

1921 Rolls Royce for $1. Any takers? Photo from FrankDale
1921 Rolls Royce for $1. Any takers? Photo from FrankDale

You then put out your second item for the $1 sale – this is your vintage 1921 model Rolls Royce. It’s the only one remaining in the world as the company has stopped making them. The minute you put keys + car’s photo on the stand, you see a rush of people, each with a dollar bill in hand trying to buy the car from you. Such a huge rush of people makes you anxious and you decide to go inside and catch a breath (and drink some lemonade). By the time you come back, you see someone offering you $10,000 for something you wanted to sell for $1. Before you knew, BBC covers this and you get an offer of $1 million from an unknown source. You had a thing for lots of zeros, so you immediately take the offer and hand over the keys.

What just happened? Why did someone gave you a million dollars when you actually wanted to just sell it for $1?

Why did the world make Wingify a million-dollars-a-month company when all I wanted to make was $1000?

The answer lies in this: money is a proxy for how much value you create for other humans

Money, be it a dollar, a million, billion or trillion dollars, is ultimately a proxy for amount of value you are creating in the world.

Someone decides to hand you X units of money because you provide them with X units of value. It’s as simple as that.

Watch the video on how economic machine works. I promise it’ll be the best 30 minutes you will spend today

How is additional money created?

In most cases, economies are zero-sum games. You get $100 for doing a job, you spend $90 on pizzas, video games and movies and put $10 in your bank. The $90 that you spent is someone else’s income (which they further spent, so no new money is created in a transaction), and $10 that you put in your bank is lent to someone who must give back $11 to the bank. If the economy was just limited to $100, where does this extra $1 in the come from?

What I’m talking about here is not money-as-cash (which is easy to create – just print additional money). Here, I’m talking about money-as-value. If most economic transactions are just exchange of value, where does additional value come from? The answer lies in the question: the additional money-as-value is created in the world when additional value is created in the world.

Economic growth happens when more of human needs are satisfied
Economic growth happens when more of human needs are satisfied. Chart from Economist

Let me give you an example. Suppose that in pre-Industrial age, you are in a sweater manufacturing business, making sweaters by hand and are the only one selling sweaters in the town. The maximum you are able to make are 10 sweaters a day, putting in $5 worth of wool and sell them for $10 each, making your daily profit of $50. Your limited capacity means that you are able to sell sweaters only to a limited number of people in your town. Some of them are able to buy, the others are left wanting. This inability to serve more people frustrates you because your money making potential is limited and you really want to see more people wearing your sweaters. So you set out to invent a machine to make sweaters.

After years of toiling on the part time, you see success – finally a machine that can make 100 sweaters in a day. You take a loan to get more wool and start producing sweaters. You are cautious first and only make 20 sweaters on day 1. Much to your surprise, even though you have 20 sweaters to sell, you are still only able to sell 10. People who didn’t buy tell you that while they’d love to buy sweaters, they have already spent all their savings on stuff they are used to paying for. They simply don’t have additional money to buy your sweaters. Next day you figure out that if you sell sweaters at a cheaper price, say $8, selling 20 of them will still make you a total of $60 daily profit – more than what you made before.

You slash your price to $8 and this is when value is created. People who had $10 budgets for your sweaters buy it for $8 and spend the remaining $2 on stuff that other people are selling. After buying all the stuff that they are used to buying, the other people now have an additional $2 to spend and in 4 days each one of them is able to buy your sweater. You give some part of $60 daily profit as interest to the loan you took but are still left with more daily profit than what you had before ($50). You have more money, your people in town are able to afford more sweaters. When everybody wins, it’s not a zero sum game and additional money-as-value is created in the world.

Money is created when you are able to satisfy more (or equivalent) of human needs while using equivalent (or less) resources and time. The freed up resources and time is then used to do other stuff that people value.

In other words, productivity drives economic growth. People value a lot of things – efficiency, leisure time, finding mates, being engrossed, mastering a skill. Satisfying all those needs using lesser resources than before (through technology, innovative policies, newly discovered resources) is how additional value is created.

Startups are in the business of creating value for others

Today’s startups are a world apart from the simple theoretical barter system of economy. The dot com hype of 1999 sent startups to stratosphere, where many of them IPOed and made lots of money for their founders and investors. Then they came crashing down and destroyed $5 trillion of value.

So, what does it mean to destroy $5 trillion? Didn’t that money go somewhere? Even if a founder got rich before her company crashed, she must have gained the money to spend somewhere – real estate, vacations, champagnes and so on. If money went back in the system, how exactly did value get destroyed? As Warren Buffet explains in this article, “value is destroyed by any business that makes losses in its lifetime”. Taking to the extreme, for example, if I start a business where the whole proposition is to pay employees for sitting idle, I’m destroying value. That’s because if my business didn’t exist, those employees would have been employed elsewhere, would have still gotten paid (so they can buy stuff) AND would have been creating something of value for other people. By not making people create something of value, I’m destroying value. They’re consuming but not giving back. This means inefficient businesses destroy value. Flop movies destroy value. Bad plans destroy value. Irrational exuberance destroys value.

In other words, a startup is in the business of creating value. Full stop.

If you are an entrepreneur and all that reading about exotic business models (aka Zenefits) or loss-making growth (aka most public SaaS companies) or hoped-for-advertising profits (aka Twitter) overwhelms and confuses you, take a deep breath and simply think about the fundamentals: are those startups better at creating value for a group of humans than anyone else in the world? How large is the group of humans who benefit? And by value, you clarify: are they in a business of creating something that other people want.

To reiterate, I’ll quote Paul Graham from his essay “How to make wealth“:

‘Wealth (value) is not the same thing as money. Wealth is the fundamental thing. Wealth is stuff we want: food, clothes, houses, cars, gadgets, travel to interesting places, and so on. (To create wealth), you just have to do something people want.’ ~ Paul Graham

Closing thoughts: on future

I’ve been thinking about future of startups or economy in general. If we fast forward a 1000 years, how will our economy look like? Will we have the concept of money? There are two points worth exploring. The first one is that all the technological progress means that poverty is reducing everywhere and because of increased automation and productivity, people’s needs are increasingly fulfilled using less cost and resources. This means that in a globally satisfied society, economic growth will be very, very slow. There simply won’t be any incentive to innovate because everyone’s needs are already satisfied. This also means that, paradoxically, as economies (or companies) grow, growth flattens out. Everlasting economic growth is a myth (to a large extent).

However, and this is my second point, economic growth will never stop totally. It’s because there will always be luxuries that only a few can afford. For example, if there’s a resort in the Alps whose capacity cannot exceed 200 people, there will always be people who will drive its price up and up. This creates an incentive to discover or create such exclusivities. This is also true for arts and collectibles where sentimental value is associated. Maybe Virtual Reality will eliminate the need for seemingly limited natural resources and all the people in the world will be able to enjoy the Alps resort for almost zero cost. And similarly maybe AI of the future will be able to paint what humans used to paint and it’ll be hard to tell human-created art from machine-created art. At that time also, the perceived value will go down (as there will be a glut of amazing creations).

From multiple angles, it does seem that in future, economic growth will slow down or stop completely. And I guess that’s okay. What humans will do when economy can no longer grow is beyond anyone’s imagination. (Edit on Sept 9th, 2016: the book Beginning of Infinity had me rethink the assumption that growth is finite. The book argues for practically infinite growth as new problems will always arise and we will always solve them. It’s a wonderful book, do read it.)

Thanks Aakanksha for reviewing and suggesting changes.

Addendum (October 9th 2016)

Following some conversations with my friends Kunal Shah and Nilesh Trivedi, I have an important addendum to my post.

Both of them (rightly) pointed out that there is a difference between creating value and capturing it. For example, Linus Torvalds created a lot of value but decided not to capture any of it. That’s a perfect legitimate and admirable way of operating in the world. Linus and all the open source contributors have added a non-trivial amount of value in the world and that’s hugely respectable. Same happened when Dr Salk decided not to patent his new invention: the polio vaccine. Millions of lives have been saved because of it.

Nilesh made an important point and it was reaffirmed in this article: Jonas Salk: Good at Virology, Bad at Economics. The point is really about emphasizing that whenever you create value, you have a *choice* not to capture it. We need people and organizations dedicated to public good and they do create value in the world without capturing it. However, we do need incentive structures that money creates. Without an incentive structure, the very value we hope to have in the world (say an HIV cure) may not exist in the first place because nobody feels incentivized to work on it. (Yes, we can hope this important problem inspires people to work on a cure regardless of incentives. But we can’t rely on hope alone, we have to explore all options of creating value.)

Of course, world will be a better place if there were 10x more Linus or Dr Salk in this world and we should do everything possible to make sure such people get proper recognition and live a life that’s satisfactory to them. Universal basic income and other innovative schemes may actually tilt the balance towards enabling people to create more value without necessarily capturing it. But I believe that humans are hard wired to compete; we are hard wired to respond to incentives. Money is one of the most prominent incentives today for creating value. In future, the proxy for creating value could change but there will likely always be proxies using which people will judge whether what they’re doing is of any value to anyone.

Another important point that Nilesh made was that it’s possible to capture value without creating it. Say if you are in the business of installing windows and you pay a kid to keep breaking windows in your neighbourhood. When you get money for installing replacement for broken windows, you have actually destroyed value. Had you not caused the window to break, the $100 someone paid to get a new window could have been used to buy something else – say a coat – and that person still would have that old window intact. This case is different if window breaks down because of an accident. In that case, you created value because it couldn’t have been otherwise for that person. If the person wanted a window, s/he would have to spend those $100. S/he didn’t have a choice. Another example is that if you are in business of construction and an earthquake comes and destroys some buildings. When your business booms because you were paid to build buildings, you were creating value. Earthquake was not an intentional destruction of value. (PS: you will also create value if you prevent unintentional value destruction – say inventing earthquake prediction algorithm)

However it get murky when who caused what isn’t so obvious. Say you are a defence contractor and a war breaks out. Your business boom and you earn profits. Did you create value or destroy it? I think the perspective depends whether you had anything to do with war breaking out. Maybe you paid lobbyists who promoted aggression. Maybe your mere presence gave your country confidence to attack in a war. This is a complex case, but we can safely assume that profit maximization without ethical and moral considerations could easily lead to value destruction. Ethics and morals should trump profit.

One can create value and capture it, while still holding ethics and morality in very high regard.

So I do want to temper my suggestion that money is a perfect proxy for value. It correlates with creating value but imperfectly. Situations and contexts really determine whether you have created value or not. I also want to suggest that profit maximization isn’t the best approach in life. One should balance creating value and capturing value. Society does need public goods that don’t allow capturing a lot of economic value – poverty, space programs, peace building.


  1. Beautifully written! I really admire your intellect. In addition, I completely respect and am utterly amazed by the fact that you built this company from the ground up with pure sweat equity and no ‘unicorn’ funding etc. I am an entrepreneur in Ghana myself and believe strongly in doing that for my company as well. Let’s keep in touch! You are awesome!

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