
Why We Choose Profit - AngeloAnolin
https://m.signalvnoise.com/why-we-choose-profit-e511efc4dcb9#.2ywqscd9u
======
xwowsersx
I know this going to sound grumpy, but...

I agree with a lot of this and enjoyed reading their book in which they
outline their philosophy on business and management.

But how many times are they going to scream and blog about this? It gets old.
I get it, you're profitable and you think it's a good thing. But they've
repeated this over and over and they sometimes go overboard in trying to pit
themselves against VCs and the perceived waste of the SV tech culture.. Some
of it is fair. Some of it just feels like marketing on their part...a way to
write more blog posts by pitting themselves against an enemy.

Companies that are profitable and doing well don't need to constantly blog
about their profitability. Just my two cents.

~~~
simplehuman
It's called content marketing. How do you think they have remained profitable?

~~~
xwowsersx
Haha touché. I guess I just wanted to point that out...

~~~
simplehuman
Tbh, I am very impressed by their perseverance. As you say it was novel in the
beginning years but it's tiring now. But they have kept going at it and not
let themselves get tired. They have also motivated their employees to build a
brand for themselves. Something to learn here...

~~~
benologist
What's really novel about it is their employees are not here manipulating our
flow of news, that's the opposite of how most startups' blogs get to our front
page more than once.

------
peterbonney
Take _that_ , strawman!

Seriously, nobody "eschews profit for potential". If I give you the choice
between a dollar today and two dollars tomorrow, you aren't "eschewing profit"
if you choose the latter: you are weighing the potential gain (an extra
dollar) against the potential risk (I can't/don't pay you) and deciding that
the reward outweighs the risk.

Or you can rationally decide that the risk outweighs the reward. Whatever.
Optimizing current income isn't "right". Optimizing terminal value isn't
"wrong". Nor vice versa. They are just different choices. Rational
disagreements over risks and returns are how markets form.

Now, if the author wants to say that many companies are too optimistic about
their actual future potential and therefore aren't doing the right risk/return
calculation, I won't disagree. But this is where boards and investors
(theoretically) serve to impose that reality check on the inherent optimism of
most entrepreneurs.

~~~
simplehuman
Well, What if I for sure give you 1000 bucks today OR I may give you 2000
tomorrow. Which would you pick?

What if you had this choice for 30 days straight?

~~~
charlesdm
It would depend on how the "OR" is determined, so you can assess the risk?

~~~
simplehuman
I think that's the point of the post. If risk is hard/impossible to assess
which would you take?

~~~
charlesdm
Well, you would still have certain data points to make a decision from. If
you've been part of an industry for a while you'll start understanding it.

Second, if you already have a ton of money, you might take on the additional
risk to get 2x instead of 1x. Say you have $20mm in the bank, generating 10% a
year, then getting a $10mm payout instead of a $5mm is probably worth it,
since an extra $5mm won't change your life.

If however, you have $100k in the bank, then you should probably take the
$5mm.

~~~
peterbonney
Exactly. Two people can face at the same choice with the same facts and same
assumptions and come to different conclusions because of their individual risk
preferences. Neither is necessarily wrong.

------
meesterdude
Some are saying this is nothing new, that they've repeated this already - but
I saw this evolve from a set of tweets around market fit - and the reaction
some people had to the idea.

Is it new? yes and no. It's basecamp - basecamp has been basecamp; they're
just getting better at explaining who they are and why.

is it worth saying? absolutely. I have talked with a lot of founders who don't
even think about profitability. But without profit, you have no market fit.
You might be up in the air, but gravity pulls all objects down.

Basecamp has always represented a voice of sanity in an industry plagued by
hype and fads. Maybe you are sick of hearing them, but for others (such as
myself) they are a lighthouse in a storm.

Also, this _is_ great marketing, because its not an ad. Its actual, meaningful
content. 1/3 of the article isn't why basecamp is the facebook of project
management. Its respectful.

------
pdog
Counter-example: Slack chose growth and they swallowed up a multi-billion-
dollar opportunity that 37signals (now Basecamp) rightfully could have owned.

Slack employs over 700 people now (compared to 51 people at Basecamp) even
though they're a decade younger.

~~~
rubiquity
DHH and Jason Fried have several vacation homes and sports cars and actual
hard cash. The founders of Slack have golden tickets with somebody else's name
on most of them.

I guess it all boils down to what's important to you.

~~~
charlesdm
I'd much rather (co-)own 37signals than an equity stake in any venture funded
business, including Slack.

Who seriously loves working crazy hours? Make $20m and invest that well,
that's all you need to live a full, free and happy life with your family.
Enjoy work, but don't live to work.

~~~
pdog
Luckily, ambitious people don't think like this. They'd rather make a huge
impact on society (think companies like Google and Tesla) than retire
comfortably once they can afford fancy toys.

~~~
cookiecaper
Google and Tesla are only possible because their founders actually got control
over the money and were able to deploy it to their ends. Yes, their rise was
VC-fueled, but that's not the only way to go about it.

At some point, you have to be rational. Yes, in theory you could make enough
money to reshape the world in your own image. In real life, people need
balance and they need limits, and they need to learn to be content with what
they can get within those limits, however much that is.

Elon Musk is now a two-time divorcee. Brin is a divorcee. I don't actually
know Page's marital status and don't care enough to look it up.

Google and Tesla's impact is primarily technical, not social; the social
impacts are not insignificant, but they're incidental to the technology, and
though they like to think they are, Google et al are not in control of how
that technology is used. In fact, the effects of these technical innovations
appear contradictory to what are likely to be considered the tech industry's
dominant values (see: election of Donald Trump).

Google and Tesla are important companies, but perhaps their founders could
indeed use a little more balance.

------
andrewljohnson
More companies would choose profitable course if the tax regime were
different. How (U.S.) taxes work, you are heavily incentivized to build
"profitless" companies and sell them to make profit in the form of capital
gains.

If you build a company over 10 years and make zero profit, then sell it for
$100M, you pay $15-20M in long-term capital gain taxes.

On the other hand, if you build a company and take $100M profits over 10
years, you pay $35M in corporate income taxes. And it's worse than it seems
too, because you pay those taxes as you go, instead of waiting for growth to
compound and paying taxes at the end of the cycle.

The VC industry exists basically because of the tax regime, as do a variety of
other credit sources. This same tax regime also disadvantages boot-strapped
companies, which is sort of a sad side effect if you ask me. If you have the
capital to avoid profit-taking, you get richly rewarded for it.

I'd like to see tax reforms to avoid this set up, where small boot-strapped
businesses can retain earnings in order to fund their growth, without paying
corporate taxes, or having to resort to borrowing so they can spend down their
"profits."

~~~
spitfire
Try Estonia. 0% corporate income tax, 20% on dividends, Something like 30%
employment tax on employees within Estonia.

So register your business in Estonia, operate outside where you can grow as
much as you want without being taxed, then take dividends when you're ready.
Estonia has an e-residency program which lets foreign citizens form businesses
within Estonia easily.

~~~
xachen
This ideology is what gets people in trouble with the tax authorities of their
resident country... talk to an accountant and watch them laugh you out the
door.

~~~
spitfire
Why? The company would be formally Estonian. You'd pay your 20% on any
dividends to Estonia, then whatever tax your country of residence demands.

I'm not advocating tax fraud in any way shape or form. I'm saying Estonia will
allow you to setup an Estonian business, and has a business friendly tax
structure.

It won't help you with your personal taxation when you bring your money back
as dividends/salary. But it will help you if you choose to reinvest it in the
business.

------
metaxy2
On some level I'm surprised this approach isn't more common. With diminishing
marginal utility of wealth, a small chance of making millions has a much
higher expected value than an almost zero chance of making billions. Plus,
even if the billions were worth proportionally more, we actually tend to
_under_ weight high risk/high reward scenarios compared to a perfect expected
value maximizer. E.g. you wouldn't pay much to get a 1/10,000 shot at
unimaginable bliss, even if the expected value math works out.

I'm guessing part of it is that at some point, say under a 5% chance, we stop
calculating altogether and it just becomes "so you're saying there's a
chance!" If you have a 1% chance of making something as big as Basecamp and a
0.001% chance of starting Facebook, they both feel about the same, so might as
well shoot for the moon.

~~~
diafygi
This approach is more common. It's called starting and running a small
business (that maybe someday grows naturally into a big business). Small
businesses are way more prevalent than startups, even in tech. Small business
loans are orders of magnitude more voluminous than VC and Angel investments.

However, remember that we're in a VC funded forum right now, so we're in a
bubble where the growth-over-profits is portrayed as equal or preferred to
simple slow growth profit.

I'd highly recommend checking out your local small business owners' group or
meetupss. They are just as smart as you are, but just never got sucked into
this bubble here.

~~~
metaxy2
I suppose I did mean more common _within our circles_ \--the corner of the
culture that reads Hacker News. I'm from Western Mass, which has way more
small software businesses than startups, so I'm not sheltered from the idea.

I think you're right there's a certain groupthink that goes into it.

------
equalarrow
Basecamp is one of the few bright beacons in the tech industry. They walk the
walk.

I often turn to SvN whenever I need a quick morale boost or injection of
reality.

~~~
manigandham
In the _entire_ tech industry? You're not looking hard enough, Basecamp is
doing well but so are 100s of other companies.

------
manishsharan
There is nothing wrong with taking a distribution from a company;
investors/founders need a payout.

while I agree with much of the content, I do disagree with this statement:
"Companies that keep reinvesting keep adding risk to their companies."

I can't agree with this assertion. Companies that keep reinvesting their
profits are doing it to finance future growth. Obviously, future growth
implies a degree of risk. But you could argue that by reinvesting profits, you
are de-risking the future by building capability to satisfy a demand and the
proof of demand is the profit generated.

~~~
kmonsen
If you put the money in your own pocket it is yours. If you use it to reinvest
in the company it can be lost. Clearly this is risk.

You call it reinvesting, and any form of investing comes with risk. I think
you are missing the point here, he is not saying it is never smart just that
it adds risk which is clearly true.

------
mark_l_watson
Great philosophy, bootstrap a profitable company and keep maintaining that
bootstrapping way of doing business. I am reading Nassim Taleb's book
AntiFragile, and am in the process of judging both organizations and personal
strategies on the fragile/antifragile curve. BaseCamp is antifragile and that
is a good thing.

------
vram22
A couple of questions on the financial terms (words) Jason used in the OP:

>Unlike companies that reinvest all or most of the money back into the company
every year, we take money (profit) out every year in the form of distributions
(we’re an LLC)

What does that - "distributions" \- mean? That they take the profit and share
it between the owners / partners of the company annually?

>We’re still an LLC at Basecamp. The simplest pass-through structure you can
have at our size.

What does a pass-through structure mean?

Update: Thanks for the answers, guys.

~~~
carsongross
A distribution is the paying out of profits to owners of a business.
Distributions must be paid in proportion to ownership share: if you own 50% of
a company you must be paid exactly 50% of all distributions.

Distributions are not subject to payroll tax, which is a nice benefit of them.

Pass-through entities mean that the tax liability for the entity "passes
through" to the owners of the company, so the company proper does not have a
tax liability, rather the owners do.

When I am God Emperor, all company dividends will be deductible against
corporate taxes, to encourage companies to return profits to the owners in the
form of dividends. This would better align the c-suite and "owners" in a
sustainable, cashflow based relationship, much closer to the LLC model. It
would also make stock ownership more attractive for poor people, since the
income would be taxed at a lower rate for them than for rich people.

------
Mc_Big_G
I agree whole-heartedly with the article and how they do things, but this is
just recycling their same old shtick for marketing purposes. Nothing new from
them here.

~~~
kmonsen
I agree with everything you say, but I almost feel like SV needs to read this
once a month just to make sure it is not forgotten.

Not arguing this should be the only business model, but an option that is
considered.

------
alberth
>> "Our books are so silly simple, our operating agreement hasn’t changed in a
decade."

Both Carlos Segura and Ernest Kim were original founders of 37signals. [1]

I wonder if they both get some type of profit distribution even though they
haven't been involved in the business in years.

[1]
[https://en.m.wikipedia.org/wiki/Basecamp_(company)](https://en.m.wikipedia.org/wiki/Basecamp_\(company\))

~~~
carsongross
If they are owners of the LLC they must be paid out distributions in exactly
the percentage that they own the company.

------
sreyaNotfilc
Why We Choose Profit?

Becau$e ... money i$ a terrible thing to waste!

But seriously, before I've even read the article you can tell that the author
may feel (or told to feel) bad from making a profit.

I would say that being profitable is not a bad thing at all. Someone (or
somebody) created a tool, or a service that helps people out. There's a demand
for such service. People are willing to spend money on it. There's no problem
there.

It take effort to innovate (and to run things that help people out). The best
way to keep the quality of things high is to... make money to pay for people
and things to make your service the best it can be.

Nothing wrong with that.

------
s0me0ne
There are cheaper alternatives to basecamp people

[https://freedcamp.com/](https://freedcamp.com/)

------
gigatexal
im sure VCs would love a company that's already profitable too. But now that
you are there's no need for venture capital.

~~~
ryanbrunner
They absolutely wouldn't, and it makes sense for them not to. VCs make their
money by funding the Facebooks and Googles of the world, not the Basecamps.

From the perspective of the founder, Basecamp seems pretty great - multiple
millions of dollars in profit a year, ability to live a comfortable lifestyle
without waiting for an exit.

From the perspective of a VC, it's a mess. Their fund isn't set up or really
interested in dealing with dividends, they're built around the idea of an
exit. Furthermore, given 100 companies, they'd much rather have 1 Google and
99 failed companies than 50 Basecamps and 50 failed companies. So adding risk
by re-investing is always in the investor's interest. Finally, they have no
leverage in a profitable company. The company doesn't need them anymore - VCs
benefit quite a bit from holding the pursestrings.

------
brilliantcode
Refreshing to see the kamikaze growth style encouraged by VC slowly
unraveling.

We make $1 for every $0 we spend is far better than $1 for every $2 spent
_anyday_.

There's _nothing_ financially secure about being in the pockets of someone who
wants you to grow at zero net profit rate.

I just can't fathom Founders who think that somehow they are in the clear
because they are now making 7 digit revenues but _negative net profit_.

Pocketing your annual salary month to month, now that's FU money. You get to
keep it and no underperforming VC breathing down your neck to blow up in order
to make up the losses generated by the remaining 299 variants of Uber, AirBNB,
Tinder and Ethereum.

