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Before we get started, are you like me? An entrepreneur or maybe a freelancer who loves what you do but you hate invoicing? That’s where FreshBooks comes in. FreshBooks is an easy to use online invoicing service that saves you time, gets you paid faster and makes you look professional. I’ve been using FreshBooks for two years and I love them. The best part is that getting started is completely free. Just go to freshbooks.com and sign up for a free package. They’re also giving one birthday cake to a new Mixergy user every business day. So when you sign up, say you heard it on Mixergy. Did I make that clear? You get one birthday cake, one person in the audience, only exclusive to us. Anyway, go sign up and you’ll see it, mention Mixergy.
Next, who’s the lawyer that tech startups trust? You can probably say with me at this point, you’ve heard it over and over again: Scott Edward Walker of Walker Corporate Law. But don’t take my word for it. Check out what Neil Patel, founder of KISSmetrics, said about Scott: “Scott is a great lawyer. He’s affordable, responds fast, doesn’t charge you for 5 minute phone calls and always gives you great advice.” WalkerCorporateLaw.com.
If your friend wanted to create an online store, which platform would you recommend? I’d recommend Shopify. Shopify stores look beautiful and they increase sales, so if anyone you know needs an online presence, recommend Shopify.com.
Andrew: Hey everyone, my name is Andrew Warner. I am the founder of Mixergy.com, home of the ambitious upstart and today my guest is a freak who believes that businesses should actually charge their customers and generate profit. Joining me, of course, is David Heinemeier Hansson. He is the creator of the Ruby on Rails framework and a partner at 37signals and, of course, coauthor of “Getting Real: Agile Web Framework with Rails” and “Rework.” David, I’m getting all kinds of tongue-tied here, I don’t know what’s going on with me here today. But let’s jump into the first question. You’ve said your goal is to earn, well, actually, why don’t you say it? What is the financial goal with 37signals? And I’ll take a drink of water to clear my throat.
David Heinemeier Hansson: So, the financial goal of 37signals is constantly moving. We just like setting a milepost that’s further out all the time and go towards that. But that’s really even overstating it, too, to put it as a financial goal because it is not something that we really think about or care about all that much on a day to day basis. I kind of treat goal setting a little bit like planning. Invest about 30 seconds into it and then check in on it every three or six months or something like that. But the current goal, just to pick a nice, round number, has been $100 million of revenue a year for the company and I think that that’s absolutely possible. The products that we sell appeal to a very large audience of small businesses and small teams, so there’s no reason for me to see why that shouldn’t be possible. But it’s more important for us that we just continue the good thing that we have and we keep growing it steadily and surely and we do so without taking on crazy risks or betting the farm all the time or whatever else have you.
Andrew: I’m curious about how goal setting influences your work. How did work at 37signals change after you guys said, hey, let’s go for $100 million in revenue?
David: It didn’t change at all. Goal setting is really sort of a sideshow, interesting thought experiment activity for us. Like, even the number, whenever you pick round numbers for anything, you know it’s bullshit. Like, we’re never going to make actually exactly $100 million, which means that it’s not something that we put in careful analysis or extrapolations into because, as soon as you do that, I think you commit yourself to that goal in restraining ways. We’re just trying to do the best job that we can to make the best products that we can, to treat our customers as best we can and then we hope that, in time, we’ll reap the rewards we have in terms of the goals. But I think too many people overstate the value of setting goals. I mean, it’s fine, it’s good, it’s good to have something to shoot for, but get it out of your head five minutes after you set that goal and just let it be there in the background and then, if you happen to get there, you can be, Awesome! We got there! Let’s set another goal, and if you don’t get there, so what?
Andrew: You know, in the self-improvement books, David, they say that, you set a goal, that’s going to be the pillar that will drive you forward. Is that the right phrase? That’s going to be the thing that gets you up in the morning, it’s going to be the thing that keeps you going when you’re frustrated, it’s going to be the thing that lets you know where to go for the next few years. If that’s not it for you, if it’s not the goal, then what is it for you?
David: Yeah, I think that’s complete bullshit. I don’t think that having this arbitrary number is going to be the thing that gets me up in the morning. What a load of crock. I think what’s going to get me up in the morning is that I care about what I’m working on, I’m interested in the tools that I’m using, I’m passionate about the problems that I’m solving, I’m getting good feedback from customers and coworkers, so that I’m in an environment I care about. I’m spending the eight or whatever hours a day I’m spending on this in a productive manner that I’m happy with. I think all those things are infinitely more important than this notion of the goal. I think the notion of the goal, perhaps work, if you’re doing something shitty, if you hate what you’re doing, you hate getting up in the morning to work on it and you generally are not passionate or interested in the work itself and the problems themselves and you’re just in it for the goal, you’re just in it for the flip or the payout or the reward at the end of the road, then sure, having something big and extravagant, a carrot up there might work for you. But I’d say that you’re doing it wrong because the chances are you’re not going to reach your goal. So, is all the time that you spend on this, is that lost? Is that wasted if you didn’t reach the goal? Do you think I’m going to give two hoots if we don’t reach $100 million a year in revenues for 37signals? Fuck, no. I will have enjoyed by time and I will have felt like I had a positive impact on our customers, our coworkers and the world at large and that really is so much more important than just having it be this binary switch of whether I reach this abstract, pulled-out-of-my-ass number.
Andrew: So, I said in the introduction that you believe in revenues and profits and actually charging your customers for your product. The first product that you had was, I believe it was Basecamp, right?
David: Correct.
Andrew: How would it have hurt your product if you said what other Internet entrepreneurs might have said, if you said, “You know what? We’re kind of new at this. We’ll offer Basecamp for free for a while. We’ll get a lot of customers, we’ll learn from those customers, what they like and what they don’t like about our product. They’ll be happy to give us feedback. They’ll tell their friends ’cause it’s free and then we’ll charge for that, we’ll figure out the revenue afterwards when they’d tell us what premium features they’d want.” How would it have hurt Basecamp if you did that?
David: I think it might very well have destroyed Basecamp. I think there’s a fair chance we never would have become the company we are today. I think that, in general, is one of the worst means for startups out there. I think it’s absolutely a terrible, horrible, despicable idea to do that and I say that because it sets exactly the wrong expectation. If you have so little stake in the game, if you have so little knowledge about what’s going to be a good product that you know absolutely nothing when you put it out there, that the only way this thing is going to be of any worth to anybody is if some random guy shows up and gives you feedback, well, you’re fucking doing it wrong. I mean, think about it harder, solve some problems where you could actually be a barometer of whether it’s crap or whether it’s good. We were solving our own problems and we knew that this was solving our problem, then of course it’s worth something. Why the hell would we go down the path of giving this away for free and then going through the absolute horrid experience it is to flip the switch on somebody and say, Oh, you like this product? You told all your friends about it? Now it’s going to cost you x. Before you didn’t pay a dime. Are you happy now? No, of course you’re not happy. You spoil all that good will that was built up initially because somebody came along and liked what you had to offer and I also think that the majority of the feedback you’re going to get back is going to be crap. People give you a different kind of feedback when they’re not paying for stuff and the quality of that feedback is generally crap. You get much more realistic feedback once you charge money for something.
Andrew: Do you have an example of some feedback that you got because you were charging that’s better and different than what you would have gotten if it was free?
David: I think the core here is that the people you’re getting the feedback from are invested in what you’re doing. It’s very easy to just sign up for a free product and then just give some random feedback. You don’t have a whole lot of stake in it, you don’t have a whole lot of investment in it. More likely than not, you haven’t spent that much time on it. If you’re actually paying for something, you’re going to be in a mindset of trying to make this work and get your money’s worth and I think that the quality of feedback that comes out of that is infinitely higher and the kind of feedback that comes from drive by freebies. That’s not to say there’s nothing of value in free feedback and there’s also value in feedback from people who didn’t sign up for your product because they thought it wasn’t worth it, like it was too expensive or whatever. But the kind of feedback that’s actually going to, sort of, I think there’s two different kinds of feedback. The kind of feedback that comes from paying customers is the kind of evolutionary, “let’s hone it” kind of feedback and the feedback that comes from free, drive by customers is more sort of reality check, Is this idea a completely stupid idea that nobody’s going to sign up for or not? But I think you should have solved that problem before you got to the point of launching.
Andrew: Okay. Isn’t the lean startup methodology, doesn’t it say, come up with an idea, find a potential customer who has his paying point, create a minimal viable product for them, give it to that customer, get their feedback and adjust with them because the customer knows everything and you don’t because you’re creating it for other people really, not just for yourself.
David: Well, I think there’s your mistake number one. Creating software for other people is really fucking hard. It’s so much easier to create something for yourself and when you are creating something for yourself, you are the customer, too. You’re not the only customer, you don’t have all the answers, but you should have a fair amount of the answers and if you look at pretty much any sort of widespread, successful product or start-up out there, the creators of those services or tools, they damn well use their own product. You can be rest assured that Steve Jobs cares about the iPad because he uses the iPad and you can rest assured that we care about how Basecamp works because we actually use Basecamp. Same thing with Dropbox or any of these other tools. They’re solving, at least in part, the founders’ and the creators’ own problems. When you’re trying to act just on the behalf of somebody, or not even on the behalf, on sort of the request of somebody else, like, Do this for me and then I will pay you money, you’re really more just a consultant. I don’t think you’re actually a product person at that point. You have to have a personal stake, an interest in the game to be a good product person.
Andrew: Okay. So then, Swordfolio, that’s one of the latest companies that you guys created, it’s a web site where you can find portfolios of designers and pick the designer that you want and hire them. What was the need that you guys solved with that?
David: It came directly out of, we wanted to redesign Signal vs. Noise.
Andrew: The blog.
David: And we’re thinking, we don’t actually treat the design of Signal vs. Noise as something truly important. The designers we have on staff would rather spend their time on improving Basecamp or the other products. What if we just hire somebody to do it, right? And then we’re thinking, How would we actually hire a web designer for this? I was like, Well, I would just like to look at some styles. Like, what is the work that these people that we’re considering, what kind of work are they doing? And I want to review a lot of people at once. I don’t want to get just, like, three links to something and then I have to pick between those three guys. Then, what else do I care about? Well, it would be kind of cool if we could just meet them in Chicago at the office and we’re thinking we want to spend, let’s say, $10,000 on this. Those three criteria are the cornerstones of Swordfolio. We allow people to filter by the city that they’re in, the budget that they have and then they just get to see a ton of web designs. And then they can go through a long list really quickly and say, I like that, I like that, I like that. Let’s talk to those guys. And it also just comes from us getting a ton of questions from people, Oh, you guys do web design, can you recommend me a web designer? And we would be, like, Uh, well, I don’t know. I don’t know what you like, blah blah blah. So, it solved those two problems. Our own problem of trying to find a web designer for Signal vs. Noise and the problem we had in sort of referring other people to web designers, which is actually very similar to how our job board came around. So we have this thing, jobs.37signals.com where people can post their jobs on and we needed it ourselves because we wanted a place to post our own job ads and we had the same referral problem of, Hey, do you know a good Rails programmer? And I’d be, like, Uh, uh, I don’t know. Here’s a place to do it.
Andrew: Okay. What’s the responsibility breakdown at the company between you and the other active partner in the business, Jason Fried?
David: So, Jason is more the design side of things and I’m more the programming side of things. So that’s at least initially how we split things off and then we sort of care mutually about the business aspect of things and we just tend to divide things up between what needs to get done and I think the split where Jason’s more on the design side and I’m more on the programming side is really helpful. It’s great to work with a founder who has a complementary set of skills to you and is not just a duplicate of what you are and what you can do, because there’s so much work to be done and it’s great how it just naturally falls one way or the other.
Andrew: So when you guys decide to create Swordfolio or to change the pricing on one of the products, it’s not one or the other of you? It’s the two of you making the decisions together?
David: Oftentimes, something comes up as an idea from one or the other and then we sort of talk about it, figure it out and then we go off and do it. The process is not really that long. Oftentimes, it’s just flash of inspiration and then let’s do it. Swordfolio, for example, took us all of a week to do. Or two weeks, or whatever it was. A lot of things don’t really need a long, elaborate decision-making process when the costs involved in implementing those projects are tiny.
Andrew: So you just say, let’s give it a shot. Let’s get a designer and a developer on it. We’ll launch it and we’ll see what happens. Have you ever had a failure like that? Can you talk about one of the failures at 37signals?
David: We have failures all the time. We have failures in internal estimates for features that we want to get done that get blown. We have failures of underestimating the scope of something. Tons of tiny failures internally in terms of how we organize the work and how we get things done, but none of them really prop up to be great for sharing stories, because I think that the bulk of the failures that we do are in sort of the implementational level of, like, we could have done this slightly better. But it’s not really as a culture that we’re all that interested in …
Andrew: What about a product failure? Has there something that you guys launched that you just said, Hey, you know what? This is not good. We’ve got to bury this thing and move on.
David: Not really. I don’t think so. I’m trying to remember if we’ve ever discontinued anything we’ve had out there. I mean, there’s certainly things that do better than others. Basecamp and Highrise are two of the most successful products that we have. You could say that something like Campfire, which is our chat tool, is nowhere near the same level of success. Some might call that a failure in relationship to the success of the other products. That’s not how we see it. Campfire for me is the most important application that we have for organizing our internal work. I would have done it even if it would have been just for us and the fact that it also pays some of the bills and it’s part of the makeup of the revenue, which is just all the better. I don’t think we’ve really had any public thing fail so bad that . . .
Andrew: Why not?
David: . . . we would want to bury it. I think in big part just because we don’t take huge risks. We don’t jump on things where we feel like there’s a great chance this could fail. There’s so many ideas out there, we have so many ideas for various products that we could make. Why not just focus on the ones we’re pretty damn sure are going to work? I understand the whole, Well, some ideas are so grand and so large and they’re such gambles that either they’re going to be a flop or they’re going to be like this amazing success. And that’s fine. It seems like the vast majority of the tech startup communities already are working on that side of the idea fence. I think it’s fair that there’s also going to be people who just work on the low risk, but practical ideas and problems out there. So when we feel like we have a problem that at 37signals, we would like to pay for a solution to, then that’s a pretty fair bet that there is going to be at least other people who would also pay for that and, if there are, then it’s probably not going to outright fail.
Andrew: I wonder if it’s your background. I interviewed recently Morten Lund, one of the early investors in Skype, a guy who took incredible risks, lost all his money. Now he’s back, building his career, building new companies and I got emails from people saying, You don’t understand …
David: I used to work for Morten.
Andrew: You did?
David: Which is sort of a small world kind of thing and I think that that actually helped inform my own process …
Andrew: How do you mean, because he is a risk taker?
David: Yes. So I worked with Morten at a company called NeoIdeo in Copenhagen and I was one of the companies that was part of his incubator Prey4 as well, and I got to see that sort of, let’s say, wild risk taking that he would indulge in. That is his personality, to make these big, huge, lavish bets on things and I think that help inform me to say, “Do you know what? That’s not my style. That’s not what I’m interested in doing.”
Andrew: How do you mean? Do you have a specific example? He’s very proud of that, of the fact that he takes big risks and he says now that he’s taking fewer risks because he’s learned what you learned from his experience. Do you have an example of something that you saw him do and you said, That’s just not me.
David: Well, I think that, most recently, going bust, which was buying that Danish newspaper for an epic sum was something I could never conceive of seeing as a good idea for me, for my kind of risk tolerance. And he just, one has a ton of ideas and I’m sure that there are golden nuggets between a lot of those ideas, but the risk he has to take on to explore all of those ideas is very, very high and I just don’t enjoy the cops and downs like that. Like, if your sort of risk portfolio is like this all the time, that’s a trader’s mentality. I don’t have a trader’s mentality. I don’t have, Oh, we are huge one day; Oh, we are down; Oh, we are huge; Oh, we are down. I’d rather just have like this, like have a nice, steady, predictable growth and I just believe in the beauty of compound interest. Like, we might not be growing 2000%, but if we can just keep our nice, solid growth for a couple of years, that’ll compound to be quite the impact. And I certainly wouldn’t trade, so I mean, the world has to be made up of both kinds of people. What I feel in general is that the startup scene is too focused on the sort of “swing for the fences” or whatever you want to call it, type of ideas, either it’s going to go bust or it’s going to be this lavish, extreme success. I think we could have less of a focus on that, more of a focus on practical solutions to less grandiose problems and we’d be better off.
Andrew: So the e-mail that I got from people in Denmark, and apparently I’ve got an audience in Denmark, was that your attitude is very much the culture over there. One guy said, at the end of the day, all they do is go home and eat the same old Danish traditional diet and look at you strange if you eat the wrong thing on your bread. Really, this is a guy who’s married to a woman in Denmark. Is that where this comes from?
David: I don’t think so. I don’t personally subscribe to the Danish model of thinking about things. I think that’s one of the reasons I don’t live in Denmark any more. I think that the, sort of, the mentality in general there is probably too much on the other side, is too restrictive. There’s too little risk taking. So, I mean, maybe you can say it actually is somewhat informed by, like, your Morten Lund out here and your typical Dane here, then maybe I’m a little bit more here or something like that. But, actually, that’s why in many ways I do admire that we have people like Morten Lund taking these extreme risks, because I think he’s, you’re pulling people over to the other side and making them see a different perspective and a different paradigm and I think that’s good. It doesn’t mean I want to be there but it probably helped me pull along the way. If we didn’t have anybody who was doing all this stuff out here, then we would still all be sitting like every other Dane, just being an employee at some boring company eating the same boring food every day or whatever stereotype you want to dream up for this argument is. So I think it’s good, I just think it’d be better if we were sort of more in the middle, right? So if there was more, like, considered risk taking. It’s not that you shouldn’t take any risks at all. Starting any company of any kind, even how sure you are that this solves a problem for somebody, is going to be a risk. There’s a fair chance that it won’t work, but there’s different kinds of risks. There’s the one in 10,000 or one in a million chance of making something and then there’s a one in seven chance or one in 14 chance. Like, I’m more in the, Let’s take a one in seven chance rather than let’s take a one in 10,000 or one in a 100th chance.
Andrew: How do you know? How could you evaluate it and know that you’re taking something that’s very low risk, but still has a worthwhile upside?
David: So, I go back to the principle of looking at your own problems. I think we can be objective enough about something like project management, so everybody in the world has projects of some kind, a lot of people using e-mail to organize those projects, email has pretty objective deficiencies when it comes to organizing and involving people in projects. Here we have a solution that we come up with to solve our own problems around this, that’s cutting down on the sort of problems that we had with e-mail. Hmm, that doesn’t seem that high risk. It doesn’t seem like it takes a big leap of faith for somebody to look at their inbox and saying, Do you know what? These 3000 emails I have in here? Maybe that’s not the best way to organize a project. I can try something else, I can try something like a project management tool out there and then you combine that with, sort of, OK, solid problem with a solid solution. You went from having the problem to having less of the problem by using the solution and then you look at the amount of risk involved with coming up with the solution. For Basecamp, it was, what? Six months on the calendar of work for 37signals on the side, next to other things we were doing? Very, very, very low risk. If Basecamp had been a spectacular failure, what would we have lost? Well, we would have lost six months of spare time. Yeah, I can risk six months of spare time. Seems reasonable vs. the kind of “swing for the fences” kind of thing, like let’s take $41 million in venture capital to come up with this maybe idea for this very far, I don’t even know if it’s a problem-problem, and see if maybe we can come up with a solution. That to me just has no appeal and I wish there was less of that.
Andrew: Now, when I have dinner with friends or just sit around over drinks and talk about your company, and we do it a lot, we talked about 37signals, how do they do it? What we learn from them, what we can copy from their ideas, what we envy. Here’s the one thing that most entrepreneurs that I talk to seem to envy. You guys have a consistent revenue source where you didn’t just decide to sell Basecamp one time and let people keep using it the way shrink wrapped software was sold before. You did month to month. How did you convince people in the early days to sign up month to month and keep on paying you for as long as their data was with you?
David: I think that that’s one of the absolutely beautiful parts of web pay software and I think it’s beautiful because it’s beautiful on both sides. So, actually, when we were first creating Basecamp, we weren’t thinking of it as a month to month thing. We were thinking we were going to go year-to-year, right? We were going to charge 500 bucks a year for access to Basecamp. And the credit card processor wouldn’t let us. They’re like, Hey, what are you talking about? We’re going to be on the hook for 12 months for a product that you haven’t delivered yet? For 500 bucks? What if three months into it they decide they don’t want it anymore? You guys go out of business in six months, we’re going to be on the hook. No, no, no, you can’t do that. We’re like, “Well, all right. I guess we’ll just have to do it month by month.” What we figured out was, for somebody to pay us, like, $24 a month or $49 a month or whatever, as a business expense, that’s absolutely negligible. Nobody cares. Like, that’s just not an important sum for anybody. So that makes it very easy, it makes it very easy to sign up because the thing is, there’s no long-term contract. If you’re not getting $24 of value a month out of this, you cancel and so fucking what? The worst you’ve done is, well, actually we give you a 30 day free trial, so if you can’t even figure it out in 30 days and you pay once, you’ve spent $24. So what? Nobody cares.
I think that that level of flexibility and that limit on the upfront investment is incredibly appealing to a lot of people. It so cuts down on the decision making process, because if you take the other, sort of, idea, which is, you can only bill people once for Basecamp, right? Get a customer, you can only bill him once. What should we charge? I mean, damn well better be pretty expensive, because if we only get one shot at him, then let’s say it’s $2000? $5000? What’s the number? Anyways, it’s going to be something where it’s rather expensive, right? And then we would have no real incentive to do anything for that person. We got your two grand, now hasta la vista, baby. Like, I don’t care about you, I just care about finding the next customer. I think the motivations and the, sort of, interests are so beautifully aligned when you have month-to-month software. Like, the customer, every month has a chance to evaluate whether we’re still worth it.
Andrew: But it’s hard, I mean, that is absolutely true, but I know that if you put your data into Highrise, even though you can take it out, it’s really hard to find another software to put it into. It’s really hard to take your people off of Basecamp and move them somewhere else. It’s not a, just take your stuff and move it to a different apartment.
David: There are shifting costs, absolutely. There are less the earlier you decide that you don’t like this, so yes, if you’ve been using and training your people on Basecamp for three years and you want to move all your shit out, it’s going to be kind of a hassle. That’s just how it’s going to be. Even if everything was just one click of a button, it’s still going to be a hassle to learn a new tool and so on and so forth. But I don’t think that that’s the risk that most people really care that much about. They care about sort of the now, the three months, or whatever it is and we cut way down on those risks in the early days of trying to use something. I think way more people would fear getting suckered in by slick marketing materials to buy a very expensive product ones, like the $5000 Basecamp license one time, right? And then they’re stuck with this, let’s say, piece of shit that doesn’t work, that doesn’t solve their problem and now they’re out five grand and what are they going to do?
Andrew: It would have been less than five grand, wouldn’t it? It would have been maybe 100 bucks, 50, no?
David: Well, I can’t see how that would ever work.
Andrew: Really?
David: If we charged 50 bucks, 100 bucks for Basecamp, that would not have been the same kind of business. We would have needed 100 x the customers to make this work. So that would not have been the kind of business we would get into, I think. Or we would have been a different kind of customer or company or maybe we would just have been a less profitable one. I wouldn’t have been that interested in that model, I would have tried to pursue something else.
Andrew: You did a little bit of math for the people at Y Combinator when you spoke at start-up school there and said, Look, you could charge 40 bucks a month and all you need is 2000 people to earn about $1 million a year. And you can find a niche where you can find 2000 people who are willing to buy your product. You can be just a little better than the competition, find 2000 people who can see that. Is that the kind of math that you guys did when you started out, did you do anything like that?
David: I think, actually, the funny thing is, I don’t remember the specifics, but I think the math is slightly wrong which is, kind of, quite interesting . . .
Andrew: Yeah, it’s just a little bit off.
David: It only goes to prove the point that, precision doesn’t matter. This is back of the envelope kind of stuff. And, yes, we did that kind of math. So we started out with a target for, I think we wanted, what was it? $4000 a month in recurring revenue for Basecamp for us to sort of say, if we can do that year after year, that will have been worth our side-project time to do, right? I think we reached that after two weeks. And that was when we were, sort of, like, Wait a minute, that’s cool. Maybe there’s something more here than just the side business. Maybe this could be the real deal. And even still, even with that really encouraging first two weeks, it still took us a year to get to the level where we were, like, All right, this is what we’re going to do. We’re going to stop being a consulting company, we’re going to be a product company fulltime. This stuff just takes time. And even after a year, what were we doing? We were paying the bills, we were certainly not throwing it around. This was not a lavishly profitable operation after one year. These things just take a long time and I think that’s sort of the other thing that I think is sort of a little bit missing, like, there’s so many of these social, flash, viral, instant, shake and bake success stories out there that people have this mismatched expectation that, if whatever they’re working on it is not a blockbuster idea within six months, it’s a failure. What the fuck are you talking about? We would have written Basecamp off as a failure in six months if those were the criteria for success. Like, what venture funded startup out there do you think would have looked at their income statement after six months and, had it looked like Basecamp, thought, Gee, we’re doing it right! No, they wouldn’t, they’d be like, We’re fucked! The VC’s are going to come in, they’re going to take control, they’re going to shut this thing down and they’re going to sell it off in pieces or whatever else is going to happen and yet, we waited it out and it grew to be for us a beautifully sustainable business that we’re interested in staying in.
Andrew: Help me understand something about your personality. On the one hand, I see deep ambition, ambition to change the industry, ambition to leave your mark on the industry, ambition to build a great company in the industry and on the other hand I see, Hey, we just launched this thing to see what would happen. At the same talk that you gave at startup school, you said Ruby on Rails was just a project or maybe actually that was somewhere else, but you basically, when you launch something, you say, We just wanted to launch something and see where it went. And on the other hand, we’re going to build $100 million company. How do you balance both those sides?
David: I think they’re balanced like this, like that. So if this is me, caring about what I do on a day to day basis, what I spent my eight hours on, making sure that this is fun, interesting, sort of rewarding work to do. This is me caring about the ambition of reaching certain milestones.
Andrew: Ambition way lower than the day-to-day happiness.
David: Yes. I think the two, I think they actually inform each other. When they’re flip side, I think you’re less likely to reach your ambition and when they’re like this, where you care about your day to day, you care about the problems, da da da da da, you’re more likely to reach this. That’s just my experience, that sort of relationship and how it should be. I’m a little worried or concerned or suspicious about people who place ambition too high because ambition, to me, is all about focusing on this one event in the future at the cost of, the higher your ambition, the cost of more of everything else vs. just treating ambition as sort of like, Yeah, let’s aim for that, that’d be fun, that’d be great but that’s not really the important thing, right? The important thing is that, on a day-to-day basis, I fucking like my life. Like, I like the stuff that I’m working on, I like the people I’m working with, I like the problems I’m solving, I like the customers that I’m solving them for, I like the journey, right? I like the whole game. These things take a long time. I’ve been working with Rails and Basecamp for seven years. Do you know how many times I would have wanted to kill myself if I hated my day-to-day job? For seven years? What kind of reward is worth throwing away seven years of your life into something that you’re not, you don’t like the journey of? I sure as hell wouldn’t do it. I’d much rather pick something else to do that didn’t have any big pocket of gold at the end of the rainbow if it meant that I could then enjoy my life for seven years. It’s just, my time on the planet is worth more than that, so, a great term for this, Tim Ferris in the 4-Hour Workweek, the key thing I took away from that book was the notion of deferred living, the notion that, Oh, well, you have to put in all these years of misery because then retirement or purchase of your company or acquisition or VC money, something else is going to come along down the road, right? I don’t think that’s how it works. I think you will condition your brain to be sort of dependent on a shitty setup. I’ve not found a whole lot of entrepreneurs who’ve been able to go through, sort of, the lean seven years and sort of devalue and then come out on the other side, get their success and then be able to sit back, enjoy and relax. No, we are humans of habit. We will go into certain patterns and if your pattern is that you have to work 14 hours a day on shitty stuff to meet your ambition, once you meet your ambition, your body will still be, I need 14 hours a day of work. You will just go on and do the next thing and I think that that’s, to me, I think, I’m mainly judging this from my own perception, that would be a miserable existence. I don’t want deferred living. I want to design my lifestyle to be, as it is today, and then I can just continue that. I mean, there might be things or opportunities that open up, but I have to be happy with what I’m doing right now.
Andrew: The way you describe life day to day inspires me. I want that kind of life and I know that if I aim for it, maybe next week I’ll launch something new or I’ll take on some new initiative and I’ll suffer for it. Maybe I’ll decide that I’m going to go give a presentation somewhere and putting together that presentation’s going to be painful, but at the end of that pain, it’ll be good because the audience will enjoy the presentation I gave, I’ll feel proud that I came up with good ideas. Don’t you sometimes have to suffer to get to that great feeling when you’re launching something, when you’re building something that you care about?
David: There’s traces of that, but I think thinking about work in terms of pain and suffering is a very sort of Protestant work ethic that I think is very deeply embedded a lot of people in this part of the psyche of how we think of work, which I just don’t think is valuable. I think it’s a problem, it should be, in programming, we have this sense of code smell, right? There should be a work smell. If the work is too painful, then there’s something wrong. So take the presentation, for example. If you’re feeling that it’s truly painful to put the presentation together, then maybe this isn’t the right topic. Maybe there’s another topic you could talk about that would be less painful to talk about. And you should probably focus on that.
Andrew: You never had that feeling? Have you had that feeling?
David: Oh, yeah, I’ve definitely had that feeling.
Andrew: So what did you do? Can you give me an example? A specific example of when you did that, of when you felt that way?
David: I felt that way, actually, with presentations. I find it painful to give presentations, let’s say, if I’ve either giving them too many times already, like, I can’t do repeats, so I can’t just go up and give the same presentation five times. I can give the presentation like 2 ½ times and the half time through, the third time I’ll be, like, jeez, I’m bored out of my mind, right? So, we have that with the Getting Real Workshop. We gave the same sort of workshop presentation four, I don’t know, five or six times. By the end of it, I was not enjoying myself so we stopped. That was the conclusion. We would not do it anymore. And I think reacting to, sort of, those impulses that you get, Oh, this is painful, is valuable information that you should deal with and maybe a few times, the answer is, okyay, I’m going to do it anyway because there’s something else on the other end, but that should be a short term tactical adjustment for this specific case. If you’re treating that as a general approach to life, life should be painful, work should be painful, you’re doing it wrong.
Andrew: All right. Here’s another thing that I’ve been curious about you. When Jason Fried was here, your partner at 37signals, I asked him why you guys sold a piece of the company to Jeff Bezos. He said basically you wanted to take some money off the table. I’ve also heard you say at speeches, you should never look for the pot of gold at the end of the rainbow. You should just keep working and enjoy your work and so, if you have a profitable company that lets you kick off cash month to month, year to year, why take money off the table? Why bring in a third investor?
David: So, we wouldn’t do that today. If we hadn’t done the Bezos deal then, we wouldn’t do it today. At the time, that deal, it was reasonable to imagine that this wasn’t going to last, that this was indeed going to end, right? And so, what are our options then? OK, take on the full amount of risk ourselves, which is to go all the way and take nobody on board, right? To me, seemed like a somewhat risky proposition, right? We have this sort of thing that’s still economically, at least, in its infancy and, yes, it is kicking off some cash, but certainly not extravagantly so, so there’s some risk there, right? The other thing is, we could choose to try to flip it right now, find some Yahoo somewhere to give us $20 million and it’s ours no longer, so it’s zero risk, everything is given up. Or perhaps, like the Morten Lund thing, there’s a thing in between the Morten Lund extreme here and sort of the super safe thing here that’s somewhat in the middle, right? To me, this was that. We sold a small chunk with none of the traditional strings attached you would get from a VC, the timelines, the control, or any of the board positions or anything else like that, traded a small chunk for comparably a small chunk, like, certainly nothing that would lead us, either of us to sit back and go, All right, let’s now retire and sip Mojitos or something. It was, to me, entirely consistent with that risk minimization strategy and then, still thinking like, is my day to day work going to be worse off tomorrow, the day after we sign this piece of paper? And I would think about it, all right, is Jeff going to come in and start meddling with things, is he going to tell me, Rewrite the whole thing in JAVA because that’s what scales? Is he going to do any things like that that’s going to have a material impact on my life and my happiness on a day to day basis? We designed the deal in such a way that I could not answer yes to that question in any way, shape or form. No, I don’t see any opportunity for him, even if he goes mental, to fuck this up for us. So even if he turned out completely adversary, this was not going to sink the company. That is not true of most kind of investment deals. If your VC goes bonkers, which happens more often than not, you will suffer the consequences. So just the particulars of this made it a no brainer for me. Again, I wouldn’t have done it if I knew what I know now, if I knew that shit was still just going to grow and be nice, but that’s not how you manage risk. You don’t manage risk by being a fortuneteller, by knowing what’s going to happen in the future. This was sort of like comparably cheap insurance.
Andrew: Why did you think, I wrote this down as you were talking, you thought it was going to end. Wondering why. Why did you think there was a chance that 37signals’ growth could end?
David: I think you’d be incredibly arrogant if you think your idea’s so good that it has zero risk. Like, that’s when you’re going to start making stupid, stupid mistakes. If you think that the only way from here is up, you’re delusional. There are so many factors that are going to be outside of your control that you can’t sort of envision. There could have been some competitor coming out that was just so much better that they were going to steal all our customers, right? We could have fucked it up monumentally. Let’s say we lost all customer data in such a way that it’s never recoverable. Like, yeah, that’d be a company ending position. Let’s say something else happened, one of us gets run over by a train or a bus or …
Andrew: Was there anything specific that made you guys think, Oh, maybe, well, let’s think about the risks right now for a moment. What happened?
David: No, there wasn’t.
Andrew: There wasn’t.
David: Not, like, there was not one specific thing. It was more the general idea that, if you look at the history of companies, right? The number of companies that have looked like, oh, they were shooting stars, they were going to make it and then they didn’t, that list is pretty fucking long and we’d be arrogant to think that there is not some probability that we would end up on that list and if we would end up on that list, our life would be significantly easier on the other side if we did this deal than if we didn’t do this deal. And if we didn’t end up on this list, things just went on, the impact of the deal would be fairly minor, right? So this is exactly the same analysis you would always do when you buy insurance. Like, OK, I’m going to pay x hundred dollars a year for car insurance, the chances I’m going to get hit by somebody is fairly low, but if I do get hit, then it would suck if I had to pay a $5000 repair bill by myself and that would suck more than paying $100 in premiums, right? Same analysis.
Andrew: Earlier, I just kind of assumed that you wanted to change the industry and leave your mark on it. Maybe I should ask you, why do you speak out so much against venture-funded companies and businesses that will take losses for a while with the expectation of making money in the future. You did it this morning, you just tweeted out a link to a PowerPoint slide about Color and how crazy it was that they raised money. Why do you do this?
David: So, part of it is just my own personal outrage. I get annoyed at the destruction of wealth, the creative inefficiencies but to me, it’s deeper than that, it’s sort of old man on the lawn, the corruption of the youth. So I think the fact that these kinds of deals and these kinds of companies has this intense spotlight on them is sort of brainwashing the next generation of starters to think that this is the way to go. This is how you’re going to make it in startup land. This is the path. This is what we must do. And I think that that’s absolutely horrible. I don’t want the next generation of starters to think that this sort of global approach is the only way that you’re going to make it. I want them to see that there’s alternatives out there, that you can make it bootstrapped on your own, that you don’t have to rely on some sugar daddy giving you a big check.
Andrew: Why is that important for you to have them know that?
David: Well, I think as citizens of the world, we should all care about the prosperity of the world and if we could have more people in the world working on more worthwhile things, pursuing more worthwhile ways, then we’re all going to be better off. I think that that’s the same ethos of open source software. Why would I care to share software that I made and could have kept on my own hard drive with other people? Well, why wouldn’t I want to tell the world progress? I think that that’s an innate human thing to want to do.
Andrew: What I wonder though, and I agree with everything that you’re saying there and I admire the direction that you’re sending the industry, that you’re helping the industry to see, I’m wondering, you have a contact management app in Highrise, project management in Basecamp, you’re dealing with organizations that could be inspired to stay connected to their employees more or could be inspired to reach out to people in their world more. Why not be the guy who stands up for that instead of the guy who stands up for bootstrap companies? Why not stand up for things that are more aligned with your marketing, with your business?
David: I think I can have my cake and eat it, too. I think I can do both things. I don’t think they are mutually exclusive.
Andrew: But I don’t hear you talk about the other stuff much.
David: I talk about the things that I’m just personally involved with at that time. So if the theme or the thing I’m reading about is that, then I will react to that and come up with something. I’ve plenty of opinions and the book “Rework” is, in large part, a collection of those opinions on how we think work should be organized, how you should divvy up tasks and responsibilities and how you should go about your way, so I think that that’s absolutely there, I think that’s a lot about what we’re sharing is how we work and how we see that could be a better part of working and the applications that we do embody all of that, so Basecamp is designed around managing projects as project collaboration vs. say, project control. So all of those opinions are embedded in the products and we’re trying to drag people into our world view of how these things should be done and through books like “Rework” and “Getting Real,” we’re trying to share our approaches on how to do these things. I find the industry thing is more sort of a pastime.
Andrew: It’s your personal fun on Hacker News and Twitter.
David: Sure. And I think, I mean, some of it is that and some of it is just a deeper care for which way the industry is going and, sort of, I think it’s important that there are contrarian voices calling out things that they see as unhealthy. So for the other bubbles we’ve had, I think the world would have been better off if the first dot-com bubble would have burst a couple of years earlier. I sure as hell hope that the world would have been better off if the subprime bubble had burst earlier, so in all of these things, there are people who sit on perspectives or information or opinions that could, in however tiny a way, help sway public opinion and I certainly have no delusions of grandeur, I’m tweeting on my own account, it’s a tiny drop in the ocean but I also believe in, sort of, compound impact so enough tiny drops in the ocean, and you can do something.
Andrew: OK. Finally, two questions. You take a look at a lot of people’s web apps and a lot of people’s businesses, are there common mistakes that you see them making often, over and over again that keeps them from getting that $40 a month from 2000 people?
David: I think the initial, sort of, idea of starting out your app free and then somehow figuring it out what’s going to work and slap a price on it is a classic mistake that I think people should avoid. Launch an app that’s good enough that you would pay for it and then ask other people to pay for it, too. So definitely do that. Another mistake I’m seeing is giving away too much for free. So it’s a fine balance between making your free account good enough that people will want to try it and feel like they got a good taste for it, but let’s take Dropbox, for example, right? So, you get, what is it, five GB for free or something?
Andrew: Two GB right off the bat and it can go up to 10.
David: Two right off the bat. I don’t think a lot of people love Dropbox who don’t pay for it because two GB is all they need. That to me seems like a shame. Like, to me, I’m thinking, could I get a taste of what Dropbox offers me that would be less generous and would, sort of, get more people to convert? I mean, I’m sure the thing is still working for them. As far as I hear, dramatic and profitable. Other businesses are not that lucky. Other businesses, sort of, don’t have that freedom to give that much away for free and still make it out well in the end. So, I think you should look at your breakdown of your different tiers or however else you’re going to split it up, and just make sure you’re not giving away the farm. Like, you should not have 80% of your people be able to get by on the cheapest or the free plan. Then, redesign your plans.
Andrew: What number is a right number?
David: I don’t know. I don’t know what the right number is. I think that the, I really like the split down, I think the most perfect split down we have is the one we have on Basecamp. I think the reason that we do that is because we found that magic lever for us and the magic lever was the number of active projects.
Andrew: Number of active projects. I see.
David: Yup. That’s the main thing that’s causing people to upgrade or not upgrade. Like, the different tiers, it’s like, 10 active projects or 35 or whenever and when you reach this level, you’re forced to upgrade. And people are usually happy to do so because it means that they’re using the product and, like, if you have 35 active projects, yeah, you’re probably getting $49 of value out of the product, right? And that goes back to the whole thing of making the money thing a no brainer. That’s also why I’m not a big fan of consumer stuff in general, because the amount of fucking haggling you’ll get over a $5 fee on something with consumers is extreme because a lot of consumers, they don’t derive any monetary value out of the things that they’re doing. Like, it’s for fun or it’s for a slight reduction in inconvenience vs. small businesses and small teams, like, if they could pay $49 to save 10 minutes somewhere, they should be doing it. So this sells so much easier and I like easy problems.
Andrew: And finally, how close to that $100 million are you guys?
David: We’ll see.
Andrew: You’re not revealing anything yet.
David: Yeah, we’re not going to, I don’t think we would stand to win anything, there’s no upside for us to share revenue or profit numbers, so we don’t.
Andrew: All right. Well, let me say this. You were sick this morning and you still came in to do the interview. I’m really grateful to you for that. I’m grateful to you—this is just going to be me being extremely grateful—I’m grateful to everyone at 37signals, even behind the scenes. You guys have just been so good to me. I remember when I first charged for something, Jason Fried was one of the first people who sent me a note and said, I’m glad that you did that, keep going. A lot of other people screamed at me and said, You shouldn’t the charging, you need to do everything for free. I said, nobody knows that he’s being this good. Nobody knows that he’s sending me this note and, beyond that, the book, “Getting Real” had such a big impact on the way that we think about not just business, but I think in a lot of our lives, we’re thinking how can we slim down and focus on what’s really important. So, I’m gushing here but I mean it all, thank you so much.
David: Well, thank you.
Andrew: Cool.
David: I appreciate it.
Andrew: All right. Thank you all for watching and you guys have all probably seen 37signals, so let me suggest this. Go check out David’s photography. David, damn good pictures. Can I say that? Can I direct people there instead of directing them to 37signals?
David: Sure, absolutely! There’s a link from LoudThinking.com to my photos.
Andrew: LoudThinking.com, your personal web site. Cool. All right. Thank you, all. Thanks, David
David: Thanks.
Andrew: Bye.
