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Why We Choose Profit (signalvnoise.com)
130 points by AngeloAnolin 37 days ago | hide | past | web | 82 comments | favorite

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.

And yet companies losing barrels of money get their "I'm even more in debt now" VC posts upvoted as news.

The current situation creates an asymmetry, and that distorts how people think business is done, which in turn distorts how people think business _should_ be done.

I think it's fair to have posts about businesses that don't have to burn through their own lifeblood to try and change enough to finally make some money. That's _way_ more normal.

>And yet companies losing barrels of money get their "I'm even more in debt now" VC posts upvoted as news.

Does this happen that often? The only times I can recall are when they are already really large companies and the comments are usually filled with people talking about how ridiculous it is.

Almost all companies doing post-series-B are losing money at the time they finalize the round. While only some of the deals are explicitly structured as debt or debt-like (although, more and more, it seems), they are all pretty similar on a balance sheet. They are selling something which hurts the business as-is in order to get cash, to pump into a system that isn't making money.

At the end of the day, the celebration is predicated on a denial of the business realities these companies are faced with.

Now, in terms of how _frequent_ these posts are on hacker news... not as frequent as they used to be, for sure. But when they do pop up, nobody is saying it's not really news. That's my whole point.

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

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

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...

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.

It'd be nice to not have marketing posted as news here.

You'd kill an awful lot of content on here, then. Every funding announcement, every technical article written by a developer under the banner of a company is content marketing.

"Dissenting voices" against the screams of, "Growth at any cost!" and "Pets.com is the Uber for Facebooks! Unicorn!" are refreshing.

I honestly don't see very many of those voices around anymore

> a way to write more blog posts by pitting themselves against an enemy.

That's exactly what it is, but they've been clear about that, picking an enemy is one of their "ideals" from their books.

It is against the grain of startup culture and a lot of popular big businesses which is why they always mention it.

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

Except it gets people every single time. Porn is addictive as hell.

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.

You're splitting a hair in a way that's not advantageous for Basecamp to do. They are painting themselves as an ideological antipode to the SV/VC world. Never mind that within SV it's not all big VC moonshots and there is quite a bit of nuance. That subtlety is noise that dilutes Basecamp's David vs Goliath message.

I'm not going to complain too much about Basecamp's blunt marketing message though, overall I feel it's a positive message to see in the world. For those are new to tech or whose understanding is based on tech journalism, this is probably a good thing to hear despite how shallow it is.

Hyperbole is 37Signals' schtick, but it's not that much of a distortion of a situation where many startups don't simply raise far more than they earn to grow but actively avoid adding revenue streams in the belief they might be inimical to growth and hype.

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?

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

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

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.

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.

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.

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.

In fairness that's a bit like saying John worked hard and got into NBA now he is doing what he loves and is making millions a year therefore any student that has an inkling in basketball should give it their all and eschew everything else for a shot at the NBA.

What happens to all the ones that don't make it? Go flip burgers?! Maybe it isn't crazy to opt for a more stable + likely outcome than "go for broke".

I'm not knocking Slack. They've done a great thing but there is also a large element of luck in what they achieved meaning many things could have gone wrong which would have nullified their hard work.

With VC fuelled "growth" you're always locked into shooting for the NBA at all costs.

That's too generous: at this stage it's more like knocking a banker on a million dollar salary for not following the route of the star college basketball player that most people think will be an NBA star...

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.

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.

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.

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.

> Who seriously loves working crazy hours?

I do. And so do plenty of others. Everyone has a different purpose in mind. Saying "that's all you need" about life choices is incredibly reductive and never helpful.

Is it working crazy hours you enjoy, or achieving impressive results? Those are two different things, and the latter can almost always be achieved without the former.


I don't get working crazy hours, but to each it's own! :) I prefer working smart rather than working long hours.

> smart rather than working long hours.

I know you mean well but these are not exclusive, you can do both. There is no substitute for sheer effort, regardless of how optimized it is. But yes, to each their own.

I'd be willing to bet that if the founder of Slack wanted/needed to he could take quite a bit of money off the table. Come series B/C/D+ usually founders can take a bit off the table. Stewart can probably do whatever he wants (though he made enough form Flickr he doesn't need to).

As for me, I have not very much in savings, but I would take 30% ownership of Slack over 30% ownership of 37Signals/Basecamp in a _second_, and not even just from a long-term perspective. I'd bet with a 30% stake in Slack you could put a couple million away to hedge downside risk, then have tons and tons of upside available.

I think HN could do a much better job at understanding the practicalities of equity and what it really looks like if you're a founder. You're not just handed a bunch of paper and told to work and dream for 10 years, generally speaking.

A 37signals type of business is completely different to a venture business. It depends on what you look for in life, and how you prefer living your life.

I personally couldn't care less about potentially having billions in upside. $10-20mm is enough for me to do whatever I want in life.

Why did you choose to name the Basecamp founders, but not Slack founders? At least part of the Slack founders seem to be public figures who have had recognized financial success when Flickr was acquired many years ago. Also, it is probably that with Slack at its current levels of investment the founders have been able to take money off the table for themselves -- that is how these big rounds seem to be structured for unicorns to remove some "distraction" for the founders.

I named the Basecamp founders because I was able to recall their names off the top of my head. I could have done some more research I suppose.

Without doing that research how can you tally their cars and homes?

Wow, what does slack have 700 people for?

They want to show to their investors they're burning their VC money. Didn't you know that having 700 employees is a lot more prestigious than just having 50?

If they want to grow beyond "just a team chat app" that takes a lot of engineering talent to do it quickly enough to compete with MS, Google, FB, etc. who are all moving into this space full force.

Additionally, to sell into the enterprise you need a sales team, so a lot of those are probably sales people on commission.

700 is the new 200

I think 37Signals is the wrong company to use a comparison of headcount as some great thing. If you read Rework for example, 'they' prefer a small headcount and purposefully keep it so.

Is 700 employees more desirable than 51?

Only in some form of measuring contest.

If it's necessary to build a better product then yes. Slack is on a track to dominate this space and make Basecamp irrelevant.

Slack is not in the same space as Basecamp, work tracking vs chat is a dramatically different use case. A more apt comparison would be Asana, but I'm not particularly worried about that either: there isn't really a one-size fits all approach for work tracking. I actually worry more about the future of Asana because they have those VC-fueled dreams and Facebook-cofounder-level expectations that mean anything less than a moonshot is a disappointment. With all those resources Asana can do a lot of things Basecamp can't, but there's no guarantee that can translate that all into the tremendous sustained growth they need to meet their goals.

Is it a better product, or a larger market? The quality of the product and the size of the market are two almost entirely separate things.

I don't understand what is your point. The questions was "Is it desirable?" It's not - it's a tradeoff. More employees create more complexity, but it could be the case that's sine qua non to get create the product and capture the market.

Slack is IRC, Basecamp is a project management app, they really aren't even in the same space. Slack will never make Basecamp irrelevant, they're not playing the same game and aren't in the same space.

Campfire is Slack, no?

They're really no longer a product suite company, they renamed themselves Basecamp as that's their only real success and they've started selling off their other products.

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."

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.

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.

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.

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 underweight 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.

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.

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.

I agree with the first half of your post, though I think it's clearer in the second sentence to say that the expected utility is higher rather than the expected value.

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.

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

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.

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.

You're trading a certainty for an uncertainty. That's pretty much the textbook definition of financial risk.

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.

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.

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.

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.

I can at least answer the last question. "Pass-through" refers primarily to taxation.

An LLC tries to combine the benefits of Corporations and Companies. The Company benefit is that any income is effectively the owners' income: it passes through the company to the owners, who then file taxes on the income as if it was a paycheck. This is the "pass through" idea; that income (and taxation) is passed directly to the owners.

The corporate benefit is what gives LLCs their name. In cases of litigation, even though the revenue stream is passed to the owners, it is the business that is sued as an entity. This then "limits" the liability of the business owner.

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.

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.

>> "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)

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

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.

There are cheaper alternatives to basecamp people


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

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.

More importantly, if your already profitable, and you do need to bring in money (perhaps to fund a new large project) you have a much better leg to stand on. You can shop around, take your time, and refuse to agree with terms that put your team/company at a disadvantage.

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