The bar for success in our industry is too low(37signals.com)
37signals.com
The bar for success in our industry is too low
http://37signals.com/svn/posts/1890-the-bar-for-success-in-our-industry-is-too-low
89 comments
By definition there is not a single business that is profitable from day one. A plumbing business isn't profitable until the tools and vehicles have been paid for.
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.
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 bootstrapped a consulting business, and didn't have any savings at all to do it. I had to be profitable from day one.
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.
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.
presumably there was a significant cost in time and/or money required to gain that experience.
You've got to live anyway. Might as well pay attention while you're doing it.
technically, I don't think that's quite true; a company can book profits even as it's paying off a loan which is bigger than the profits or even than total turnover as long as (operational cash flow) - (interest payments) > 0.
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.
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.
Plumbers make a lot more money than people think. But when Amazon started, Jeff Bezos was still probably making more in interest payments than any Plumber makes in a year. So, two responses: (1) Amazon, and (2) what's your point?
Lots of plumbers are more successful today than lots of YC startups.
Lots of plumbers are more successful today than lots of YC startups.
There is not much chance of being a millionaire plumber any time soon especially not after a couple of years work.
I think you're probably wrong. Plumbing scales like any services business: you stop being able to manage your inbounds, so you hire another plumber who makes less than you. Repeat N times. At some point, you're making enough off the top of all the plumbing work to stop doing plumbing; now you're a full-time business manager. You brand, promote, and scale --- by franchising, hiring more managers, partnering, or securing large contracts. Somewhere in the middle back there, you became a millionaire.
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.
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.
My point was that it is possible to become a tech millionaire in a couple of years - this is of course unlikely - but there are many examples of people doing this. It's almost impossible to become a millionaire in a couple of years as a plumber.
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...
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...
There's not much chance of being a tech millionaire, either. Much more likely that you end up poorer than the plumber.
But hey, I'm still working on my startup, so I guess that just means I'm dumb.
But hey, I'm still working on my startup, so I guess that just means I'm dumb.
There is not much chance of being a millionaire software developer any time soon either, especially not after a couple of years' work.
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.
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.
Chemed, the parent company of Roto-Rooter, is trading at $42 a share and has a market cap of $944.82M.
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Maybe it's not important "always", but it's important most of the time. People forget that there were thousands of other web startups who tried to "get big fast" at the same time that Amazon did. They're dead now.
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.
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.
:) Hey - I was the winner in the race of about 180 million. (And that was before I was even born!)
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.
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.
Some profitable companies operated at a loss for extended period of time at first. Sure, nobody disagrees with that. The point of the post was that it isn't the operating at a loss that makes a business a success, no matter how large the revenue stream. Operating at a loss may turn out to have been worth it, in retrospect, once the profits start rolling in.
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.
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.
One of the dubious features of business journalism today is that articles tend to privilege the passive investor's point of view. Hence the emphasis on things like stock-market indices.
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.
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.
Ok, this one calls for just a little bit of snark:
> 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.
> 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.
When 37signals started Basecamp they didn't have their fame, Rails, their books or their blog readers... Just like everybody else, they started with none of that.
I remember when they didn't have any products, and were just a consultancy. They had a following even back then.
Certainly they weren't "famous". Their blog Signal vs. Noise was not that special a blog at the time, not even close to the biggest. I don't think I'd even call it "A-list", at the time.
I had the impression the blog was already pretty big.
Still, I think "aw, shucks, little us?" thing is kind of silly. Without that fame, would they still be raking in so much money?
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 had an about average size blog for the time. It's definitely not like their fame preceded or enabled their success. It's the other way around.
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).
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).
I'm not convinced. I'd rather see a series of case studies of small and successful firms that don't have something like Rails or a huge following (and what other word to describe some of the people who comment on their blog... some of them are really falling all over themselves to sing praises to 37S).
What are you not convinced about? That their current following hasn't been that big since the dawn of time?
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.
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.
They go on and on about how small and simple they are, and how they do less, and so on and so forth.
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.
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.
Obtaining press for a new/exciting product is especially easy when its free. Journalists have to write about what people think is interesting, without it they would be out of jobs.
That being said publicity is easy, actually being successful-entirely different story. Dont judge success on publicity.
That being said publicity is easy, actually being successful-entirely different story. Dont judge success on publicity.
Yes -- for instance, 37Signals is considered a success.
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Good old Midwestern thinking is always refreshing.
Some one wise once told me: we humans strive for 3 things to become successful.
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.
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.
I think the problem is most are gunning for number 2.
If they're looking for fame, and they get the fame they want - then they're a success - no?
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.
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.
No. The fame is a delusion. If you're trying to get famous behind entrepreneurship, your businesses have to succeed, or you stop being famous --- or you wind up Scoble Famous, which may be even worse.
The subtext is good though. Fame of any sort is highly, highly overrated.
The subtext is good though. Fame of any sort is highly, highly overrated.
Not really.
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.
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.
We're not talking about humanitarians or artists. We're talking about entrepreneurs, and their goals. I agree money doesn't have to matter to an artist. But it has to matter to an entrepreneur, even if your goal is fame. It matters the same way that being able to kick a ball matters to a punter, even if they're playing football just for the fame.
A-friken-men.
Money in must be more than money out, otherwise you aren't a successful business, you're an eventual death.
Money in must be more than money out, otherwise you aren't a successful business, you're an eventual death.
Summary: If you don't make a profit, you're not successful.
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...
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...
>Hey, guess what? A lot of businesses have run in the negative until they got traction and make a metric ton of money.
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.
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.
I get his point, and agree with it. In hindsight, I think I was responding more to the underlying theme of nearly every 37signal blog post.
What, that successful technology entrepreneurship isn't a potion doled out in little bottles by the gatekeepers in Waltham and Sand Hill Road? That you can apply the same common sense that bike shop owners and building contractors do, reach Internet-scale success, and not live in a sleeping bag on your friend's floor while you do it?
No, that it's easy and obvious and a certain amount of luck has nothing to do with it.
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.
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.
If you don't make a profit, you're not successful. That does about sum it up.
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.
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.
The argument is that proper credits should be given to companies once they make that switch from getting traction to actually make money. Currently, media and blogs more and more name a company successful when they have traction, but not yet make money.
I tend to agree with the statements made in the blogpost.
I tend to agree with the statements made in the blogpost.
Interesting perspective.. I'm looking forward to his talk at start-up school.
There's a reason for this phenomenon. It might be misguided in this particular case, but there is a reason that it exists. It's the same reason that everyone here loves businesses based on technology. It's the same reason that VCs are willing to invest millions of dollars in nascent companies which will, in all likelihood, fail in the near future. It's the same reason I spend my evenings working on my own startup.
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.
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.
This is a great way for financiers to think about entrepreneurship, but maybe a really bad way for operators to think about it.
Don't forget that there are other industries having such remarkable properties as well: another example is pharmaceuticals and generally biotechnology. Or the motion picture and music recording industries.
Industries where the resources of the participating companies produce IP, not products (or products where the marginal cost of production is insignificant compared to the cost to design).
Biotech has startup costs that are orders of magnitude more than software - especially web stuff. People with PhD's + lab + equipment == lots of dollars. Multiply that by years for them to make anything close to being testable on people and it's a big chunk of money.
A big website or widely distributed software package is still extremely expensive to create and maintain. Less than a pharmaceutical company to start, perhaps, but pharmaceuticals don't have to be maintained once invented, and they're relatively protected from competition for the lifetime of a patent. Software companies must invest continuously in development, or their window of profitable operation will be narrow.
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.
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.
"My point is that the massively profitable, "free" website run by three people in a garage is probably a myth."
Why hello, craigslist.
Why hello, craigslist.
You're dreaming if you think Craigslist is three guys in a garage. They have ~30 employees, and I can guarantee that they have large server, colo and bandwidth costs. They also make their money off of direct payments (as opposed to advertising), and their annual revenue is around $100 million, by the estimates I've seen. So they're profitable, but not hugely so. (By way of comparison, Netflix makes a bit over $20 million net per quarter, on over $300 million gross per quarter.)
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.
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.
Actually, they are quite exceptional. Craigslist gets more traffic than either Amazon or Ebay and those companies respectively have 16,000 and 20,000 employees.
You've missed the point: Craigslist is so far and away the exception to the rule, it's practically non-reproducible. And for what it's worth, they're also not nearly as profitable as either Amazon or EBay, regardless of their traffic.
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.
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.
The thing that is reproducible about Craigslist is their simple, functional layout and organic, community-centric growth. Much like HN.
Well, of course you can reproduce their design. But reproducing their design won't reproduce their success. If it were that simple, every website would look like Craigslist.
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.
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.
Your pretty much correct on this except for the extreme cases like markus frind and plentyoffish (if the profits claimed are actually true)
But as the industry matures, it's becoming apparent that that model doesn't hold up quite as well. 1 success is rapidly copied by every other major website and YC type startups, there's major marketing spend to stay on the front of techcrunch, techmeme, digg, etc. Software requires more maintenance, hardware becomes a bigger cost, employees extract more from their employers or leave just when they're most productive, etc. So where it might have been 1 success will make up for 10 failures, it's rapidly becoming the case that 1 success will make only make up for 5 (or 1) failures.
citation needed?
http://www.amazon.com/Competition-Michael-E-Porter/dp/087584...
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.
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.
Feel free to tell me "yes, we heard it ¡Ya basta!", but Hal Varian's (chief economist of Google) book is a fantastic look at a lot of the economics in high tech and is well worth buying (my summary doesn't do it justice, I'm afraid - meaning it's not just fluff:-)
http://www.squeezedbooks.com/book/show/7/information-rules-a...
http://www.squeezedbooks.com/book/show/7/information-rules-a...
>It's the same reason that VCs are willing to invest millions of dollars in nascent companies which will, in all likelihood, fail in the near future.
...
> The reason is scalability.
Very high risk / Very high returns
Like Gambling ?
Very high risk / Very high returns
Like Gambling ?
> A construction company that loses money is not going to be worth $50MM any time soon. A tech company with similar financials might be.
In other words, it benefits from speculative bubbles.
In other words, it benefits from speculative bubbles.
I think this article is wrong for three reasons. Products can be successful without businesses being successful. Success is determined by meeting your own goals. Acquiring paying customers is a business success.
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.
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.
You're missing the premise of the article. Fried isn't ragging on open source projects which will never make money. He's ragging on the business press for pumping up companies as success stories when they haven't turned a dime in profit.
There are a million ways to score a software project, but not nearly as many to rate a business.
There are a million ways to score a software project, but not nearly as many to rate a business.
With all respect to 37Signals, havent they said it n-number of times, and we have had the same discussion on HN n+m-number of times
<sigh>
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.
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.
Nobody is arguing those facts, and I don't think anyone at 37 Signals is naive enough to claim that you can't grow faster by spending more money (and going into debt, in whatever form).
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.
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 dunno. This is deserves a celebration. It's a fucking triumph! These guys made a product that no one really competes with and are making real money largely giving it away. It seems pretty clear that it scales pretty beautifully and that they could turn the screws a bit, experiment a bit, and make a huge pile of profit off of this.
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'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.
The whole point of the article is that Evernote is not making money and aren't even expected to break even until 2011.
They are very clearly making money. They are just spending more than they make. Revenue is still an important metric. Many companies which are supposedly successes still have $0 in revenues. Saying such a company is already successful is much worse than saying the same about a company with significant revenues but still no net profit.
I think the point is that the article is talking explicitly about how to "turn a profit" and using, as an example, a company which does not turn a profit.
Yep, and I think that's stupid. Strictly speaking, they aren't profitable. Of course, GROSS profit (sales - COGS), they might be. We don't know. But consider the following scenario:
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.
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.
True enough. But still though, why not wait until a company is actually profitable before we herald their business as a great example of profitability. Lots of things can happen along the way — a lot of the times it doesn't end well at all.
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).
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).
It still blows me away that David’s talk at Startup School 2008 was met with such enthusiasm (I know David was surprised too).
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.)
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.)
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Similar to Everynote there are lots of companies that have taken money from VC's and have not yet become profitable e.g Vonage.2011 is a big target though since it is 2 years away and nobody know what might happen then, there might be a much better killer product then Evernote running at much lower cost.
While i agree that profitability is important but in the field of Web and according to the market you sometimes have to give away something for free to charge for something else.Even 37signals gives away tadalist etc for free.The best part is they have a bunch of products to earn cash from.
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.