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David Heinemeier Hansson at Startup School 08

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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.

Video Details

Duration: 31 minutes and 53 seconds
Year: 2008
Country: United States
Language: English
Genre: None
Producer: Startup School 08
Director: Julian Frumar
Views: 815
Posted by: ento on Jul 13, 2009

David Heinemeier Hansson, creator of the Ruby on Rails framework and Partner at 37Signals gives insight into creating a profitable startup company.

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