You don't have to sell your company to have financial security

http://www.37signals.com/svn/posts/1159-you-dont-have-to-sell-your-company-to-have-financial-security-and-the-freedom-to-do-what-you-want

by pchristensen • 18 years ago

129 89 18 years ago

37signals.com

pchristensen2• 18 years ago

I knew it!!!

http://news.ycombinator.com/item?id=254409

kirubakaran• 18 years ago

So did everyone else :) Here is the next prediction: pg will post a reply comment here.

sant0sk1• 18 years ago

If you want to formalize that prediction there is a medium to do so.

http://www.intrade.com/

wallflower2• 18 years ago

My hat is off to DHH and 37signals for managing to implement the simple but not easy and classic ideal of doing what you love for a (excellent) living. If you hate your job, how can you be good at it?

nanijoe• 18 years ago

I'm not even trying to be funny...I do hate my job, and I am pretty good at it

andreyf4• 18 years ago

I think his point is that someone of equal mental capacity who loves whatever it is you do would be better.

iamelgringo• 18 years ago

I hate my day job ( as an ER nurse ) and I frequently hear co-workers say that I'm very good at it. They often express surprise that I want to leave it behind.

wallflower2• 18 years ago

Freud was once asked what he though a normal person should be able to do well. The questioner probably expected a complicated, a "deep" answer. But Freud simply said, "Lieben und arbeiten" ("to love and to work"). It pays to ponder on this simple formula; it gets deeper as you think about it. For when Freud said "love", he meant the expansiveness of generosity as well as sexual love; when he said "love and work," he meant a general work productiveness which would not preoccupy the individual to the extent that his right or capacity to be a sexual or loving being would be lost.

(From "Identity and the Life Cycle", by Erik H. Erikson)

axod7• 18 years ago

Nearly every 37signals blog post seems to say the same thing.

d0mine• 18 years ago

What do they say?

axod7• 18 years ago

Basically that they run 37signals in pretty much the opposite way to most startups. Which isn't surprising since 37signals isn't a startup.

jcl• 18 years ago

My impression: "You should make a product to sell rather than making a company to sell."

Andys• 18 years ago

They're just replying to pg posts which all say the same thing :-)

marvin• 18 years ago

That's unfair. Pg's essays do have a recurring theme of "startups are a good idea", but he covers the subject much more broadly than DHH. Not to mention the discussions of lies we tell children or why nerds are unpopular.

endlessvoid94• 18 years ago

I can certainly agree with some of this, but I really do enjoy working alot on a software project of some sort. I COULD work 40 hours/week on it, but I'd be perfectly happy working 60 or more and "chasing" this goal.

It's very rewarding for me.

dmix• 18 years ago

They introduced the article as a rebuttal to PG's article.

But, like most of their recent articles, its just promoting the bootstrapped stay-small business ideal.

If your looking to make a lifestyle business then they have some good advice. But all businesses are not equal.

The market, industry, and success all play a big role in determining whether or not VCs, M&As or IPO's are right for your business.

I've said this before, 37Signals is selling a work-style philosophy.

Which is probably why they didn't make much of an argument, besides "we work 4 days a week and still take vacation" and "other people have stayed small so you can too".

Let's not forget that 37signals is no longer an early stage start-up. If your making a million+ in revenues, of course you can make flexible hours for your staff.

staunch• 18 years ago

I find it hard to believe working on the projects they do is the most interesting thing those guys can think of to do for 30+ hours/week. Either they're incredibly boring people or a bit delusional.

I think they continue to work on them because it's mostly pleasant work, they have total control, there's a lot of inertia, and of course because it's making them wealthy.

edw5192• 18 years ago

I find it hard to believe working on the projects they do is the most interesting thing those guys can think of to do for 30+ hours/week.

I don't.

Sometimes the real fun comes after the business passes its first few milestones. Lots of people bust their butts building a business in order to get it to the point where it will be a lot more fun to run.

axod7• 18 years ago

I don't buy that. The excitement for a lot of people is in building. Creating. Once a company is self sufficient where's the fun in that?

diego2• 18 years ago

Some people may think that doing pleasant work where you have total control and make lots of money is indeed the most interesting thing you can think of. Especially if you have the freedom to tinker with random ideas and enjoy the people you work with.

I am in a similar situation (well, probably not making as much money) and I do find it very interesting. At this point in my life I wouldn't want to lead a company with a limited runway and investors eager to find a buyer for it.

I still get to play and experiment with new technologies, and I use some of our profits to fund at least a couple of interesting projects per year. I could do this for decades.

michaelneale• 18 years ago

I don't think technology wise, but they seem to spend a lot of time thinking about and experimenting with user interface and user experience. That is an interesting field no matter what, and satisfying when you get it right.

invisible• 18 years ago

I think that some of the "interesting" factor comes in when people rely on your projects. It is the most satisfying thing when you begin a new project with goals, milestones, ambition, and fervor. However, it is very satisfying when people benefit and appreciate what you put effort into.

mechanical_fish• 18 years ago

Perhaps the authors, like many artists, are happy to have the perfect day jobs so that they can pursue interesting hobbies in their spare time. You know, hobbies like blogging, or writing open source software. [1]

There really is a limit to the amount of exciting original thinking that a person can do in a week. You need to sleep. You need to exercise. And you need downtime. If you've got an exciting, fast-moving, forward-looking hobby, it's kind of useful to have a pleasant, renumerative job to do in your off hours.

And it's hard to develop frameworks for building maintainable software if you never actually have to maintain any software. Practice makes perfect.

[1] I cannot believe that I just read a post suggesting that David Heinemeier Hansson might not be doing enough interesting things with his time. How much more code should the guy be giving away? I'm sure there's a non-empty set of people who wish he'd slow down.

crocus• 18 years ago

I find it hard to believe working on the projects they do is the most interesting thing those guys can think of to do

It doesn't seem like it is. They recently decided to spend less time on the company:

http://www.37signals.com/svn/posts/893-workplace-experiments

If it was the most interesting thing they could imagine doing, why would they decrease the amount of time they spent on it?

Tichy4• 18 years ago

What do you consider interesting?

Jem• 18 years ago

I don't own the company I work for, so perhaps my outlook is different, but I certainly love my job and find that a lot of the time it's the most interesting thing I do.

I am quite a boring person though!

vaksel4• 18 years ago

I think you do need to sell your company. The ideal of living of residuals shouldn't apply to the internet businesses. They are just way too unpredictable, look at companies from 1998...how many are still around? Only a few of the few are still around, and that's only because they have become synonyms with their niches. Google? Search, eBay? Auctions, Amazon? Online Stores etc. But for each one there are a hundred dead companies that had a good 5 years, and then died.

Small companies/large companies, most of them eventually fail to be competitive. Internet has almost 0 barriers to entry, there is absolutely nothing stopping another startup from coming in and taking you out, doesn't matter if you have a bigger piggy bank.

Better to sell while you are still on top, and then if you really want to, you can use some of that capital to build something else that you can be happy about. And lets face it, if its 6 years later, chances are you have plenty of new ideas you want to try out.

If I have a 5 year old company that makes $250,000/yr for me, and Google offers to buy it for 10-20 mil, I'd take the deal, because it means I'll now have guaranteed money to live the lifestyle I want for the rest of my life, and I'll be able to use a portion of that to do my next startup that I'll be just as excited, as I was about my original idea

swombat3• 18 years ago

You don't have to live off residuals. You can live off the money you put away while running your business. That's one of the things that DHH points out in his post.

I have a friend who ran an online business for 4 years while doing a medical degree and put away about half a million pounds (~$1m) while doing so (that's on top of the money that he actually spent). That's enough money to be quite comfortable for a long time.

vaksel4• 18 years ago

Well residual = salary you pay yourself, and yes you can put away a large chunk, but you'll never catch up to a guy who just walked away and sold his company for 10 mil. Well not in single life time.

i.e. lets say your friend gives himself $250,000/yr and he grows that by 15% every year and then gets another 10% as a return on his investment, and then lets compare to a guy who just got his check from Google and put it in the same investments to get 10%.

So I threw this into excel:

Row 1: $250,000x1.15 <--this is his company growing at 15%, so he can afford to give himself, a bigger payout(15% more per year)

Row 2: $1,000,000x1.1 <--this is his 1 million he currently has saved, gaining the 10% from investments

Row 3: Sum of 1+2 <---both numbers combined

Row 4: $10,000,000x1.1 <--the guy who took the 10 million, and invested it

After 20 years: Guy who is still running his business 24/7, growing it at a magnificent 15%: $10.8mm Guy who is doing absolutely nothing, or started another company: $67.2mm

Now I'll grant you that the guy who is still running his business, also has his own company that is probably worth more than the 57 million difference. But to get that, he has so far worked non-stop for 20 years.

After 40 years: 112.2mm vs 452.6mm

After 60 years 1.4bb vs 3.0bb

After 80 years 19.986bb 20.484bb

So as you can see, it'll take him 81 years, before the guy who wants to keep his company gets the same amount of cash, as the guy who became millionaire at the age 30.

Thats the whole point, you sell your company as soon as you are offered a large enough chunk of money, so that you can start investing it. The whole "the rich get richer", is possible because money makes money. And that 10% is pretty average, usually possible even if you are risk averse.

And even if the person is COMPLETELY risk averse, and put that money into different ING Savings type companies, which give you like 4.7%, it'll still be 39 years before the residual guy catches up.

akeefer• 18 years ago

I don't think many people would debate what to do if you had the opportunity to sell at a huge markup (i.e. 40-80x your yearly take) that would leave you set for life. That's kind of a no-brainer.

The real question, to me, is whether you should build with the intention of trying to flip or if you should build with the intention of making it a stable business. That direction will make a huge difference in a lot of your decisions about whether to take on funding, whether to focus on early revenue or just on user numbers, etc. And there's no easy answer to that one; it really depends on what you want out of the experience, what your expected likelihood of being able to flip is, if you take satisfaction out of building over the long term or if you'll get bored in a few years anyway, etc.

13ren5• 18 years ago

I think there's a legitimate question of how possible it is to build a stable software/internet business for the long term

It's easy to start such a business; but it's also easy for your new competitor, and for open source. But apart from barriers to entry, there's that routine cataclysm of a computer technology revolution every decade or so. That one is hard to survive. This volatility is the main reason Warren Buffett doesn't invest in computer technology companies.

I think the long-term is a decade or so.

pavelludiq• 18 years ago

I respect both PG and DHH and i think that they are both right from their experiences. PG seems to be older and with more experience though. My thoughts on the situation are simple. Why not be flexible? Why not start a business and work on it as long as its rewarding to do so? If your company gets rally big and you think it wouldn't be as fun to manage it, as coding all day, then sell it, if you think running a big business is for you go for it. If you company doesn't grow, but guaranties you an income you can choose if you want to sell it and do something more interesting, or if you want to take it easy and just enjoy working. Are these men blind to see this as an option? Why is it supposed to be one way or the other? Flame wars on technology are annoying enough, but on business strategy they are annoying and boring too.

gscott• 18 years ago

In 10 years the 37Signals crew might not enjoy the work as much as they do today. People change over time, interests shift, they might want to join the hypothetical pg co-op later down the line.

However, if you can make a nice wage like 20k a month, work when you are in the "groove", have all of the things you want in life, take some nice vacations I don't see why they would need to make any changes until there life's interests shift focus.

andreyf4• 18 years ago

In 10 years the 37Signals crew might not enjoy the work as much as they do today.

My thought exactly. Taking free cooking/art classes is fun, but sooner or later, you start wanting to make something that'll last 100 years. That's what Arc is about. Ditto for Knuth's Art of Computer Programming.

Can you imagine Knuth writing them while running a business?

pageman2• 18 years ago

I'm thinking if you have 3 exits (there might be more): IPO, M&A and continue running it then have a diversified portfolio of these 3 options.

fallentimes2• 18 years ago

We're in YC Summer 08, and our goal is the model spelled out by DHH in this post...with slightly less arrogance.

Wufoo has a somewhat similar model to 37signals and they're unbelievably profitable.

Tichy4• 18 years ago

Wufoo are my heros because to be honest, I would never have thought there would be money in providing web forms. They might be an excellent example for "just don't die"?

andreyf4• 18 years ago

> They might be an excellent example for "just don't die"?

Have you used their products or researched the market? This is an excellent example of "do an amazing job, and charge people very little for it". Organizations make a lot more money from building web forms, they just pay it all off to sales staff to sell them.

nickb• 18 years ago

How do you plan on providing an exit to your investors by following the 37sig model?

fallentimes2• 18 years ago

we might not have to have any (other than YC). And I'm not saying we would never sell...it's just not the primary goal. We'll see though...I'm getting ahead of myself.

steveplace2• 18 years ago

Issue dividends or do a stock buyback.

Still, you probably could sell your hypothetical company. Could even be easier, since you have actual cash flow to look at.

Tichy4• 18 years ago

I think both dhh and pg want the best for "us" (and that's why they deserve to have fans). Maybe dhh is worried that pg's talking about risk is too discouraging for many people who would be happier as entrepreneurs but remain scared in their cubicle life. On the other hand pg might be worried that people end up not pushing themselves hard enough and ultimately failing and staying mediocre.

Since dhh was a speaker at Startup School I also assume they get along fine and we simply benefit from a kind of benign competiton.

Probably they are both right, what I would like to know now is which course of action has the bigger chance of success ;-)

Nevertheless I also feel pointing to the CEOs who stayed with their company might be inaccurate. Jeff Bezos might still be with Amazon, but he might not be much into selling books. He might be exploring things like the Kindle and Amazon Web Services, or something entirely different. The point: those longterm-CEOs might simply be doing startups within the safety of the mother company.

sanj• 18 years ago

So who is the Vorlons and who is the shadows?

jsmcgd• 18 years ago

I think this is quite interesting. On one hand we have an investor saying things you would expect an investor would say (grow as much as you can). On the other hand we have an owner saying things you would expect an owner would say (my business is great). Yet when these two say it, it seems fresh for some reason.

Perhaps because when they say these things we know that they believe it in some absolute sense not just because it benefits them. So maybe I should say refreshing, not fresh.

I love HN.

andreyf4• 18 years ago

Writing business apps in Ruby on Rails is only going to seem cool for so long. Give them a couple of years for the coolness to wear off, and they'll sell without a second thought.

subwindow• 18 years ago

37signals has been doing web applications for five years.

They're not some new startup who are building Ruby on Rails applications because it is the hot new technology.

They're building Ruby on Rails applications because they invented it. It is the hot new technology because of what they did, not vice versa.

13ren5• 18 years ago

There's a tax advantage too: to have investments that return $100,000 pa you need to have saved (assuming 10% ROI) $1,000,000. You get taxed each year on that $100,000 as income - but you also got taxed when you made that $1,000,000 in the first place.

But if you create a business that returns $100,000 pa, while you similarly get taxed on that income, you don't get taxed on the creation of the business - even though it's equivalent to having saved $1,000,000, in terms of its return.

And if that doesn't set your heart singing in transcendental joy, it's probably better for you to just do what you love and the money will follow. :-)

hs2• 18 years ago

the same is true for stock u won't get taxed for buying stock and the tax is just one time (not recurring every year) at 25% (15% after 1 yr)

contrast this to 'work for company' ... u get taxed 35% every year :(

probably it's the social design school-work-govt 1. you obtain huge debt from school 2. you become obedient by having to work to pay the debt 3. you stay in the loop because of taxes

13ren5• 18 years ago

the same is true for stock u won't get taxed for buying stock and the tax is just one time (not recurring every year) at 25% (15% after 1 yr)

Really? Here in Australia, we don't get a tax break for buying stock (AFAIK). When you earn the money, you pay tax, and then you buy stock with what's left over. (though there's tax breaks for investing via superannuation)

soggo• 18 years ago

just 2 ways to get to the destination, driving or taking a train .. which is better ? well all depends on your taste, your feel or may be your mood! Just do the way way your like it man!

pageman2• 18 years ago

an analogy for me is you're in Singapore and you're thinking of flying or driving by car to Kuala Lumpur, Malaysia - driving, it takes you 4 hours. Flying is only 30 minutes but check-in time is 2 hours and disembarkation/waiting for your baggage is abou 30 minutes plus you need to take a taxi to the airport - it works out the same. Choose your poison. Driving is more scenic but you get flier's miles with flying.

pg• 18 years ago

My point was not that selling was the only way to achieve freedom and security, merely that it was the optimal way. (That was the thesis of the essay in fact: that selling a company and living off its revenues aren't opposing strategies, but rather that the former is the optimal case of the latter.)

I don't see how anyone could argue that selling was not optimal for security. Sure, you could gradually save money, but that's not optimal; it's not more secure than getting a lump sum upfront.

Whether selling is the optimal way for most founders to work on what interests them most is a fuzzier question, because it depends on the likelihood that the average founder's startup is the most interesting thing he could be working on. (Not just interesting; the most interesting.)

You can't prove this, only offer arguments of various strengths.

The strongest abstract one is similar to Occam's Razor: that a choice that has to satisfy two independent constraints is unlikely to be the optimal choice for either alone. Specifically, that you can probably do better on the dimension of interestingness if you don't also have to satisfy the constraint of making lots of money.

I'm surprised people find this idea controversial. It seems to pervade almost everyone's choices from the moment they enter the workforce. I.e. if you want to make more money, you often have to compromise on the type of work you do, and if you want to work on what you love, you often have to make financial sacrifices.

There may be a few statistical outliers who escape this force (a few top athletes, for a few years each) but for everyone else it's as pervasive as gravity.

pchristensen2• 18 years ago

I think you're talking about an exit and DHH is talking about choosing what kind of business to start. If someone offers to buy you, your chance of a liquidity event is 100%. But if you're still deciding what kind of business or startup strategy to use, that chance is more like 50%, 10%, or even 1% or less. Given those odds that any normal entrepreneur (not you or DHH) faces, he says it's smart to build for profit and take the safer money, rather than go all or nothing.

sethg• 18 years ago

So it's a minimax strategy. Or maximin. Or...sheesh, one of these days I oughtta learn game theory.

Harj• 18 years ago

he says it's smart to build for profit and take the safer money, rather than go all or nothing.

the point is that the two don't have to be mutually exclusive. they may well be if you're building a consumer web app without any monetization strategy but not for e.g. an ad network - something that needs to make money from the start and can also be bought out eventually.

condor• 18 years ago

"I don't see how anyone could argue that selling was not optimal for security. Sure, you could gradually save money, but that's not optimal; it's not more secure than getting a lump sum upfront."

That's a pretty bold statement. If you think that an offer on the table is greater than all the net income you're comfortable your company will generate (discounted to present value of course), then you would take the money and run. If on the other hand your company is creating value (net income), and you are confident it will be creating more value (net income) going forward so that the discounted future net income the company generates is way more than the upfront lump sum, you wouldn't sell and it wouldn't be more secure or optimal. I think the issue is that most 'startup' owners aren't focusing on the net income part so they don't view their company as a cashflow generating entity which can be rationally valued against an upfront lumpsum, which means they'll take the money and run just about everytime; why wouldn't they?

I'm sure 37signals could have sold their company right after launching basecamp in 2004 for a multiple of revenues at the time, guessing a couple of million dollars. However, for some reason that wasn't optimal for their security, and by 2007 (doubling revenues every year since 04) chances are they've earned/pocketed the value they could have sold the company for in 04 (if not a majority of that value) and they get to keep that cashflow generating machine going forward (which means more cashflow + more valuable equity).

craigbellot• 18 years ago

In the case of 37signals and their product line, there's no fuzziness that they are most interested in their business. They say 'NO' to all but a few of their customer requests and implement the ideas THEY want to implement, WHEN they want to implement them.

Pg says make something people want and will find useful, while DHH says make something you will find useful and stick to your intuition.

I think 37signals and their manifesto make them much happier than trying to please others.

abstractwater• 18 years ago

I don't think pg and 37s have different ideas about this. They are both very focused on the user. If 37s says no to many customer requests, it's because they think it's best for the user, nothing else.

When DHH says "solve your own problems" it's only because he thinks that if you do have a problem, it's very possible other people have the same problem. Hence, you are "making something people want".

biohacker42• 18 years ago

I keep thinking there is a risk dimension here. Build for profit and the worst case scenario is, you have to wait to save enough to have financial independence. Build to flip and worst case is bust, start again.

One strategy is lower risk then the other, pick the one you like best.

But DHH does make a good point about the special scenario when your startup is indeed the most interesting thing you'll ever work on. Then after you flip it and decide retirement is not for you, you've already sold your best idea.

I think that's a rare scenario, there's not much risk of "losing" the idea of your life. Then again, there's not much chance that any particular startup will be sold.

MaysonL• 18 years ago

No, build for profit, and worst case is: you make a profit for a while, and then spend the next couple of decades treading water, slowly going broke.

dhbradshaw2• 18 years ago

Sometimes I wonder if a life filled with adventure and engagement might not be bigger and more interesting than one filled with security and freedom.

richcollins• 18 years ago

One thing that hasn't been addressed here is the likelihood of creating a company that that will be acquired for enough money that you no longer have to work vs the likelihood that you can create a business that lets you live comfortably.

My guess is that most businesses that make enough money for you to live off of comfortably would have an acquisition value that is high enough that you wouldn't have to work anymore.

beaudeal• 18 years ago

i think its great that theres all of this discussion over something such as business models -- in this age of technology i feel its often something overlooked -- but in my opinion, they are both valid, it just depends on what you're going for. if dhh is happy working 4 days a week on 37signals and earning the money that he is, and he wouldnt rather be doing something else, than great for him! if his interest were exhausted, and he were still doing that, then i would say why not sell? for me personally i could not be happier than working on my current project, because it is what i am most passionate about. however, with that being said, for the right price it would be crazy not to sell. not only could you continue to work on it afterward, but if something else came along more interesting you would have the opportunity to pursue it. i just dont think this is as cut and dry as dhh wants to make it seem, and i really agree with the clarifications that paul made in his first comment.

aspirant• 18 years ago

Sell your company, keep your company. If you want to maximize your ability to work on interesting stuff, remember that there is a effective but unglamorous dual pronged approach to financial security. Require less luxury to be happy.

Learn to cook brown rice. Bring your lunch to work. Walk to your job (or to a bus stop to your job) and can the gym membership. Yoga studios tend to offer free classes on Sunday. Visit the library instead of buying so many books. In fact most libraries will even buy a book they don't have if you ask them. And if you really want to give your mind a break from coding, buy a repair manual and learn to fix your own car. This actually results in the satisfaction of an affectionate bond with your car that you can't buy at the dealership.

Two things have surprised me the further I go down this path.

1. Hacking the system by revolting against the consumer culture is so much fun, that I keep pushing harder regardless of my income.

2. While living like this, you'll even find low-maintenance (high-everything-else) women doing the same thing who find it attractive.

You don't have to sell your company to have financial security

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