Transcript for David Heinemeier Hansson at Startup School 08

Hi everyone, I'm David Heinemeier Hansson.

I work for 37signals.

I'm also the creator of

a web framework called Ruby on Rails.

I'm not gonna talk about that at all today.

So sorry about that.

What I'm gonna talk about though a little bit is

how lonely I feel up here.

So I work for 37signals.

We're not looking for VC funding,

we're not hiring, we're profitable.

It feels kinda weird to be

in a collection of young smart people,

and feels a little bit lonely in that sense.

Most of the talks this morning

and most of the questions were

how do I pitch my VC, how do I this,

how do I do the other thing that doesn't really

perhaps relate directly to

hey, how do I build a business

that's actually viable,

short of Google, deciding to

opening its purse, picking me up?

I think there is too little talk

among startups, about just making money.

on their own.

So, this is going to be a talk

on the secret of making money online.

But actually, I thought I'd revise that a little bit

because at 37signals, we kind of been

accused a little bit of being arrogant;

there's one way, our way or the highway.

So, to kind of preempt that,

it's a secret, to making money online.

There's probably other secrets out there too.

Now I'm going to present the one

we've been thinking about.

This is the classic conundrum.

The slashdot question.

You have a great application,

and then something magical happens,

and you have profit.

So, we've been studying this conundrum

for some time at 37signals.

We've been talking to a lot of people,

we've been doing our research,

we've been doing experiments,

testing things out, what would work and what wouldn't.

We found out that having a price

is really cool for getting profits.

I mean you have customers,

they pay you money

for the product or service

and you get profit!

I mean it's such a weird notion

it's almost too simple to work.

But I've heard that over time,

hundreds of years actually,

that has been how most businesses

have made their money.

But somehow I think that notion got lost

in the web world.

And the funny thing is

we've played this game before.

We've played it back in 2000,

it was all about the eyeballs,

it was all about the VC,

getting bought out, going IPO, whatever.

It didn't really work then.

and now we are playing another round

because there's money ready again to be

invested, money ready to buy out

social media, networking things.

And I mean it's great!

I'm truely happy for the people

who win that lottery.

I mean just like I would congratulate

anybody else winning that lottery.

But I think there is a simpler way.

I think there's a simpler way of building

sustainable businesses

that is being neglected

in this community, which is to have a price.

And the cool thing about having a price is

there are so many different ways to have it.

It's not like there's only one approach to it.

At 37signals, we have a really

simple dumb idea,

which is just get people to sign up

for a product, they pay us every month,

if they continue to like the product,

they continue to pay us money.

That works for us.

We've been more than doubling

our revenues for the past

many years we've been doing this.

Many, which is a funny thing in the startup world.

For us, it's like four or five.

But it still worked out to be

a multi-million-dollar business.

And we're pretty happy with that.

There's a lot of other people doing

similar things.

Just in different approaches to it.

So they might not have a subscription

service you pay every time or every month.

You might do something like CampaignMonitor

which is an awesome service for

sending out email, newletters, tracking them,

who's clicking on what and reaching what.

They have this plan of just charging

a cent per recipient.

Again, a very, very simple idea.

You're using a service, you like it,

it's growing your business, and you pay

to use it. They make money that way.

They're actually a cool group down in Australia,

they're going surfing

next week. And I don't even think

they've got any huge wave to have to catch.

They're just happy making money.

So,

you can also just do the traditional

time tested way of just selling your software.

FogBugz has kind of two ways of doing it.

You can either get it on-demand,

which is a new thing for them,

or you can just buy the piece of software.

FogBugz sells you a package for a price,

$199, you buy it, you install it on

your server and you're presumably happy.

And FogBugz gets money directly from that customer.

You can also combine these things.

I love this service: FaxItNice.

FaxItNice is a great way of

routing around the fact that

a huge percentage of

the businesses in the U.S.

still works over faxes.

And faxes are really annoying.

But here, you wrap it up into a nice web service.

You send them a single fax for $5,

You can sign up for retainer type scenario,

you pay $20, which is what I do,

and then you pay a little bit

every time you send, or you can

sign up for a subscription basis.

You can send and receive

faxes and you pay on a monthly basis for that.

The really cool thing about all of this is

you don't need to be a fucking genius

to make any of this work.

It's not rocket surgery.

I mean it's really just that simple, 3 step idea.

You have a great application,

you ask money for it,

if people like it they'll pay, and you profit.

But here's the kicker.

It's still hard.

Just because you slap a price on something,

doesn't mean you'll have a successful business.

Most businesses fail.

I think this is where the problem creeps in.

So, if most businesses fail anyway,

why shouldn't I go to try to be the next

Facebook, MySpace or YouTube and

get out for a billion dollars, right?

Like my good man 50 cent,

get a billion or die trying.

Now, I don't think that logic is

very good actually.

The reason I don't think the logic is very good is

because the odds are not created equal.

The odds of you, in here, making the next

Facebook, or YouTube or MySpace,

ah...tiny.

The odds of you just creating a product

that a few people will like

and pay you money for, not that shabby.

Still hard, but not as hard as trying to be

a billion dollar company.

So, here's some odds.

If you're building this simple company

just trying to sustain a few people,

what are the odds of that being a success?

1 to 5, 1 to 10? I don't know.

But the odds of you building that next

Facebook or MySpace, probably not 1 to 10.

I mean, if it was, I would probably

not be giving this speech.

I'd be trying to build the next Facebook.

The odds are lot, lot worse than that.

But people get into this notion

that it's really this easy.

We hear these stories all the time.

The Facebooks, the MySpaces and the YouTubes,

are broadcasted again, and again, and again.

It's kind of like reverse terror alerts.

So the probability of something like this

happening, like the probability of

you being crashed in a plane,

tiny.

But the fear you have of it, or the

desire you have to be the next Facebook,

huge because it's been broadcasted over and over again.

You've been brainwashed.

If you look at these odds,

and you then look at the probability

and the outcome you can get for it,

you compare them.

So let's take a business

where you have a 1 to 10 chance

of making a million dollars.

There used to be once upon a time when

a million dollars was a lot of money.

I still think a million dollars is a lot of money.

But all these VCs are talking about is

billion dollar companies,

or three hundred million dollar companies.

I think you can be pretty happy with

just a million dollars. Most people would be.

And I think we lose sight of that

because we get this image pumped up

of the billion dollar company.

Now, to do a naive comparison,

these should actually be equal.

A 1 to 10 chance of making a million dollars

should be roughly the same as

1 to 10,000 chance to make a billion dollars.

If you didn't care about the first jump.

I think that's what people misses.

The difference between having

say a million dollars and a billion dollars

is a lot smaller than the difference between

having negative ten thousand dollars in your

banking account and having a million dollars.

So I do encourage a lot more people to take

the better odds at the smaller reward and

then perhaps worry about the billion dollars next time.

Now,

how do you go about getting that million dollars?

It sounds, I'm even making that sound kinda easy.

And, in some ways, it's not as hard as you think.

It's because most people don't look at

the simple facts of these things.

So let's take the idea of a subscription service.

A subscription service that has 2,000 customers,

at $40 a month over 12 months,

make a million dollars a year.

That's not bad.

2,000 customers out of

the entire potential customers out there,

that's not a whole lot of customers.

It's not really that hard.

Still hard, but it's really not the same thing as

trying to build that next one-in-a-year thing,

Facebook or MySpace or whatever.

It's a lot simpler, and a lot more tried and true.

Dig a little bit further into those numbers.

What do I need to get those 2,000 customers?

Well, if you look at the numbers like conversion rates,

let's say you have a run-of-the-mill subscription service

and you somehow manage to make it

good enough that 5% of the people who sign up

for your service end up paying you money.

You need to have 40,000 signups

to keep 2,000 customers.

That's 110 signups a day.

That's still kind of hard to get,

but it's really not that hard.

And I think people are underestimating

trying to aim for this.

These numbers even add up to a million dollars.

Most people would be happy making even

a fifth of that. If you take it down one more level,

to make 200,000 dollars a year

you need just 400 customers at $40.

Then marketing issues, you can attack.

If you're trying to get 400 customers,

2,000 or even 10,000, that can be tiny.

You don't have to care about these big waves.

You don't have to care about discovering the next great thing.

You just have to solve a problem

a little bit better than the other guys.

Just like if you are opening a restaurant.

You're opening your restaurant, you're doing

Italian food, it doesn't have to be

the best freaking Italian food in the world.

It just have to be convenient for the people

around you. And you can make a pretty

good business out of that. I think there's

too few people trying to make just a

nice Italian restaurant in the web space.

Now, how do you go about

finding these customers then?

Because, 2,000 people paying you money

is still 2,000 people.

That's a lot of people.

Well, we tried a few different ways.

And I think that's also again where

it goes a little bit off-track.

So Backpack is an application

we have at 37signals.

It started out being, well, we did Basecamp first

for businesses and organizers of projects.

"Let's do something for the consumer."

So we did this application for the consumer

organizing their loose-ends, blah blah blah.

Well, really hard.

Because getting the consumer to

pay you money for something,

that's pretty hard.

We even have a plan starting at $5 a month.

And consumers are really fleety thing.

They'll pay just $5 a month one month

and then decide they don't need it

any more, they'll turn it off.

And it's really hard actually

to establish a business here.

So I'd advise if you are trying to

follow this model of

just selling services for money,

going to the consumer

shouldn't be the obvious choice.

There's a lot easier way to go about this.

We kind of realized this over a few years of

running Backpack and other apps.

We relaunched Backpacks

about 2 months ago

after being out for 2 years almost.

And we aimed it towards

the businesses instead.

In 2 months, it more than doubled

the revenue of what it had before.

By just adding a few more

sustainable customers,

willing to pay us more than $5 a month

to use the service.

This is really something we've found that

business is the market we're going to

focus on: not the tiny enterprises

but not the consumer either.

We call this the Fortune 5 million.

There's a ton of companies out there

in the Fortune 5 million

who have a lot of problems

which are not currently being addressed.

Either because people are too busy

trying to figure out how they can

get everybody to watch a funny video

on the internet next week, or

about doing that enterprise play where

your customers are paying you

hundreds of thousands of dollars a month.

There's a huge untapped market here

in the Fortune 5 million.

Now,

kind of the problem with all of this

and the kind of the problem with attacking the Fortune 5 million,

is this notion that if you're doing so

you're making a lifestyle business.

You're making a small mom-and-pop store,

and just two old folks behind the counter

counting the pennies and that's kind of the life.

And people look at you, "Yeah, that's nice,

you have a few customers,

that's good for you."

And I think that's

in the great words of Eric Cartman,

that's bullcrap.

I mean, it's really not that notion

that either you're going to be this

sad mom-and-pop store,

counting the pennies, or

you're going to be this billion dollar company.

There's a lot of room in-between,

of just enjoying life.

I'm glad that Paul brought up

the example of craigslist.

Because I think craigslist is actually

in that definition of lifestyle businesses,

fits it very very well.

Being able to run your own business

without taking VC money,

without taking all of these thing that

put you under a certain trajectory

can be really, really satisfying.

Calling your own shots,

running at your own pace, that's pretty great.

Once you get to that point,

financials are fine,

if you're making a million dollars a year

you're doing pretty alright.

You're doing better than most people out there.

And once you get that aspect of your life taken

care of, there's a whole lot of other things

that start mattering a ton more,

like not being in freaking meetings all day.

Like not being

told what to do by other people.

Being able to set your own pace,

calling your own shots is immensely

powerful motivator for just enjoying your life.

Craig Newmark has a great quote in this

in an article I read. It says

"We both know some people who own

more than a million dollars

and they don't seem any happier."

I think that's exactly how the money game is.

Once you reach a certain point,

everything beyond that is

really just not that important.

And you kind of pick different ways to

get there. If you're going for

that billion dollar slot,

you're giving up a ton of things that

I don't think most people are considering.

He has another great quote,

"Finding a good cause is

incredibly hard and time cosuming."

So if you can find a good cause in just

a business making a million dollars a year

that you enjoy actually you're working on,

why would you want to give that up?

What's this overzealous

intent of flipping your business?

Where are all the people saying

"I just want to build a business"

and enjoy it over the next 20 years?

Most of the startup people I'm talking to

seem so narrowly focused on

"We gotta pump it up and then

we gotta sell out and then

we'll live the good life."

I'm not so sure that life that awaits you

after selling your startup is the good life.

I've talked to more than a fair share of

company founders who've done exactly that

I have one particularly sorry tale of a guy

who was doing technology. I was talking

to him about his laptop. He were saying

"Yeah, I'm probably gonna get a PC

next time, because it runs Outlook real good

and all I do these days anyway is

schedule meetings."

"What? Are you willing to trade being

an active developer who's passionate about

what you're doing, for a little bit of moolah

to get into that hell hole?

I don't think so."

The great thing about this is the notion

that we have these big hits, we have to

YouTube, the guys catching those big waves,

it reminds me of the movie industry.

This is not it. Business, in general, is not like

the movie industry. There's no need to

dominate the box office.

There can be lots of winners.

Just like there's lots of small Italian

restaurants out there doing pretty great even

though there's lots of Italian restaurants.

There can be tons of companies out there,

who are just solving small simple problems.

They might have 2,000 customers while

others have 10,000 customers. And in any

case, most of the great companies that

have been built over time,

started out with that. They started out with

the 200 companies.

The exceptions are the Facebooks of

spending 2 years and being worth

15 billion dollars on paper.

Don't use that as your role model.

But then you have, of course, Sequoia asking

"But where's the network effect?"

"How are you going to be viral?"

"Are you going to infect the entire population?"

Well, forget viral.

Forget this notion of this automatic

viral thing that will infect and spread.

You know what's viral?

Shoes. Shoes are viral.

When you buy them from Zappos,

at 10 o'clock in the evening,

you get an email 15 minutes later saying,

"You're such a swell customers

we're going to put you on

expedited delivery,

you can have it tomorrow morning."

And getting that box tomorrow morning,

and opening the packet saying "Hey,

that's the pack of PUMAs I just ordered

last night. Just how many hours ago?"

In other words, it's just great service.

Just a great business. It doesn't have to be

this ingenious idea. Often this simplest

ideas in the world, like treating your

customers nicely while still asking

for money for what you do, can work.

And you can build great businesses like that.

So,

How do you get started doing that?

Well, I think people are taking it

totally lopsided.

A lot of startup companies think,

"Gee, how can I ram out the gates

I have so little time. This is this

magical market moment if I don't launch

within 3 month we're gonna be toast!"

Zappos are selling fucking shoes.

People were selling shoes before that.

And yet somehow, they're

great business today.

Because they're just selling shoes

better than the other guys.

You can do that.

So, how do we get started.

Basecamp was the first product

we built at 37signals.

And we developed it with a team of

3 people who were doing other stuff.

I was attending college, doing some

consulting on the side,

37 signals was a design business

having clients on the side.

So we didn't have a whole lot of time to do it.

It was a side-business.

A side-business is really not that bad.

Having a limited amount of time every day

to work on something, or even just having

a few days a week to work on something,

really focuses your energy.

I was actually doing contracting

with 37signals at the time.

I had 10 hours per week

to develop Basecamp.

Not 10 hours per day, 10 hours per week.

That was the bill I would send to 37signals.

When you have 10 hours per week,

those really matter. You can't

screw around with 10 hours.

Then nothing gets done that week.

Having less time is really a huge benefit

to most people. Because if you have

all the time in the world, you're probably

going to yank it all up anyway and

it's not going to

be really, well yank it up in the business sense of the word..

You're going to spend your time or

waste your time on frivolous features,

that you don't need anyway.

Another thing that's interesting about the whole Basecamp story.

We grew Basecamp for a year before

it was big enough for us to say

we don't need to do consulting anymore.

People are in too much of a hurry.

You don't really need to build that

huge company overnight.

Most companies are not built overnight.

Like that statistics of 7 years before

M&A happens. I think even

that's even short. I think even most businesses

take longer to become great businesses.

So don't be in such a freaking hurry.

Another thing, of course, is just

I have one technical bit in here.

We ran on a single server for the entire

first year. The great thing when you're

charging money for what you do, is that

scaling problems rule.

Because scaling problems mean that you

have more people paying you, and then

dealing with outage issues, not a big deal.

If you can, for example,

get 500 customers per server,

you're having 500 people paying you

$40 a month, $125,000 a month.

Do you care what that server costs?

It can be the most expensive in the world

and it wouldn't matter.

Now, finally,

take it easy. This whole startup thing,

this whole rush thing, you're thinking about it

as I'm gonna put in all this work right now

and then I can just coast away from there.

It's never gonna get less work.

The amount of work within the beginning,

in some ways it's gonna get more work.

So if you set up your practices right now,

of working 14 hours a day, 7 days a week,

you're just going to be stuck in that

freaking treadmill for the

rest of your time on this.

The patterns you set, the practices you

choose to adopt when you're a startup,

will stick with you.

Finally, if you try this,

actually build a service or product and

charge money for it and it doesn't work,

here's the awesome news:

you can just blame it on us,

and save your ego like that.

This is a foolproof plan.

You can always get TechCrunch to write up

that 37signals drove you to the dead pool

for charging money for your stuff.

Thank you very much.

We have time for a few questions.

- David, you talked about opening Italian restaurants,

- keeping things simple. What happened with Ruby on Rails?

- What created the innovation?

- Ruby on Rails is awesome, I love it,

- I'm just wondering that you talked to us

- about keeping your aims small.

- But I think the reason why you're here

- is because of really the great achievement.

- So where does great achievement come in,

- according to this formula you describe?

I think it just comes down to just

trying to solve simple problems.

Ruby on Rails is my attempt at just solving

a simple problem which is I want to enjoy

what I work with. And to continue

the evolution of Ruby on Rails, is picking up

tons of these small atomizations.

One of these simple problems. Ruby on Rails

is really a small simple solution.

The first version was a 1,000 lines of code,

created entirely by me while working on Basecamp.

It wasn't a huge mammoth project.

I wasn't trying to get VC funding for it or

hire 20 people doing any of these other

interesting things that you can do for that.

And even today, we have,

for the Ruby on Rails project, we have

tons of VCs coming up saying

"Hey, do you want to make Rails Inc.?

I have a few million dollars I want to invest."

"No thanks, really." I think some things

just work in the current conditions

as they are and Ruby on Rails works for me

because I actually have to use it everyday

to build something real.

It's not the day job I have. It wouldn't

work like that. I think having a day job

as a framework designer is probably

the worst thing you could ever do.

I don't think that's how good innovation comes.

I think good innovation comes from just

solving simple problems that you're

intimately involved with.

So that's actually one piece of VC advice

I heard before, solving your own problems,

great advice. Makes it the easiest way

to get someone just realize you're not unique.

If you as a company have a problem,

you'll probably find 2,000 other people

at the same problem willing to pay you for it.

- Can I ask you one follow-up question?

- In light of what you talked about,

- what would you have done differently what you did before?

With the company in general?

- Yeah, in terms of Basecamp and in terms of Ruby on Rails

- what do you feel like you put in too much time or effort in,

- what, based on what you have told us about,

- would you have done differently?

Sure. This is where I would need a moment

to prepare so that the answer doesn't sound

as arrogant as it is; I wouldn't do very much

differently. I'm pretty happy with how

things turned out, I'm pretty happy with the process in general,

I'm pretty happy that we didn't listen to

people telling us "Hey you just give your

product away for free. So many more people will

like it and use it."

- From your experience, with what you call

- the Fortune 5 million, what kinds of businesses

- would you consider in the sweet spot

- of the Fortune 5 million and what kinds of

- businesses would be outside of that?

Sure. So I think that's a great question.

What are the businesses that fit well into Fortune 5 million,

fit well as customers for these kind of businesses?

I think that when other bigger companies

talk about small to medium sized companies

they usually talk about 500 to 1,000 people.

That's not small to medium size to me.

That's freaking huge.

That kind of company we're trying to reach

is 3 people.

5 people.

A guy doing something in his spare time.

There's always going to be more of those

kinds of businesses out there,

than the huge 500+ companies out there.

And these people are just looking for

simple solutions. They don't care about the

legitimacy bullcrap. They don't care about

if you've got VC funding or what.

They just want their problems solved.

So if you're putting a great application out there

just solving a sliver of their problems

for reasonable price, they're just going to

look at the value of that and say

"OK, I'll do that. I'll buy this."

Which means that you can get rid of

all the other stuff that you normally have to

worry about if you have to sell into

Fortune 500 where you really have to

worry about the red tape and sales people

golf trips and the strippers and the states

and the spends accounts and all that crap

that goes along with that way.

- So it sounds like you're saying there's no business

- too small to be in the Fortune 500 million.

Completely. There's way more businesses

at the low end than there is at the top end.

And you're going to be much happier for it.

When you're dealing and servicing people

who're paying you $29 a month,

$49 a month, you're not beholden to

any one customer.

If you have a customer who's paying you

a quarter of a million dollars a month,

if they call you up you better answer,

and you better do exactly what they say

if you want to keep that account.

It's not the same thing on the low end.

You can innovate on behalf of a larger area of customers.

And I think you're going to be much, much happier for it.

- I got a fairly general question.

- Being a software developer I'm sure

- a lot of people can relate to this.

- One of the problems I find is,

- being in front of my computer 10-14 hours a day,

- I'm supposed to be working on writing code.

- But I find that I spend a lot of time

- getting distracted to surf on the web,

- trying to keep up with Rails.

- Did you have any similar problems?

- What advice can you give to developers

- to keep on track, what motivated you

- to really crank out a product?

First, have you thought of getting a parent filter?

I think they're really good to be working with.

Second, I think the problem is

you're trying to work 14 hours a day.

Who the hell gets anything productive done

for 14 hours a day. Try working

5 hours a day. If you have only 5 hours

a day to spend on something,

you'll focus your time a lot better.

We've just gone down to 4 day work weeks.

We're trying to work just 8 hours a day.

The amount of productive time I get out of that,

what, 2 hours, 3 hours? I think people

are just not wiling to accept the fact that

you can't, in a creative, endeavorous,

programming work for 14 hours a day.

It's ridiculous. If you can just get 3 hours,

3 great hours per day,

you'd get a ton more done.

- Thank you.

Alright, thanks very much.