The bar for success in our industry is too low
37signals.com
37signals.com
The reason is scalability.
My dad was always shocked that investors valued the last startup I worked for in the tens of millions of dollars while we were losing money. He's worked in construction his whole life for firms that do on the order of $100MM in revenue per year. Like all construction firms, however, their margins are razor thin. Their revenue doesn't grow much faster than their costs (employees and materials, primarily).
A construction company that loses money is not going to be worth $50MM any time soon. A tech company with similar financials might be. A tech company might take a while to get their technology right. But when they do, they can leverage it. Their revenues can grow far faster than their costs. Software as a product scales better than just about anything I can think of. Software businesses often go from slightly in the red to huge annual profits in very little time.
Everyone in tech is trying to find the Next Big Thing. This includes us (entrepreneurs), the media, and investors. In the case of the media, they're just trying to be the first ones to break the next big story, as usual. Just like investors, if they want to succeed, they have to be willing to take risks. They have to bet on companies that look like they have potential. Sometimes they're wrong. But in those rare cases where it pays off, it usually pays off big.
Other industries lack this quality. In other industries 1 success is not going to make up for 10 failures. In technology you make money by picking winners before everyone else. It's somewhat of a crap shoot. But the bar is low because the potential reward is high.
My point is that the massively profitable, "free" website run by three people in a garage is probably a myth. The massively profitable online retailer run by three people in a garage is definitely a myth. To reach the scale where non-trivial profits are possible from the internet, you've got non-trivial expenses.
Why hello, craigslist.
I'll grant you that they're exceptionally small for a website of their size -- but being "exceptional" means only that they're the exception to the rule. The rule is what's important.
There's simply nothing about Craigslist that you can count on reproducing. If you're creating an internet company today, and you're aiming for hundreds of millions in revenue, it's 99% probable that you will need to spend more money than they do.
Again: you're missing the point. Craigslist is the exception to the rule. It's a product of its time. For any value of X, if you tried to say "this is the way Craigslist did X, therefore I should too," you'd very likely be wrong. And in any case, Craiglist is pretty far from the romantic notion of three guys in a garage. It's an expensive site to run, even if it's more cheaply run than other big sites.
for starters...
Plenty of empirical evidence out there in the decline in shrinked wrap software, the disappearance of successful IPOs, and the inability of the vast majority of websites to charge for any service whatsoever.
http://www.squeezedbooks.com/book/show/7/information-rules-a...
Very high risk / Very high returns
Like Gambling ?
In other words, it benefits from speculative bubbles.
37Signals' products weren't profitable for a year or more, if memory serves. They took "investment" from the other side of their business (consulting). Every month, when their product revenue grew, I'm sure they were thinking, "Wow, we're going to be profitable in X months"... and eventually, they were.
Product profitability takes resources. You need:
1) Time (you can accelerate this with cash if you're disciplined) 2) Money (you can use savings, investment, or you can "buy" money/time with consulting)
That's immutable.
EverNote and their ilk ("our ilk", I should say, as RescueTime falls squarely in that world) is trying to build a business formula that works... And it looks like they're succeeding. Presumably they could cut dev staff, stop all experiments, and get to profitability MUCH sooner-- maybe even today.
But that's how business works, right? It's all about intelligent debt to ultimately maximize the metrics you care about (presumably some combo of growth, revenue, profit, and lifestyle). You hire an employee, and you are spending time and money on them for a while before they are really contributing. You take funding so that you can run the experiments that require capital. You take your consulting profits and pump them (and your spare time) into product efforts. And some businesses scale differently than others (Amazon is a great example).
That's ALL DEBT. And it can all be smart debt (like a mortgage used to be!).
Just because companies are choosing a different flavor of debt or choosing markets that scale differently doesn't make them bad. I personally am THRILLED to give up a relatively small stake in our company so I don't have to consult and can run experiments about as fast as I want to.
Scarcity FORCES you to be smart-- but the lack of scarcity doesn't mean that you CAN'T be.
From where I'm sitting, the point is that such a company shouldn't be called a success. Projections may be good, it may be very likely they will pan out, but until they actually do, the business is not a success, it's still theoretical.
If it turns out, because of unknown factor X you completely deplete the market before you become profitable, your business model is no longer a success. There are too many unknowns to guarantee that any company which looks likely to be profitable actually will be.
I'm all for thumbing your nose at some/most free apps, but EverNote has really proven something and deserves praise. There seems to be real (reinvested profit) buried under the growth/r&d spending.
I have an apartment building, and I clear $10k per month on it in clean profit. Yum! But I've got bigger dreams, and I know that if I had ANOTHER apartment building, there'd be scaling economies in terms of management and maintenance staff as well as marketing.
But $10k a month isn't going to build/buy another building. So I take out a loan whose monthly debt service is $30k per month.
All of a sudden I'm unprofitable, right? Except that as soon as I get my 2nd building up and full (a 2+ year process, quite a long time to be "unprofitable"), I'm clearing $70k a month. Until the end of time. Short term (voluntary) pain for a long-term gain.
Evernote is doing the same thing. You don't build something like Evernote and get to profitability super quickly because of the economies of scale (much like Amazon).
But the other place where 37s is wrong is totally dismissing forecasting, which at this scale works pretty well. When dealing with signup and conversion rates like Evernote has, it's actually pretty statistically significant. You can predict where you'll be in 12 months and it's pretty easy to calculate how what your COGS is going to looking like when you're serving 10m users instead of 100k.
Just like Facebook, Evernote could reduce their investment in growth. They could trim staff and they could turn the screws a bit on their free users to up their conversion rate. But given how the scaling works out, I think they are likely making the right choice with their investment/debt. By delaying this as long as they can, they can ultimately have a higher margin business.
Given that there actually does exist plenty of companies that are profitable, why not let one of those provide the shining example of profitability, rather than one that isn't yet profitable (but might, or might also not be in the future).
The content of his talk was not the main reason that it was met with such enthusiasm. (What he talked about was obvious and no one would disagree.)
It was his delivery that made it such a bit hit. His passion and conviction was easy to see. We could have easily read the talk on-line, but we go to these things to get the "whole story", the things that words alone do not convey. What a pleasure it was to see someone in his position so enthusiastic about his work. It's hard not to get caught up in the moment.
(The fact the he's the author of Rails and his liberal use of the f word to make his point also helped.)
Which is the more successful business now?
I agree that you aren't a success until you are making money, but I don't think that it's important to be profitable always.
Lots of plumbers are more successful today than lots of YC startups.
What is also probably true is that it is very hard to go out of business as a freelance plumber. It is very easy to go bust as a tech entrepreneur. The flip side of that: on a steady income, the plumber gets more opportunities to grow her business than the tech entrepreneur --- she can stay in business, turning different knobs, indefinitely. You hope that the tech entrepreneur's individual opportunities are much more valuable, but that depends, doesn't it?
There's also the classic factoid that most millionaires got there not by striking gold, but by managing their money well.
Be careful about Geek Exceptionalism. It will burn you. People excelled in business long before there was an Internet.
Whilst like you can do the process you point out, it's likely to take 10+ years to do that. You could also do this same process as a tech consultant and then grow your consultancy business the same way - but that wasn't my point - that's all.
People after all play the lottery every week - though on average they would be better off putting that money in a savings account and waiting 30-40 years...
But hey, I'm still working on my startup, so I guess that just means I'm dumb.
The fact that a handful (almost literally) of businesses have achieved this, and quite a few more make a modest profit in a reasonable time, does not by any stretch mean that these "successes" are going to do the same thing. The whole point of the complaint here is that most of those "successes" won't actually be successful, ever. It's just that in this business, the one that does make it will make it big. But the others will still fail.
If you're the one in a billion for whom "get big fast" works, it's a great outcome. But for everyone else, the other model works a lot more reliably.
We're all one-in-a-billion!
// Agree with the point though - it's like assuming that all runners are as fast as Usain Bolt.
The important consideration is the size of the deficit (in time or money or ownership) a company accepts and what they gain in exchange. And the bigger the deficit, the higher the stakes.
I did not even have a laptop at the time (for network diagnostics and the like) -- I just had my experience.
I've had to learn an awful lot about resource management as a result of doing it this way, and I'm grateful for that.
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I think it's perfectly possible for, say, a company funded by VCs to be profitable from the start of operations, since the money that bought the equity isn't expected to be paid back.
It may even be the case that great business success is always preceded by years of operating at a loss. Let's assume that for the sake of discussion. It still doesn't show that any company that operates at a loss, no matter how large the revenue stream, is going to be a great business success. And it certainly doesn't show that the business, while operating at a loss, is currently a success. Operating at a loss, with a large revenue stream, may be a necessary condition of success, but it surely isn't a sufficient condition.
1. Money
2. Fame
3. Making a difference
Everyone aims for all the 3 things. But you have to pick one out of the 3 - prioritize what you want. And then come up with the metrics that will help you measure your success.
Most startups these days unfortunately have no idea what they are aiming for.
But if their aim is money, but they use fame based metrics (number of page views, number of users, amount of publicity) - thats where the problem arises.
The subtext is good though. Fame of any sort is highly, highly overrated.
Most authors go after fame. Not money. A New York Times bestseller status is 100 times more meaningful than the low royalty fees they may earn.
Most non-profits and social movements (eg: http://blogactionday.org/) aim for fame and/or making a difference too.
R. Buckminster Fuller never chased money. He went for making a difference. And (I think) he achieved that.
J.P. Morgan was one more guy who aimed for fame more than money. He made a shit load of money too. But people were surprised after his death that he wasn't the richest person of his generation (everyone thought he was...)
Different folks have different wants and measure success differently.
And from an investor's point of view, a successful business is one whose stock is going up. A "hot" company that is losing money hand-over-fist but has a slim chance of Hitting It Big may or may not be a great place to work (depending on how Dilbertesque the management is) and may or may not be fulfilling the dreams of its founders, but the investor who has that company as one element of a large portfolio has every reason to be happy with it.
And if you're a reporter or editor in the business/tech press and you're used to seeing things from the investor's point of view, why shouldn't you run with a story like the one Jason F. complains about? Why wait two years publish an article about a startup that is actually wildly profitable when you can fill the news hole right now with an article about a startup that might someday be wildly profitable?
By contrast, a bootstrapped company that makes a tidy heap of profit for its two founders and three employees is booooring.
A piece of software can be very popular and successful, even if there is no direct business correlation.
Not everything can be easily correlated. Even 37signals own rails isn't being charged for in many situations. How much extra value has giving away rails done for 37signals? Giving some things away for free can be considered a marketing expense... an expense where you get to do what you like best - making software.
If a painting doesn't sell for a lot of money, is it a successful painting?
Seriously... there's lots of software bringing joy, and helping people do stuff - not all of it has to be making money.
If the business plan is to make something cool, then eventually pay off the investment... then that's a success. Success is merely meeting of goals.
So this company, has made something people like and use, and also give them money for. They are also on their path to paying back their investment, and gotten a lot of cred, press, and customers in the meantime.
Software companies almost always make multiple products. So gaining a lot of customers with early products is a great way to bootstrap things. Then the software company can more easily sell stuff to their existing customers.
They've met their own criteria for success and other peoples.
So this article misses out on how a product can be a popular success without the business being a financial success. It also misses out on how, if they are meeting their goals they are a success. Finally it misses the business goal of acquiring customers who like what they do and pay them money... in their first product.
In this case the New York Times has more of a leg to stand on than 37signals.
There are a million ways to score a software project, but not nearly as many to rate a business.
> The bar for success in our industry is too low
As evidenced by one of the most widely watched companies as of late in said industry making lots of money with a product they constantly boast "does less"?
I'm not sure I've quite nailed it, but you get the general idea.
Actually, what they fail to point out is that they are famous enough that they won't necessarily get clobbered by someone who does what they do better, because the other guys will really struggle to get the word out, whereas they have Rails, their blog, books and so on to promote their 'does less' products.
Still, I think "aw, shucks, little us?" thing is kind of silly. Without that fame, would they still be raking in so much money?
They've explained this on multiple occasions when people ask them how to repeat their success without their advantage of having a big audience and (relative) fame: they didn't have that when they launched Basecamp.
They had a blog, but not a huge audience like they do now — they certainly did not have a bigger audience than is possible to build up through "traditional" blogging means (writing great content that people like to read and link to).
37signals is an excellent case study of a company which has built a profitable successful business without any kind of fame or following. Because they weren't famous and they didn't have a big following and Rails didn't exist, way back in february of 2004 when they launched Basecamp.
However, small, simple, and few features makes for a very low barrier to entry if that's all they have, so I'm not sure it is a very good model unless you are famous like they are (that's their "barrier to entry"). In other words, they are something of a special case, not really an example to be followed, even if what they've done is admirable.
That being said publicity is easy, actually being successful-entirely different story. Dont judge success on publicity.
Money in must be more than money out, otherwise you aren't a successful business, you're an eventual death.
Enlightening. Hey, guess what? A lot of businesses have run in the negative until they got traction and make a metric ton of money. Congratulations on being profitable from day one. TMTOWTDI
That said, I despise the twitter business model...
I think the key point here is that while they are in the negative phase, they aren't "successful businesses"; they're struggling to survive. Jason's problem it seems is not so much that people aren't profitable, its that they are credited with being successful prematurely.
EDIT: Or maybe it's just the "We know the best way to do everything" attitude.
I admire their success, but not the condescension. I might be the only one here, but not the only one.
You're the one that's extrapolating here.
Fried is indirectly criticical of the Evernote model, but he isn't writing it off. What he's saying --- straightforwardly --- is that Evernote isn't a business success, yet.
What he's very directly critical of is the lazy journalism that valorizes the Evernotes of the industry. Evernote may be successful one day. It may even be very likely that Evernote will be successful. Maybe very successful. But it hasn't happened yet.
I tend to agree with the statements made in the blogpost.