Profits = Freedom
37signals.com
37signals.com
Take this post.
Premise: Profits = Freedom.
Results:
Company runs without debt: unrelated to profits. Profitable companies can use debt as a tool, and they cite their lack of credit history as causing a problem! Debt free is not the same as profitable.
We trust our employees: this has everything to do with hiring and nothing to do with profitability. They can offer the benefits they list because they're profitable, but profit doesn't make them trust their employees.
We speak our minds: this is because they have controlling interest in the company, not because they don't have debt. Again, no relation.
This would be confusing as hell for someone that tried to build their business based on the advice in this post.
I kid, I kid ;-)
But their SvN blog is the opposite: they post whatever strikes their fancy whenever they want. I prodded and he told me that there's no restraint on publishing -- any of their employees can post with no explicit pre-approval. He said that sometimes people will have him do a sanity check before posting, and he could only recall giving the thumbs-down once.
I connected the dots and posited that the blog acts as the release valve for the whole company's feature angst -- he didn't really have a response (and was tired of talking to my crazy ass), but he didn't have a rebuttal either.
- trust our employees b/c we're not beholden to people who insist we don't
- speak our minds b/c we're ok with losing customers who disagree with us (since they're the only people we're responsible to)
agree with you re: company runs without debt, tho. that's unrelated to their larger point.
Reconstruction/guessing line of thought: When profitable, you don't need to indebt yourself to stay afloat, hence less people/entities to account to, hence more freedom.
Running a company without debt is liberating; you have a dozen fewer things to worry about.
heh No I'm not (I have a mortgage). I'm using the banks money, and investing it to make a pretty handsome return. (I'm in the UK, property prices are doing pretty well).
Debt is useful to build big stuff. As far as I see it, 37signals aren't building big stuff, so they don't need debt.
I enjoyed Rework but I find the canonical way they try to pass of these opinions increasingly distasteful.
My point is that without completely agreeing with it, the post still has value.
Spending money you haven't earned yet (either through an investor, a bank loan, etc.) can be a very good way to accelerate growth, and sometimes the only way to allow any kind of growth or even continuity. But I do think there is some truth to the cost of debt in having to deal with your creditors one way or another.
If people had to actually write in all the 'qualifiers for smartasses' to avoid it, they would make pretty awful reading. The frustrating thing is, this reads like it's already been through some of that. He's very obviously not claiming some iron causality between debt and profitability. Just a relationship, in his case, possibly, consult your doctor before attempting.
It's not the purpose of the article and it would be a tangent to go off and explain this relationship. Again, if you were making a subtle epistemological argument about the relationship between knowledge and certainty, go chase down everything. This is a blog post about the joys of running a profitable business.
No one is going to build a business from a literalistic interpretation of a blog post.
Profits = Freedom - (37signals)
Profits + 37signals = Freedom
Debt can be a good thing, it can help finance growth or reduce monthly costs to increase cash flow. For the same reasons there could be justifiably good financial reason to get a mortgage even though you could pay for the house in cash, relating to tax benefits and other incentives.
Once you are consistently profitable, or have a high paying job that affords significant personal cash flow, you might be inclined to forgo all debt entirely, but on the other hand once you are in this scenario you are the least likely to default on a debt and have the capacity to take bigger risks by borrowing without ruining either your credit or causing an immense about of stress.
It's great I guess that they don't take the debt approach, but it's not necessarily a positive thing, and I bet I could look at their financial statements and see tons of opportunity to leverage debt that would free up cash flow so they could be making better use of their capital.
yes, it can be or can not be - it's an uncertainty they try to avoid.
Buffet quote:
“Leverage, is the only way a smart guy can go broke … You do smart things, you eventually get very rich. If you do smart things and use leverage and you do one wrong thing along the way, it could wipe you out, because anything times zero is zero. But it’s reinforcing when the people around you are doing it successfully, you’re doing it successfully, and it’s a lot like Cinderella at the ball. The guys look better all the time, the music sounds better, it’s more and more fun, you think, ‘Why the hell should I leave at a quarter to 12? I’ll leave at two minutes to 12.’ But the trouble is, there are no clocks on the wall. And everybody thinks they’re going to leave at two minutes to 12.”
It's also probably not true, unless 37Signals uses their debit card for every random purchase they make.
A credit card is a perfect example of why debt is not categorically bad. If you pay off the debt within 30 days, you have a 0% interest rate. You also probably earned some kind of rebate, airmiles, or loyalty points. And you probably saved time over trying to pay for the product using cash or check.
Purchasing with a credit card is a small example of how intelligent use of debt can be a wise business decision.
Unfortunately, there are many enterprises (drug research, agriculture, smelting, office construction, theme parks, waste processing, private space exploration, etc.) which are fundamentally dependent on large amounts of capital both during the start-up phase as well as to ensure daily continuity of operations.
Most of these capital intensive business also demand a reasonably large staff to support these daily workflows.
With a larger staff comes the increasing probability that one bad apple will be hired. Just one bad apple can bring an entire enterprise down without a reasonable set of security and trust-limiting thresholds on capital expenditures and workflow control. The Union Carbide chemical spill in Bhopal and the Barings bank collapse come immediately to mind.
A prominent COO once told me that for every 100 hires, he expected to pick-up 1 bad apple every 2 years. In his context a "bad apple" was someone whom, over time, would repeatedly and deliberately attempt to criminally defraud, sabotage, or publicly discredit the company.
With those odds, basic human nature, and capital-intensive business economics, it's not hard to see why these enterprise's mores on debt and individual trust run counter to 37Signals' philosophy.
The point being that running Twitter isn't freedom until Twitter doesn't need to constantly ask others to pay the bills.
37s advice about charging is still quite a niche model for the web though. But I'll resist the temptation to start another 'get users to pay' vs 'advertising debate.
Grow based on your profit isn't really 'run of the mill stock business advice' though. Some businesses take time to build. Some require a few years investment. Some can be profitable straight away. One size doesn't fit all.
If you want the lowest risk sure fire way to make money online though, it's certainly "Find a niche" -> "Create useful content" -> "Promote" -> "Monetize through advertising".
The other thing is that in the several autobiographies I've read, people who create really cool stuff - for example Walt Disney, Richard Branson, Duncan Bannatyne... They're always in debt. They're always running from one thing to the next by the skin of their teeth trying to get the next thing financed. Investing all their profit and more into building and growing. But they're also workaholics as well. So what do they know ;)
I keep hearing this Find A Niche thing, and I have been doing some research. It really sounds like a case of researching stuff and writing some useful articles on it. Place the articles on a SEO optimized website and wait for the adsense dollars to roll in.
If it is that easy, surely everyone would be doing it, or is it really that easy?
While I would like a passive revenue stream, the only problem I have with this strategy is that I don't really want to spend my time researching and writing articles. I would much rather find a niche market for an online software app (sort of like patio11's bingocardcreator) that is small enough to build fairly quickly and makes a difference to some market, but finding such a market if you don't already have inside knowledge is the hard part I am finding.
The reason that everybody isn't doing it is many-part, but the highlights are that SEO isn't that easy for the lay-person, and it actually does take quite a bit of work and commitment. There is a very big initial workload to setting up a site to generate passive income, and like a fire, it needs constant stoking to maintain, and will start by making VERY small amounts of money at a time (My first attempt grossed an average of $12 per month).
Simply put, the 'easiest' way to make money isn't really all that easy... and as for 'lowest risk', I'd completely dispute that too. If Google changes an algorhythm, or categorizes you as spam, or you're linked to by an unsavory site, then that could all go away. If you're hosting 50 sites on the same IP address, and have actually managed to get them to profitability, and Google bans the IP, now what?
You tar the sites and move them. It typically isn't that difficult, however most of the people who run the "online niche" strategy have got little technical know-how, so if you can do this stuff you're ahead of the curve.
It's even better if you know a programming language because you can create tools that handle the dull repetitive tasks (eg, backlinking) that you need for it to work at scale.
There was a story on here a few weeks back by someone leading the 4 hour work week nomadic lifestyle and it in the comments I think it was hinted that was the case.
Do you care to share any example sites you have produced that bring in some amount of money passively?
I am currently employed in a decent job at a big corporation, so my goal at the moment is to do something that makes some money, so $12 a month be a start. I have in my mind a 2 year plan to some sort of independence.
As I said, I would much rather spend my spare time building Rails Apps that provide a useful function to some small set of people willing to pay something for the pleasure, but finding the niche markets is the problem.
Now there's always the risk that nobody wants what you made (see fendale's comment), but lets assume for a sec that that's hard either way. Here's a very dry analysis of the path to money for both:
Advertising model:
- Create something useful
- Find an audience
- Find advertisers
- Get advertisers to pay you
Product model:
- Create something useful
- Find an audience
- Get audience to pay you
That's at least one less step in the ‘product model’. You can even argue that to properly execute the advertising model you'll actually need one more step in between: “Create an ad placement strategy” (“Create” as in “design and implement” in all cases here).
Getting money from the people who experience the value of the “useful thing” sounds a lot more direct (and more efficient, which correlates to a better return) than getting the people who value the attention of the people who value the “useful thing” to pay you.
I don't have any first-hand experience with the ad-supported model, but I seriously question whether it's a/the sure-fire way of making money online.
There's also a heap of other reasons... for example, if you create X, and sell it to users, you're only selling one thing. By advertising other peoples products, you can be selling 1,000 different things. The chances of success are vastly increased. Also, if you sell directly, your users are likely only to purchase once from you. If you run advertising, they are more likely to generate continuous revenue for you, from multiple products.
Businesses don't.
> By restricting yourself only to people willing to pay money, you've cut out most of the internet population.
No, you've cut out freeloaders who expect something for nothing, people you generally don't want anyway. This isn't cutting people out, it's filtering out bad prospects. People who want stuff free are the worst customers, I'd much prefer those who are willing to pay for something they find valuable to them. You can avoid a lot of scaling problems by only focusing on paying customers and there's no shortage of paying customers if you build something of real value.
Also the point about 'avoiding scaling problems' is sort of funny. You can certainly avoid scaling problems if you don't try and grow big.
The fact is, it's often easier especially online, to solve the hard problem (get big) first. Once you've done that getting profitable is a walk in the park.
Exactly my point, and since the point of most business is to make money that should be the obvious first goal. Getting big is for dreamers, it's a lottery, getting profitable is the sensible goal. Get big later, or risk failing chasing wild dreams.
Never having debt isn't mundane business advice. Mundane business advice is to borrow as much money as you can given that you can mitigate your risks and have an average return on that money greater than the interest rate you're borrowing at.
Not having debt is fundamental for real freedom. Not having debt is worth giving up some material crap for.
Trust people. Make adjustments on an individual basis if it is ever necessary.
We all want to do good work that has a positive effect on the world and make money to support people we love. Try to set up an environment so people can do their best work.
"Life is too short to work at a job you hate,
but everyone has to do something someone else is willing to pay
them for." Sid Emmertthe concept of "feedom" (and the idea that being able to maximise it is a good thing) is very similar to his "capabilities" - http://en.wikipedia.org/wiki/Capability_approach
As an individual, even if you don't ever want to get into debt and pay for all your purchases up-front, you have to make an effort to build your credit history. If you don't have a good one a lot of things completely unrelated to debt become a lot harder in our society.
Same thing applies to companies. Possibly even more.
In Denmark it's the other way around. You don't get a credit history you get marked as a bad payer. In other words you are not forced to take on debt to show that you can pay your rent instead you are checked to see if you are a bad payer.
I have lived in the US and had to build a credit history to rent a flat. I never understood why this is good for anyone but the banks.
I have just explained how it can also be done and is done and run perfectly well.
Make of it as you want.
If you don't need credit, you don't need a credit score.
The only way I could see people not 'acting like adults' is if they think that by extension certain other things are allowed, which aren't -- by virtue of not being mutually beneficial. DHH and Jason Fried are pretty forceful personalities. It's hard to imagine them not being clear about why they're managing the way they do.
Would it ever backfire without clear, forceful personalities guiding it?
Refreshing to hear about anyway. Investment in the confidence of employees via trusting them seems like always a good investment.
And ditto what other people have said here about the advice being somewhat basic. But on the other hand, the investment strategies of say Warren Buffett are incredibly basic as well. Basic != overvalue
I saw in an interview that John Mackey of Whole Foods got a lot out of reading it for what's that worth.
It’s these supposedly crazy things that make me not want to give up 37signals for anything.
I'm guessing a sufficiently large buyout offer will change your mind on that right quick.
"Everyone has a boss. There is no escape."
What they can't do is only whatever would cause massive amounts of customers to stop using their products.
I am absolutely baffled.