Profits = Freedom

http://37signals.com/svn/posts/2223-profits-freedom

by whyleym • 16 years ago

95 54 16 years ago

Only on the web is completely stone sober run of the mill stock business advice considered revolutionary and "out there". 37signals' advice is pretty straightforward: build something worthwhile, charge money for it, make a profit, grow based on your profit not on some hypothetical ideal, etc. Mundane business advice in any other industry.

axod5• 16 years ago

There are millions of web businesses making extremely big profits - from advertising, leadgen, and even a few like 37signals from subscriptions

37s advice about charging is still quite a niche model for the web though. But I'll resist the temptation to start another 'get users to pay' vs 'advertising debate.

Grow based on your profit isn't really 'run of the mill stock business advice' though. Some businesses take time to build. Some require a few years investment. Some can be profitable straight away. One size doesn't fit all.

If you want the lowest risk sure fire way to make money online though, it's certainly "Find a niche" -> "Create useful content" -> "Promote" -> "Monetize through advertising".

The other thing is that in the several autobiographies I've read, people who create really cool stuff - for example Walt Disney, Richard Branson, Duncan Bannatyne... They're always in debt. They're always running from one thing to the next by the skin of their teeth trying to get the next thing financed. Investing all their profit and more into building and growing. But they're also workaholics as well. So what do they know ;)

fendale3• 16 years ago

> If you want the lowest risk sure fire way to make money online though, it's certainly "Find a niche" -> "Create useful content" -> "Promote" -> "Monetize through advertising".

I keep hearing this Find A Niche thing, and I have been doing some research. It really sounds like a case of researching stuff and writing some useful articles on it. Place the articles on a SEO optimized website and wait for the adsense dollars to roll in.

If it is that easy, surely everyone would be doing it, or is it really that easy?

While I would like a passive revenue stream, the only problem I have with this strategy is that I don't really want to spend my time researching and writing articles. I would much rather find a niche market for an online software app (sort of like patio11's bingocardcreator) that is small enough to build fairly quickly and makes a difference to some market, but finding such a market if you don't already have inside knowledge is the hard part I am finding.

dirkstoop3• 16 years ago

I'd say the more sure-fire way is: “Create something useful” -> “Charge for it”.

Now there's always the risk that nobody wants what you made (see fendale's comment), but lets assume for a sec that that's hard either way. Here's a very dry analysis of the path to money for both:

Advertising model:

- Create something useful

- Find an audience

- Find advertisers

- Get advertisers to pay you

Product model:

- Create something useful

- Find an audience

- Get audience to pay you

That's at least one less step in the ‘product model’. You can even argue that to properly execute the advertising model you'll actually need one more step in between: “Create an ad placement strategy” (“Create” as in “design and implement” in all cases here).

Getting money from the people who experience the value of the “useful thing” sounds a lot more direct (and more efficient, which correlates to a better return) than getting the people who value the attention of the people who value the “useful thing” to pay you.

I don't have any first-hand experience with the ad-supported model, but I seriously question whether it's a/the sure-fire way of making money online.

philwelch• 16 years ago

"Mundane business advice in any other industry."

Never having debt isn't mundane business advice. Mundane business advice is to borrow as much money as you can given that you can mitigate your risks and have an average return on that money greater than the interest rate you're borrowing at.

smakz• 16 years ago

Rather fluffy article but one point I'd like to raise is that it is odd for a consistently profitable company to avoid debt.

Debt can be a good thing, it can help finance growth or reduce monthly costs to increase cash flow. For the same reasons there could be justifiably good financial reason to get a mortgage even though you could pay for the house in cash, relating to tax benefits and other incentives.

Once you are consistently profitable, or have a high paying job that affords significant personal cash flow, you might be inclined to forgo all debt entirely, but on the other hand once you are in this scenario you are the least likely to default on a debt and have the capacity to take bigger risks by borrowing without ruining either your credit or causing an immense about of stress.

It's great I guess that they don't take the debt approach, but it's not necessarily a positive thing, and I bet I could look at their financial statements and see tons of opportunity to leverage debt that would free up cash flow so they could be making better use of their capital.

borism• 16 years ago

> Debt can be a good thing

yes, it can be or can not be - it's an uncertainty they try to avoid.

Buffet quote:

“Leverage, is the only way a smart guy can go broke … You do smart things, you eventually get very rich. If you do smart things and use leverage and you do one wrong thing along the way, it could wipe you out, because anything times zero is zero. But it’s reinforcing when the people around you are doing it successfully, you’re doing it successfully, and it’s a lot like Cinderella at the ball. The guys look better all the time, the music sounds better, it’s more and more fun, you think, ‘Why the hell should I leave at a quarter to 12? I’ll leave at two minutes to 12.’ But the trouble is, there are no clocks on the wall. And everybody thinks they’re going to leave at two minutes to 12.”

portman• 16 years ago

>> "it is odd for a consistently profitable company to avoid debt"

It's also probably not true, unless 37Signals uses their debit card for every random purchase they make.

A credit card is a perfect example of why debt is not categorically bad. If you pay off the debt within 30 days, you have a 0% interest rate. You also probably earned some kind of rebate, airmiles, or loyalty points. And you probably saved time over trying to pay for the product using cash or check.

Purchasing with a credit card is a small example of how intelligent use of debt can be a wise business decision.

pchristensen• 16 years ago

This is typical of what drives me crazy about 37signals. They say several things that are true but then claim that there's a causal relationship between them.

Take this post.

Premise: Profits = Freedom.

Results:

Company runs without debt: unrelated to profits. Profitable companies can use debt as a tool, and they cite their lack of credit history as causing a problem! Debt free is not the same as profitable.

We trust our employees: this has everything to do with hiring and nothing to do with profitability. They can offer the benefits they list because they're profitable, but profit doesn't make them trust their employees.

We speak our minds: this is because they have controlling interest in the company, not because they don't have debt. Again, no relation.

This would be confusing as hell for someone that tried to build their business based on the advice in this post.

FreeRadical• 16 years ago

The 37signals posts often seem rushed.

aswanson• 16 years ago

Probably busy counting profits.

dhh2• 16 years ago

Not as much rushed as "good enough". When you have other things to do besides writing, you tend to get to that. Getting the idea off my chest and on to SvN rapidly means that it gets out there. Worrying about endless refining means that it doesn't.

robryan• 16 years ago

I guess it's about having an image to keep up. 37signals has been built on these kind of posts, their business advice should include being a business guru. I doubt their brand would be as successful without these posts.

blasdel• 16 years ago

I had a long conversation with Jason Fried about this at Startup School in October -- his talk focused a lot on restraint and avoiding releasing features, which his business clearly does quite well in their products.

But their SvN blog is the opposite: they post whatever strikes their fancy whenever they want. I prodded and he told me that there's no restraint on publishing -- any of their employees can post with no explicit pre-approval. He said that sometimes people will have him do a sanity check before posting, and he could only recall giving the thumbs-down once.

I connected the dots and posited that the blog acts as the release valve for the whole company's feature angst -- he didn't really have a response (and was tired of talking to my crazy ass), but he didn't have a rebuttal either.

kareemm• 16 years ago

I read it as profits = freedom. We're profitable so look what we can do with our freedom:

- trust our employees b/c we're not beholden to people who insist we don't

- speak our minds b/c we're ok with losing customers who disagree with us (since they're the only people we're responsible to)

agree with you re: company runs without debt, tho. that's unrelated to their larger point.

dirkstoop3• 16 years ago

When you're in debt, you're in part beholden to your creditors. Ask anyone with a mortgage.

Reconstruction/guessing line of thought: When profitable, you don't need to indebt yourself to stay afloat, hence less people/entities to account to, hence more freedom.

Running a company without debt is liberating; you have a dozen fewer things to worry about.

orblivion2• 16 years ago

If I'm reading this guy correctly, I think you may have missed the point. Well for one, he did say that these three points were possible, just not very common, without a profitable company. But the main point is that running without debt, hiring based on trust, and speaking their minds are things that they can now afford to do. They may be more profitable if they forgo these things, but the point is that since they're profitable, they can instead forgo extra profit and work in a more enjoyable environment. "buying" some freedom, in a sense.

netcan• 16 years ago

What drives me crazy is that people take pots like this or Seth Godin or anyone writing like this and applying the criticism suitable to a paper on epistemology.

If people had to actually write in all the 'qualifiers for smartasses' to avoid it, they would make pretty awful reading. The frustrating thing is, this reads like it's already been through some of that. He's very obviously not claiming some iron causality between debt and profitability. Just a relationship, in his case, possibly, consult your doctor before attempting.

It's not the purpose of the article and it would be a tangent to go off and explain this relationship. Again, if you were making a subtle epistemological argument about the relationship between knowledge and certainty, go chase down everything. This is a blog post about the joys of running a profitable business.

No one is going to build a business from a literalistic interpretation of a blog post.

Periodic• 16 years ago

I found it amusing that the <title> of the page is:

    Profits = Freedom - (37signals)

Which is the same as saying:

    Profits + 37signals = Freedom

Doesn't sound very helpful to us who don't have 37signals.

alexkay• 16 years ago

Could be fixed by using an —

lionheart• 16 years ago

Lack of debt might be good, but lack of credit history is bad.

As an individual, even if you don't ever want to get into debt and pay for all your purchases up-front, you have to make an effort to build your credit history. If you don't have a good one a lot of things completely unrelated to debt become a lot harder in our society.

Same thing applies to companies. Possibly even more.

ThomPete2• 16 years ago

This of course assume that credit history is both good and the only way to do it.

In Denmark it's the other way around. You don't get a credit history you get marked as a bad payer. In other words you are not forced to take on debt to show that you can pay your rent instead you are checked to see if you are a bad payer.

I have lived in the US and had to build a credit history to rent a flat. I never understood why this is good for anyone but the banks.

patio11• 16 years ago

Thom, you are collateral damage from a rational decision that an American with no history has something to hide. Their defaults are measurably stratospheric compared to folks with positive history. There are nondefault risks such as property damage or running a meth lab, which will cost the landlord five figures to clean if it does not raze the property. Apologies for the inconvenience.

dhh2• 16 years ago

The only time our lack of credit history has hurt us at 37signals is when we were looking for some sort of credit, like net-30. In that instance, we changed to net-10 and things were fine.

If you don't need credit, you don't need a credit score.

gridspy• 16 years ago

I read this as - "If you want real freedom, you don't just want to run a company, you want to run a PROFITABLE company"

The point being that running Twitter isn't freedom until Twitter doesn't need to constantly ask others to pay the bills.

_delirium• 16 years ago

You need more than just profits, though; you also need all the equity. If you run a profitable company but are beholden to investors, you still don't have complete freedom, though they might give you more leeway than if you were losing money.

tmsh• 16 years ago

Perhaps one assumption in this business philosophy is that you have to be really clear to everyone about why they're being given certain liberties and why it's important.

The only way I could see people not 'acting like adults' is if they think that by extension certain other things are allowed, which aren't -- by virtue of not being mutually beneficial. DHH and Jason Fried are pretty forceful personalities. It's hard to imagine them not being clear about why they're managing the way they do.

Would it ever backfire without clear, forceful personalities guiding it?

Refreshing to hear about anyway. Investment in the confidence of employees via trusting them seems like always a good investment.

And ditto what other people have said here about the advice being somewhat basic. But on the other hand, the investment strategies of say Warren Buffett are incredibly basic as well. Basic != overvalue

mark_l_watson• 16 years ago

Right on. Surprised to hear the criticisms in these comments since this seems like such basic advice: don't have debt, work in a context of trust, and the desire to have everyone do good work.

Not having debt is fundamental for real freedom. Not having debt is worth giving up some material crap for.

Trust people. Make adjustments on an individual basis if it is ever necessary.

We all want to do good work that has a positive effect on the world and make money to support people we love. Try to set up an environment so people can do their best work.

andrewcooke• 16 years ago

i'm curious no-one here (or in the article) name checks amartya sen - http://en.wikipedia.org/wiki/Amartya_Sen

the concept of "feedom" (and the idea that being able to maximise it is a good thing) is very similar to his "capabilities" - http://en.wikipedia.org/wiki/Capability_approach

bonsaitree• 16 years ago

I think the main issues here are ones of capital scale and efficiency. I believe 37Signals' tenets work well for low headcount, extremely capital-efficient businesses such as software development, hedge fund management, or specialty insurance.

Unfortunately, there are many enterprises (drug research, agriculture, smelting, office construction, theme parks, waste processing, private space exploration, etc.) which are fundamentally dependent on large amounts of capital both during the start-up phase as well as to ensure daily continuity of operations.

Most of these capital intensive business also demand a reasonably large staff to support these daily workflows.

With a larger staff comes the increasing probability that one bad apple will be hired. Just one bad apple can bring an entire enterprise down without a reasonable set of security and trust-limiting thresholds on capital expenditures and workflow control. The Union Carbide chemical spill in Bhopal and the Barings bank collapse come immediately to mind.

A prominent COO once told me that for every 100 hires, he expected to pick-up 1 bad apple every 2 years. In his context a "bad apple" was someone whom, over time, would repeatedly and deliberately attempt to criminally defraud, sabotage, or publicly discredit the company.

With those odds, basic human nature, and capital-intensive business economics, it's not hard to see why these enterprise's mores on debt and individual trust run counter to 37Signals' philosophy.

jswinghammer• 16 years ago

I enjoyed this article and because I know David reads this I wanted to suggest the book "Human Action" by Ludwig von Mises. It seems like his discussion of profits in that book might be pretty interesting with your line of thought.

I saw in an interview that John Mackey of Whole Foods got a lot out of reading it for what's that worth.

http://en.wikipedia.org/wiki/Human_Action

anigbrowl• 16 years ago

This is so obvious as to be trite.

It’s these supposedly crazy things that make me not want to give up 37signals for anything.

I'm guessing a sufficiently large buyout offer will change your mind on that right quick.

mattew• 16 years ago

I love this snippet from the comments, referring to the fact that 37signals is beholden to their customers.

"Everyone has a boss. There is no escape."

tjogin• 16 years ago

Their customers don't all want the same thing, so they can't "do what their customers want", even if they wanted to.

What they can't do is only whatever would cause massive amounts of customers to stop using their products.

skmurphy• 16 years ago

From http://news.ycombinator.com/item?id=171567 by redorb in response an earlier 37signals post at http://37signals.com/svn/posts/979-quit-your-job

    "Life is too short to work at a job you hate,
    but everyone has to do something someone else is willing to pay 
    them for." Sid Emmert

paraschopra• 16 years ago

How can they manage to get so many upvotes in a post with essentially no content?

I am absolutely baffled.

Profits = Freedom

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