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

by terpua • 17 years ago

282 79 17 years ago

37signals.com

tsally• 17 years ago

Good old Midwestern thinking is always refreshing.

ankeshk3• 17 years ago

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.

run4yourlives3• 17 years ago

I think the problem is most are gunning for number 2.

ankeshk3• 17 years ago

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.

run4yourlives3• 17 years ago

A-friken-men.

Money in must be more than money out, otherwise you aren't a successful business, you're an eventual death.

flooha3• 17 years ago

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...

run4yourlives3• 17 years ago

>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.

flooha3• 17 years ago

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.

tptacek8• 17 years ago

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.

wouterinho• 17 years ago

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.

far33d• 17 years ago

I'm sure many plumbers are profitable from day one. Amazon wasn't profitable for a while.

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.

tptacek8• 17 years ago

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.

rythie2• 17 years ago

There is not much chance of being a millionaire plumber any time soon especially not after a couple of years work.

ccc32• 17 years ago

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.

thaumaturgy• 17 years ago

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.

dmose• 17 years ago

I would argue that prostitution is profitable from day one..

graphene• 17 years ago

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.

timr5• 17 years ago

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.

whatusername• 17 years ago

:) 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.

hexis• 17 years ago

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.

n-named• 17 years ago

Interesting perspective.. I'm looking forward to his talk at start-up school.

mrshoe• 17 years ago

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.

tptacek8• 17 years ago

This is a great way for financiers to think about entrepreneurship, but maybe a really bad way for operators to think about it.

DrJokepu• 17 years ago

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.

pchristensen• 17 years ago

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).

davidw6• 17 years ago

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.

ojbyrne2• 17 years ago

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.

Tichy• 17 years ago

citation needed?

lucifer• 17 years ago

> 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.

davidw6• 17 years ago

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...

pieceofpeace• 17 years ago

>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 ?

illumen• 17 years ago

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.

tptacek8• 17 years ago

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.

shabda• 17 years ago

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

webwright4• 17 years ago

<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.

defunkt• 17 years ago

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.

webwright4• 17 years ago

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.

boucher2• 17 years ago

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.

webwright4• 17 years ago

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.

edw519• 17 years ago

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.)

rajatmehta1• 17 years ago

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.

sethg• 17 years ago

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.

davidw6• 17 years ago

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.

tjogin5• 17 years ago

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.

davidw6• 17 years ago

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?

DougBTX• 17 years ago

I remember when they didn't have any products, and were just a consultancy. They had a following even back then.

sabat• 17 years ago

Yes -- for instance, 37Signals is considered a success.

baran• 17 years ago

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.

The bar for success in our industry is too low

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