its_so_on

If an enterprise shrinks the size of the economy by $1b but in the process gets people to pay it $100m, then by getting people to make that payment it has "created 100m of value." Nevermind the effect on the rest of the system.

Please be consistent here.

I'm disagreeing with the definition of "value" used around here - for normal companies, not patent trolls - and to show my disapproval with this notion I insist that the word value be applied here as well.

I am not saying anyone supports patents. I'm saying hackernews should be more consistent - or otherwise admit that "creating value" isn't an end in itself. It's the wrong question.

Edit: I think the current title is fine. ("Patent trolls created $29B extra cost in the U.S. last year") I just want us to be clear that one guy's cost is another guy's "value".

I would love to see more cooperative-optimistic-tit-for-tat solutions to the prisoner's dilemma, so that instead of just saying "creating value" we are more specific about the whole system.

This is what (an unnamed restaurant review site) gets wrong and Google gets right, in my opinion. Google adds value whereas (unnamed) removes it.

Of course in a naive sense (unnamed) is also "creating value". Just as these patent trolls are.

We don't condone it, but let's be consistent.

If your business gets to use your labor for "free" just because you happen to be a 100% owner, it is no different from Facebook getting to use employee's at 30% of market rates because, collectively, they own 6% of the company. It's exactly the same thing.

The article and people who defend it are very wrong. You're right.

I don't often say this, but I've thought this through completely, and the people who say that people working for equity, options, etc, should be accounted for as though they were working for a straight market salary before you can say you're profitable, are simply wrong. I'm right and they're wrong. And it's important.

Let me put it this way. Say Facebook was already very profitable, making millions.

It had superstar elite ninja developers who worked a thousand times faster than a normal developer and any one of which was worth their weight in gold. To hire them on salary you would have to pay them a million dollars a year, because they don't want a salary, they want to be part of the next big thing.

So, like all Internet companies, Facebook gave out a lot of options and employee equity.

Now when Facebook was making millions and quite profitable, you're saying it wasn't REALLY profitable, since it didn't REALLY get to use the labor of those people who had equity as part of their compensation. But this is obviously completely wrong. THe founder's equity falls into the same category.

The fact that you're getting something below market rate doesn't mean you're not REALLY profitable.

This is like crying "Apple isn't REALLY profitable because they get their components below market rates by being good negotiators!! If they had to pay market rates they would be operating at a LOSS".

Well, too bad for the component sellers. Apple is still profitable.

Too bad for you if you could be making 200k per year and instead are giving it up for equity in a company that is worth less than that. The company is still profitable.

This would be like saying that back when Rackspace gave all YCombinator companies free hosting, if their hosting bills "would normally" be more than their profits, they weren't ACTUALLY profitable. Regardless of what they were making.

Well, that's obviously not true at all.

This is equivalent to saying that you can't be considered profitable unless you're paying through the nose for everything, including super-expensive managers who are able to single-handedly get a business off the ground and are easily worht 200k-500k to a fortune 500 company, and then STILL have left over.

why should anyone say that??? why should the line for "profit" be drawn anywhere other than whether the company pays more than it receives in revenue or pays less than it receives in revenue?

That is a real line, Facebook had every right to boast about it when it crossed it, the entire Internet startup sector depends on people having the right to work for equity and startups getting access to that labor by issuing shares and paying a low salary.

I mean, by this argument of what is a "natural" salary, you could say that there isn't a single profitable prostitute working in California, because the "true cost" of a job as a prostitute is firstly spending $1800 million dollars and four years fighting to legalize prostitution, and only afterward hiring a prostitute at a market (not black market) rate. Therefore, since they are empoying themselves only at a black-market rate (where a legal rate is $1800 million and four years of lobbying more expensive), they aren't actually profitable. Any prostitute in California would have to make another $1800 billion or so and spend it on hiring an actual prostitute at "market rate" not black-market or (in the startup analogy) equity rate.

That's nuts. Of course a business can be profitable without accounting for a DIFFERENT kind of rate. (one that doesn't include equity, for example).

the whole perspective of other people here is simply wrong. It's that simple.

To see this, consider: after someone spies on you, what's the least damage they can do to your privacy? Obviously the most is to publish everything they have on you for everyone. But what's the least?

The least damage is to completely forget it, never mention it, never think about it, and not even acknowledge or record it - let the world be exactly the same as if they had not spied on me.

I'm not saying this is better than ACTUALLY not ever spying on me, but it's the best thing for my privacy once they have.

Say you're a security person and do bag searches, a celebrity comes through and you actually see something very embarrassing in their bag, on some subject there's been public speculation on. (Their sexuality, whether they have some disease and you see meds for it, whatever). What's the best way to protect their privacy after you clear them (nothing dangerous in the bag)?

Obviously, by not even mentioning/acknowledging that you searched them, just by moving on.

If all my email (along with everyone else's) is being scanned to see if I'm concocting a terrorist plot, then the best you can do after this fact is not even ackowledge this and in every way act and produce a world as though it never happened.

Note that this does not make the original invasion of privacy any better. It doesn't condone it. It may also make it harder to instate more appropriate privacy policies in the future. But the premise "If I answered you 'every single person on US territory who has sent an email or made or received a telephone call in the past 36 months' then it would violate your privacy" is not completely devoid of any merit. Should every single person's privacy have been violated? No. We have constitutional protections against that sort of thing.

If it has, would it violate their privacy further to go boasting about this fact? What if it means that anyone suing you for anything can use this knowledge to do discovery and request your communications from the government? In this and a myriad other scenarios, telling the extent to which you invaded people's privacy can be worse for their privacy than refusing to do so.

Not saying I'm convinced. I'm just saying there's a little something in this line of thought. Obviously the late Martin Luther King's privacy is far worse off now than if we never knew that the FBI kept detailed files on him...

we're not talking about whether it's "worth it" for him, we're talking about from the point of view of whether the online business can be called profitable to an outside investor. Nobody cares about your unpaid sunk development costs.

This is like saying that a surgeon can't launch a profitable web business, because the time spent on it will not generate as much profit for him as if he had spent the time practicing surgery.

that's plainly completely false, and the web business can be very much profitable (just not to him.). Just THINK about it.

This is obviously totally false.

Let's do this thought experiment.

Say I would accept this if the author said that true profitability is only the amount that the company would clear if you spent less than a minimal frictional amount of time hiring someone (from company revenue) at rock-bottom wages, to keep running the company.

but if we accept this, notice something interesting. What if the way to get someone at rock-bottom wages is for the company to issue some shares (which means a percentage) and pay the worker in those shares?

Can the company still be profitable (though you're diluting the profit) on those terms? From your point of view, OF COURSE!

The author is talking about the point of view of an investor. ("Stop telling me your company is profitable.") He's not arguing from the point of view of what's worth your time: "stop thinking that if you're profitable it's worth it for you to do that."

The two are totally distinct. If the company has someone on payroll at $0 because they think their work is worth investing in exchange for the 30% equity they have, then the profit the company generates for the 70% stakeholder who doesn't have to put time in is simply 70% of company revenues minus company expenses such as hosting.

That doesn't mean the person who is working for $0 and equity isn't getting screwed. But it also does't mean the company isn't profitable.

The whole article is completely wrong and I've told you why here and in my other comments.

Would you buy a company for a thousand dollars that had paper profits of five thousand dollars a month and will for the next two years, but actually this isn't "real profit" because the founder, who had been earning five hundred thousand as a President at Microsoft, put five years of labor into it unpaid?

Of course you would buy it. That's real profit the company's making. It doesn't have to recoup the founder's lost opportunity cost over the ENTIRE life of the company in order for it to be a profitable company.

See my other comments on this thread.

That's fair. But the Internet doesn't work that way. If you develop something once, you don't need to keep standing there and keep developing it. The whole reason the article is wrong can be boiled down to this. For more nuanced response you can see my other comments.

Basically, it would be like saying, "A restaurant that makes 50,000 per month in profit isn't profitable if the person who made it is Bill Gates."

Since, "automatically" Bill Gate's time is worth a lot more doing just about anything else other than launching a restaurant. But come on. When it comes time to buy the restaurant and see how much it makes in profit so you can see how much you will pay for it - do you really think you'll reconsider the whole thing as unprofitable just because Bill Gates spent way more of his time on it than can possibly be valued at as low as that?

Get real. From an investment standpoint, nobody cares about the founder's development time. And guess what the article is about? Investment standpoint.

I will not grand the author the contention that you shouldn't tell people if this is the case.

P.S. Need help figuring out how to do that? Go here to learn about the Smart Bear Live podcast where I’ll help you one-on-one, or email me to see whether I can turn your question into a blog post. (step 1: start with some money to burn.)

You're telling me when people say "profitable since day 1" they should instead say "cash-flow positive not including consumer expenses I'm using for business". Fine. Go ahead. Say that instead. Or say the synonym "profitable since day 1" since everyone knows that's what you mean.

Let's do this. Do you think the article would still make the same argument if it read, instead, "Stop claiming to be cash-flow positive since day 1 - meaning day 6-23, besides your fixed consumer expenses!"

Then the article would read: (In parentheses is my point-by-point critique).

Stop claiming you’re cash-flow positive (not including consumer expenses) JUNE 19, 2012 2 COMMENTS

4 Share

My company is cash-flow positive, and has been from day one. (meaning day 7-23 after coding it up and getting customers very soon) – every high-tech bootstrapped founder (Actually, only a SMALL percentage of ALL projects, and a LARGE percentage of projects that can justify you giving them money.)

I know what you really mean.

What you mean is that the only business-related charges on your PayPal MasterCard — aside from those on intentional detour for tax-deduction like the external DVD drive you needed to rip CDs after you realized the MacBook Air in all its luxurious, silent, thin, sexy glory still cannot import “The Best of Pat Benatar” without the aid of a peripheral half the size and weight of the laptop itself — is an account with Amazon AWS where a medium instance whirs away for only $40/mo, just two clicks away from rebirthing as an XXL should you need “scale,” plus $0.67/mo for the S3 storage for web app uploads, plus $0.072/mo of S3 storage to back up the Pat Benatar mp3s.

(And you also don't count your rent, phone, Internet, and other expenses you currently have related to launching your business.)

So all you needed to do is sell one $49/mo account — which you did — and you’re cash-flow positive! (Except the above-mentioned things).

I know that’s what you mean, but when you say “I’m cash-flow positive” to someone with a modicum of experience it’s a turnoff, (unless they care about a scalable, repeatable business model you have already proven) because it’s actually bullshit (if somebody with "common sense" thought that any Internet business on the planet got ten thousand customers the very first day the founder had the thought to start coding it up). And when someone’s streaming bullshit at 720i, it means they’re either a full-blown bullshit artiste or they’re merely ignorant; in neither case do I want to hear more. (in other words, I've been burned by the recent bubble pop and I need some time to see you grow some more before I continue gambling. That doesn't mean it's not great that you're already cash-flow-positive. It means I'm a sore loser.)

The first and biggest error is thinking you can ignore your own salary. (Which nobody expects you to include when you say you're cash-flow positive.) Sure your time is worth $1000/hr (your opportunity cost is more like 80 dollars per hour if you weren't running the business, since you would accept a salary at 160k... the 1000 dollars heuristic is only to keep you on track if your business will keep growing and be acquired), but no you do not have to cover that to be dubbed “profitable.” (nor do you have to cover your foregone salary of 160k). But you do need at least a ramen-profitable definition of valuing your time. (no, you don't. even 2 dollars per hour is not necessary, nor is being able to pay for your apartment, car, phone, and Internet.) If your business makes $3000/mo after direct expenses, but isn’t paying you, and you still have a full-time day job to keep up with the mortgage on your under-water house, then you’re not profitable. (and if you can stop doing any work on it and the venture keeps generating $3000/mo after direct expenses, making 36k in a year or 200k in ten years as usage tapers off and customers switch away, and you use that 200k to buy a house somewhere. Well, you didn't just buy a house with the profits or positive cash-flow of your company, no-siree, you bought it with, uh...)

Why not? Because the business cannot sustain even one person to run itself, which means that $3000 is not “extra money which can be plowed back into the business or distributed for an awesome vacation.” (Unless the business can operate without one person, which is not mentioned here, or unless you can hire someone for a thousand dollars a month to maintain it and pocket the 2k per month difference). It’s just made-up leftovers because you’re not acknowledge the actual costs of a startup, which include time and you having to work a second job. (Likewise, your salary isn't actual cash-flow you can use to buy stuff. It's an illusion! If you make 200k in salary, but could be making the equivalent of 500k by founding a startup and selling it 5 years from now, that's not 200k you're earning. That's 300k you're losing. You don't have a job: you're a parasite on, well not society, but on your alternate self, whom you're robbing of 200k...)

In that case what have you proved? That if you slam yourself to the limit of endurance and ability, you can earn less money than Dell would give you for creating 1/34th of BIOS version 8.4.3.5?

That’s not a “cash-flow positive business.” (Unless you look at cashflow).

If you are living off it, even if that’s $3000/mo, then you’ve made it. You might not have a dynamo on your hands (yet!) but at least you’re in a somewhat sustainable place. Maybe next month you’ll make $3200 and you can “plow that extra $200 back into the company.” (likewise, if someone gives you 500k per year to be VP of Vatever at their company, and you spend it all on your lifestyle, you haven't made it at all.)

The other error is that it’s a misuse of what’s normally connoted by the phrase “profitable business.” (cash-flow positive business. Normally it means, in the first year of a business especially, but usually in the first couple of years of a startup, that you could keep putting time in and getting more money out than your business uses up. If you have savings of twenty k, you can run the business for two years and have savings of...thirty k. Where does the extra 10k come from? Oh, that's right the "non-profit" we all totally rightly call "profit.")

When someone says they’ve been in business for two years and they turned profitable last month, what that really means (if it’s a healthy, growing business) is that they are sustainably profitable, able to indeed “plow the rest back into the company” with a quantity of cash that could visibly move the needle on top-line revenue, or could significantly reduce further risk, or would allow for investment in a long-term project, or could be a down payment on a superstar, or something similarly valuable. (Or maybe it means the restaurant costs 10,000 per month in property, commodity prices, waitstaff, and all other expenses, and has just turned a profit of 200 for the first month after all that stuff was paid for, and at this rate you'll regain the 50k you invested to get it there in...well I'll let you do the math. That doesn't mean it's healthy does it.)

I humbly submit that "profitable from day 1" (or day 7 or 14 )is a useful shortcut to name all of the above. Of course it doesn't mean really profitable.

But it also doesn't mean that you're hosting a news a blog that has readerships but hasn't made a penny.