
The bar for success in our industry is too low - terpua
http://37signals.com/svn/posts/1890-the-bar-for-success-in-our-industry-is-too-low
======
mrshoe
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.

~~~
DrJokepu
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.

~~~
davidw
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.

~~~
timr
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.

~~~
ptomato
"My point is that the massively profitable, "free" website run by three people
in a garage is probably a myth."

Why hello, craigslist.

~~~
timr
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.

~~~
puredemo
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.

~~~
timr
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.

~~~
puredemo
The thing that is reproducible about Craigslist is their simple, functional
layout and organic, community-centric growth. Much like HN.

~~~
timr
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.

------
webwright
<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.

~~~
boucher
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.

~~~
webwright
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.

~~~
ekiru
The whole point of the article is that Evernote is not making money and aren't
even expected to break even until 2011.

~~~
webwright
Yeah. Same with Amazon when they were a few years in. Were they worth writing
about back then? I think so.

~~~
ekiru
Yes, but is Evernote currently worth using as an example of how to make a
profit? I don't think so.

------
edw519
_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.)

------
far33d
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.

~~~
ccc3
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
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.

~~~
ccc3
presumably there was a significant cost in time and/or money required to gain
that experience.

~~~
RyanMcGreal
You've got to live anyway. Might as well pay attention while you're doing it.

------
shabda
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

------
ankeshk
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.

~~~
run4yourlives
I think the problem is most are gunning for number 2.

~~~
ankeshk
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.

~~~
tptacek
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.

~~~
ankeshk
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.

~~~
tptacek
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.

------
sethg
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.

------
illumen
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.

~~~
tptacek
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.

------
davidw
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.

~~~
tjogin
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.

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

~~~
tjogin
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.

------
tsally
Good old Midwestern thinking is always refreshing.

------
rajatmehta1
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.

------
baran
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.

------
run4yourlives
A-friken-men.

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

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

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

------
flooha
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...

~~~
run4yourlives
>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.

~~~
flooha
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.

~~~
tptacek
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?

~~~
flooha
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.

