Why We Choose Profit
m.signalvnoise.com
m.signalvnoise.com
I agree with a lot of this and enjoyed reading their book in which they outline their philosophy on business and management.
But how many times are they going to scream and blog about this? It gets old. I get it, you're profitable and you think it's a good thing. But they've repeated this over and over and they sometimes go overboard in trying to pit themselves against VCs and the perceived waste of the SV tech culture.. Some of it is fair. Some of it just feels like marketing on their part...a way to write more blog posts by pitting themselves against an enemy.
Companies that are profitable and doing well don't need to constantly blog about their profitability. Just my two cents.
The current situation creates an asymmetry, and that distorts how people think business is done, which in turn distorts how people think business _should_ be done.
I think it's fair to have posts about businesses that don't have to burn through their own lifeblood to try and change enough to finally make some money. That's _way_ more normal.
Does this happen that often? The only times I can recall are when they are already really large companies and the comments are usually filled with people talking about how ridiculous it is.
At the end of the day, the celebration is predicated on a denial of the business realities these companies are faced with.
Now, in terms of how _frequent_ these posts are on hacker news... not as frequent as they used to be, for sure. But when they do pop up, nobody is saying it's not really news. That's my whole point.
That's exactly what it is, but they've been clear about that, picking an enemy is one of their "ideals" from their books.
Except it gets people every single time. Porn is addictive as hell.
Seriously, nobody "eschews profit for potential". If I give you the choice between a dollar today and two dollars tomorrow, you aren't "eschewing profit" if you choose the latter: you are weighing the potential gain (an extra dollar) against the potential risk (I can't/don't pay you) and deciding that the reward outweighs the risk.
Or you can rationally decide that the risk outweighs the reward. Whatever. Optimizing current income isn't "right". Optimizing terminal value isn't "wrong". Nor vice versa. They are just different choices. Rational disagreements over risks and returns are how markets form.
Now, if the author wants to say that many companies are too optimistic about their actual future potential and therefore aren't doing the right risk/return calculation, I won't disagree. But this is where boards and investors (theoretically) serve to impose that reality check on the inherent optimism of most entrepreneurs.
I'm not going to complain too much about Basecamp's blunt marketing message though, overall I feel it's a positive message to see in the world. For those are new to tech or whose understanding is based on tech journalism, this is probably a good thing to hear despite how shallow it is.
What if you had this choice for 30 days straight?
Second, if you already have a ton of money, you might take on the additional risk to get 2x instead of 1x. Say you have $20mm in the bank, generating 10% a year, then getting a $10mm payout instead of a $5mm is probably worth it, since an extra $5mm won't change your life.
If however, you have $100k in the bank, then you should probably take the $5mm.
Is it new? yes and no. It's basecamp - basecamp has been basecamp; they're just getting better at explaining who they are and why.
is it worth saying? absolutely. I have talked with a lot of founders who don't even think about profitability. But without profit, you have no market fit. You might be up in the air, but gravity pulls all objects down.
Basecamp has always represented a voice of sanity in an industry plagued by hype and fads. Maybe you are sick of hearing them, but for others (such as myself) they are a lighthouse in a storm.
Also, this is great marketing, because its not an ad. Its actual, meaningful content. 1/3 of the article isn't why basecamp is the facebook of project management. Its respectful.
Slack employs over 700 people now (compared to 51 people at Basecamp) even though they're a decade younger.
What happens to all the ones that don't make it? Go flip burgers?! Maybe it isn't crazy to opt for a more stable + likely outcome than "go for broke".
I'm not knocking Slack. They've done a great thing but there is also a large element of luck in what they achieved meaning many things could have gone wrong which would have nullified their hard work.
With VC fuelled "growth" you're always locked into shooting for the NBA at all costs.
I guess it all boils down to what's important to you.
Who seriously loves working crazy hours? Make $20m and invest that well, that's all you need to live a full, free and happy life with your family. Enjoy work, but don't live to work.
At some point, you have to be rational. Yes, in theory you could make enough money to reshape the world in your own image. In real life, people need balance and they need limits, and they need to learn to be content with what they can get within those limits, however much that is.
Elon Musk is now a two-time divorcee. Brin is a divorcee. I don't actually know Page's marital status and don't care enough to look it up.
Google and Tesla's impact is primarily technical, not social; the social impacts are not insignificant, but they're incidental to the technology, and though they like to think they are, Google et al are not in control of how that technology is used. In fact, the effects of these technical innovations appear contradictory to what are likely to be considered the tech industry's dominant values (see: election of Donald Trump).
Google and Tesla are important companies, but perhaps their founders could indeed use a little more balance.
I do. And so do plenty of others. Everyone has a different purpose in mind. Saying "that's all you need" about life choices is incredibly reductive and never helpful.
I know you mean well but these are not exclusive, you can do both. There is no substitute for sheer effort, regardless of how optimized it is. But yes, to each their own.
As for me, I have not very much in savings, but I would take 30% ownership of Slack over 30% ownership of 37Signals/Basecamp in a _second_, and not even just from a long-term perspective. I'd bet with a 30% stake in Slack you could put a couple million away to hedge downside risk, then have tons and tons of upside available.
I think HN could do a much better job at understanding the practicalities of equity and what it really looks like if you're a founder. You're not just handed a bunch of paper and told to work and dream for 10 years, generally speaking.
I personally couldn't care less about potentially having billions in upside. $10-20mm is enough for me to do whatever I want in life.
Additionally, to sell into the enterprise you need a sales team, so a lot of those are probably sales people on commission.
If you build a company over 10 years and make zero profit, then sell it for $100M, you pay $15-20M in long-term capital gain taxes.
On the other hand, if you build a company and take $100M profits over 10 years, you pay $35M in corporate income taxes. And it's worse than it seems too, because you pay those taxes as you go, instead of waiting for growth to compound and paying taxes at the end of the cycle.
The VC industry exists basically because of the tax regime, as do a variety of other credit sources. This same tax regime also disadvantages boot-strapped companies, which is sort of a sad side effect if you ask me. If you have the capital to avoid profit-taking, you get richly rewarded for it.
I'd like to see tax reforms to avoid this set up, where small boot-strapped businesses can retain earnings in order to fund their growth, without paying corporate taxes, or having to resort to borrowing so they can spend down their "profits."
So register your business in Estonia, operate outside where you can grow as much as you want without being taxed, then take dividends when you're ready. Estonia has an e-residency program which lets foreign citizens form businesses within Estonia easily.
I'm not advocating tax fraud in any way shape or form. I'm saying Estonia will allow you to setup an Estonian business, and has a business friendly tax structure.
It won't help you with your personal taxation when you bring your money back as dividends/salary. But it will help you if you choose to reinvest it in the business.
I'm guessing part of it is that at some point, say under a 5% chance, we stop calculating altogether and it just becomes "so you're saying there's a chance!" If you have a 1% chance of making something as big as Basecamp and a 0.001% chance of starting Facebook, they both feel about the same, so might as well shoot for the moon.
However, remember that we're in a VC funded forum right now, so we're in a bubble where the growth-over-profits is portrayed as equal or preferred to simple slow growth profit.
I'd highly recommend checking out your local small business owners' group or meetupss. They are just as smart as you are, but just never got sucked into this bubble here.
I think you're right there's a certain groupthink that goes into it.
I often turn to SvN whenever I need a quick morale boost or injection of reality.
while I agree with much of the content, I do disagree with this statement: "Companies that keep reinvesting keep adding risk to their companies."
I can't agree with this assertion. Companies that keep reinvesting their profits are doing it to finance future growth. Obviously, future growth implies a degree of risk. But you could argue that by reinvesting profits, you are de-risking the future by building capability to satisfy a demand and the proof of demand is the profit generated.
You call it reinvesting, and any form of investing comes with risk. I think you are missing the point here, he is not saying it is never smart just that it adds risk which is clearly true.
>Unlike companies that reinvest all or most of the money back into the company every year, we take money (profit) out every year in the form of distributions (we’re an LLC)
What does that - "distributions" - mean? That they take the profit and share it between the owners / partners of the company annually?
>We’re still an LLC at Basecamp. The simplest pass-through structure you can have at our size.
What does a pass-through structure mean?
Update: Thanks for the answers, guys.
Distributions are not subject to payroll tax, which is a nice benefit of them.
Pass-through entities mean that the tax liability for the entity "passes through" to the owners of the company, so the company proper does not have a tax liability, rather the owners do.
When I am God Emperor, all company dividends will be deductible against corporate taxes, to encourage companies to return profits to the owners in the form of dividends. This would better align the c-suite and "owners" in a sustainable, cashflow based relationship, much closer to the LLC model. It would also make stock ownership more attractive for poor people, since the income would be taxed at a lower rate for them than for rich people.
An LLC tries to combine the benefits of Corporations and Companies. The Company benefit is that any income is effectively the owners' income: it passes through the company to the owners, who then file taxes on the income as if it was a paycheck. This is the "pass through" idea; that income (and taxation) is passed directly to the owners.
The corporate benefit is what gives LLCs their name. In cases of litigation, even though the revenue stream is passed to the owners, it is the business that is sued as an entity. This then "limits" the liability of the business owner.
Not arguing this should be the only business model, but an option that is considered.
Both Carlos Segura and Ernest Kim were original founders of 37signals. [1]
I wonder if they both get some type of profit distribution even though they haven't been involved in the business in years.
Becau$e ... money i$ a terrible thing to waste!
But seriously, before I've even read the article you can tell that the author may feel (or told to feel) bad from making a profit.
I would say that being profitable is not a bad thing at all. Someone (or somebody) created a tool, or a service that helps people out. There's a demand for such service. People are willing to spend money on it. There's no problem there.
It take effort to innovate (and to run things that help people out). The best way to keep the quality of things high is to... make money to pay for people and things to make your service the best it can be.
Nothing wrong with that.
From the perspective of the founder, Basecamp seems pretty great - multiple millions of dollars in profit a year, ability to live a comfortable lifestyle without waiting for an exit.
From the perspective of a VC, it's a mess. Their fund isn't set up or really interested in dealing with dividends, they're built around the idea of an exit. Furthermore, given 100 companies, they'd much rather have 1 Google and 99 failed companies than 50 Basecamps and 50 failed companies. So adding risk by re-investing is always in the investor's interest. Finally, they have no leverage in a profitable company. The company doesn't need them anymore - VCs benefit quite a bit from holding the pursestrings.
We make $1 for every $0 we spend is far better than $1 for every $2 spent anyday.
There's nothing financially secure about being in the pockets of someone who wants you to grow at zero net profit rate.
I just can't fathom Founders who think that somehow they are in the clear because they are now making 7 digit revenues but negative net profit.
Pocketing your annual salary month to month, now that's FU money. You get to keep it and no underperforming VC breathing down your neck to blow up in order to make up the losses generated by the remaining 299 variants of Uber, AirBNB, Tinder and Ethereum.