This is flagrant linkbait. I start to write a witty comment responding to this post, but then I realized that's exactly what they want us to do. They even told us, explicitly in their book, that their forumla for success was to create controversy in order to attract attention to their business.
I'm still waiting for the day when I see a 37Signals post about how they intend to build great collaboration software, and not about how people should run their businesses. Making inflammatory statements statements about other people's companies is definitely one way to make it. But so is thinking and talking about your actual product.
We have a whole weblog dedicated to talking about our product and calling out new feature launches: http://productblog.37signals.com/
Most people aren't that interested in just reading an infomercial, though. Lots of people are apparently interested in reading opinions and discussions about industry topics. Be they VC funding or whatever.
You had something super clever to say, but instead you just fall back to essentially calling the target a troll. Sorry, but that tactic is one of the weakest, most trollest techniques going. I'm surprised that anyone still falls for it.
As far as "making inflammatory statements about other people's companies", given that ning is all other the tech news sites its hardly like it came out of left field. And really the "get enough eyeballs" tactic has been the recipe for countless massive failures, yet still people keep saying "FACEBOOK FACEBOOK FACEBOOK!"
Before people reference facebook, contemplate where Facebook would be if instead of being propped up by VCs desperate to flip it to the next guy, they had to get bank loans. They would have been dead in the water years ago. Instead now they're getting more and more desperate to raise revenue, and the results aren't good. Facebook is not a good example of anything.
a) Facebook is a definitely the odd man out. They made something happen that very, very few other eyeball companies have managed.
b) Facebook isn't winning shit for their investors YET. They've allegedly just turned cash flow positive, but they're still $750MM in the hole from VC infusions over the past SIX YEARS. Add interest and risk premium and Facebook has to make a TRUCK load of money to pay back their investors. Not just break even.
c) Fashions change. Remember when Myspace was the golden goose? Friendster? It is far from a guarantee that Facebook will remain hot shit for long enough to pay back $750MM with interest and premium.
I think Ning is trying to maximize the size of success, not the likelihood. Trying something very, very few other companies have managed is precisely the point.
Most of us would rather increase the likelihood; but most of us are also not Marc Andreessen. It's important to recognize this. There's nothing wrong with rolling the dice and going big, if that's what you want. [EDIT] It's foolish, however, if you think playing that way will increase the likelihood of success.
I think your point is the most widely used justification for GOING BIG. But even big companies need sustainability. Clearly 37signals has their own unique message but if there's one thing I get from it, it's that businesses should be built to last. Whether you are trying to make space-travel affordable or running your own Italian restaurant, your venture needs to last.
So the question is not necessarily one of magnitude, it's that internet companies looking for eyeballs tend to be running on faulty logic counter-intuitive to lasting - forget about making money, or changing the world ; you can't do that if you aren't here tomorrow.
Investors aren't buying stock in Facebook or pretty much any software startup (save yours) because they expect to someday get paid by the company. To make money off that kind of investment, they need liquidity. They all expect to see another financing round at a higher valuation, and with the size of Facebook these days, it'll probably have to be an IPO.
Regarding "Fashions change," I agree that that's the risky part, and from the amount of Farmville bullshit I see on my wall these days, it's a significant risk.
Sounds like a pyramid scheme where earlier investors continue to dupe later investors. Eventually it's my 401k that loses out when all of this blows up when you run out of investors. I hate the stockmarket. If you want to make money, sell a service or make a widget.
>>Sounds like a pyramid scheme where earlier investors continue to dupe later investors.
Funny way to put it, but it kind of is, except that it isn't previous investors duping new investors, it's just an investor mentality. People are still buying into Facebook at a $15B valuation with no real precedent for a company like them being worth that much. It will be really interesting 5-10 years from now after they've IPO'd/been-acquired/fallen-out-of-favor where their revenue and market cap really settle.
Agreed, Facebook is odd, no other way to say it. For developers, Facebook Connect is sort-of interesting but using Facebook is boring and I have never clicked on any FB advertisements (compare to, for example, GMail advertisements that I do hit and sometimes I buy stuff: profit for Google).
Off topic: I am half way through your new book "REWORK" and and I find it useful since it addresses so many of my own bad habits. Unfortunately, I need to constantly fight the temptation to explore new tech instead of getting things done.
Poor VCs not getting quick cash from their investments. They truly are victims for getting a stake in a hugely successful company.
VCs are not private equity. I'm sure they didn't mind quick cashouts during the late 90s, but expecting to get major money from an up and comer in a short timespan is delusional.
Equity is not debt.
By your dichotomy MySpace is simply amazing for paying investors (interest?) and facebook is a drain on the preciously scarce resources of wealthy individuals and institutions.
What metric are you using to define success? It seems not to be the traditional capitalist one.
The score card for Facebook currently says minus $750M. Breaking even or a small profit is not going to change that.
Facebook totally COULD be a successful, but they'll need to get some serious PROFITS (not revenues!) going to make that happen. Certainly within the realm of possibilities, but it hasn't happened yet.
Where did this $750M come from? Traditional capitalists. What rubes right?
I have a hard time with someone trying to assert facebook isn't a success. However, if you think success is 'profitable in 2010' then far out they are a failure.
This obsession with equity as debt is very strange to me. By this metric Apple is a hugely indebted company.
When you break down a company you look at assets and liabilities. Facebook has few liabilities in the form of debt because so many wealth individuals and institutions think having a stake in its future is a desirable proposition. I would call most of their assets the intangible ones of being of the most visited, used, and widely-known websites in the world. If you think this is worthless, okay. But I think its a little bizarre to assert they are $750M in the hole.
price to earnings for AAPL is around 30, which means that if you bought all of apple, and it continued to make just as much money, it would take 30 years to earn your investment back.
Equity is different from debit, yes, but when you talk about how much money you are making, it really only makes sense to talk about how much money you are making based on how much money was invested. If you have 1mil invested, and you are making 1 mil a year, that's pretty goddamn impressive. If you have 750 million invested, and you are making 1 million a year profit, well, gee, I could do better than that buying bonds.
Now, Both AAPL and facebook have the P/E ratios they have because people expect them to make more money in the future than they are making now. For instance, if I was to sell my company (and I've had a few offers) it looks like I'd get about a year worth of revenue. This is pretty typical when buying ISPs, because nobody expects exponential growth to go on for any period of time.
Just sayin; It is a reasonable and well-established idea to look at how much equity is invested when looking at a company's profit margins. It's also reasonable and well-established to look forward at how much profit the company is expected to make in the future, too, which is why facebook is valued as it is by some people.
(there is, however, a great degree of uncertainty in projecting what profits a company may make in the future, which is why there is a great deal more controversy over the value of twitter than over the value of AAPL. Personally, if there was a convenient way to buy a long-term 'put' on twitter, I'd do it. Just my opinion,)
I hope you realize how simplistic you are being. Does Apple give its shareholders all of its profits? Hardly.
It is interesting to theorize what a stock price for a firm that cannot be purchased by another firm (at least extraordinarily unlikely to be purchased) and that doesn't pay dividends means.
People about all sorts of measures of return. However, very few talk about equity being debt.
>c) If the advertising market ever tanks, they're screwed.
You know that has happened recently right?
People at facebook, and prominent investors like Andreessen, have pointed out repeatedly that they could raise a lot more revenue. However, most of these methods would simply destroy the site by making the user experience much less bearable.
>b) Their revenue per user is miserably low
This might be a problem if they didn't have an enormous number of users and a very impressive amount of active users.
>Holding Facebook up as an example of a worthy business model to follow is horribly naive.
Is an incredibly nasty statement that reeks of jealousy. Sort of silly too. I think you could say a similar thing about Microsoft, since there will really only be one PC OS monopolist.
People at facebook, and prominent investors like Andreessen, have pointed out repeatedly that they could raise a lot more revenue. However, most of these methods would simply destroy the site by making the user experience much less bearable.
I don't see that as a meaningful statement. If it would destroy the site, you cannot use this method to raise a lot more revenue.
That's a good point and I should have stressed that this was in the past. It's fair to say the have reached a critical mass (in terms of members, photos on the site) where they could raise more revenue now but won't see a huge loss in usage.
I think they will be able to raise revenue in a lot of creative ways. People underestimate how much the data that they have is worth.
This might be a problem if they didn't have an enormous number of users and a very impressive amount of active users.
Somehow this reminds me of the old joke about the guy who lost money on every sale but made it up in volume. Yes, Facebook might make money enough to recover the investment of the first investors someday (I can remember when Amazon looked like it would never do that), but that all depends on the overall net earnings per user being positive. To date, even Facebook's own press releases don't report a situation that makes it clear the initial investors will ever be able to recover their investments. I like Facebook well enough, but unlike my early interaction with Amazon I have never made a payment to Facebook for anything.
Are you trying to suggest that for a website like facebook, it costs them more money to serve a few dumb HTTP requests, than they can make from adverts?
That would be quite an achievement.
>> "I like Facebook well enough, but unlike my early interaction with Amazon I have never made a payment to Facebook for anything."
While I tend to roll my eyes a fair bit at how... set the 37 signals guys are in many of their opinions, the whole lottery idea I agree with completely. Even if FB has hit it big, what were the odds going in of them being the billion dollar winner, vs another failure that left them with unhappy VCs who they didn't make money for.
To me at least, swinging for the fences seems to be something you should do after you've already made some sexy cash on other stuff or at least made a name for yourself, if you REALLY want to go that route.
OpsWare quite deliberately took a high risk strategy in order to aim for high rewards.
37Signals is a small business. Profitable, comfortable, but no prospects of explosive growth.
To quote from the link above:
What is start-up purgatory, you ask? Start-up purgatory occurs when you don’t go bankrupt, but you fail to build the No. 1 product in the space. You have enough money with your conservative burn rate to last for many years. You may even be cash-flow positive. However, you have zero chance of becoming a high-growth company. You have zero chance of being anything but a very small technology business (see Navisite). From the entrepreneur’s point of view, this can be worse than start-up hell since you are stuck with the small company.
37Signals seem to be quite fine with their business. However, they appear not to understand that many others are quite deliberate in choosing riskier strategies because the rewards can be higher.
"Swinging for the fences increases the odds of striking out."
Not a law. Good entrepreneurs are game changers and it's easier to just play a different game where there is not a high reward/high risk correlation rather than play this losing game that assumes that high reward must mean high risk.
In my opinion good entrepreneurs are not risk takers, they are risk managers. The best ones are money takers.
I'm not qualified to judge his entrepreneurial abilities; my main point is to question the correlation between high reward and high risk and also to make sure risk is not glamorized. (The only reason you take a risk is that it is a necessary means to a greater benefit.)
This is just more blindness from the folks at 37s. I would like to know how much David pays Google to use their service? That's right he doesn't, so why doesn't he put his money where his mouth is and pay for each and every web service he utilizes.
WTF are you talking about? I pay for plenty of services. In fact, I love paying for good services. Dropbox is a great example. So is Campaign Monitor, Zendesk, and Survey Monkey.
Give shit away for free and people will take it for free.
The 37signals business model, also known as "a business", is the business model employed by about 99% of all businesses on the planet. They make a product or offer a service and their customers pay them for it.
For example, estate agents (realtors?) really serve 2 people - sellers, and buyers. They give their services for free to one party (buyers), and charge the other. They're pretty similar to ad supported websites.
Employment agencies commonly do a lot of work to get you a job, whilst charging you nothing in return. They instead charge the company that hires you.
Free papers are routinely given away, and instead make money from advertising. TV stations the same.
Banking is also free for individual customers (in the UK), and the banks make that money back on average, from business accounts and overdrafts etc.
Credit cards are another example. Usually free to consumers (If you pay balance in full), and the seller pays the fees. Of course they also make money if customers don't pay the balance off.
Receiving telephone calls, SMS etc is also completely free most of the time (The sender pays). [At least in UK]
There are countless other examples of real world profitable big businesses that give stuff away to customers for free.
Trying to pretend that every business on the planet, and the only types of viable businesses are ones that charge customers money directly, is plain silly.
We get that you hate/don't understand/have had bad luck with advertising in the past, but that doesn't mean it's not viable and very lucrative if done properly.
I don't think he said anything about absolutely needing to charge customers directly?
"They make a product or offer a service and their customers pay them for it."
In all your scenarios, there is an entity that is paying the company for a product or service rendered. They may not be a simple definition of the word "customer" but they are a customer none-the-less.
I think the issue is more about smart business. No one is going to knock ning (and there would be no reason for their new strategy) if they figured out how to make money on their freemium model. But they didn't! And that's not good business.
Obligatory google example: It's free. Yay, search all you want. Google's customers are the advertisers that pay for ad positioning. Yes the users are the customers too, but that does not mean that the advertisers aren't.
The issue with ning was they took a stupid amount of investment IMHO. If they hadn't they'd be profitable.
'Ad revenue' > 'Cost of serving a few dumb HTTP requests' => profit.
That equation is simple, and holds pretty well. If you're spending more money serving HTTP requests than you can make from advertising, you're doing it wrong.
But you think it works for all 100% of businesses. And that's where you're wrong. A search engine is a perfect example of a product which would fail if they tried to sell access. But you can continue to pad your ego and think you know everything there is to know about business.
"A search engine is a perfect example of a product which would fail if they tried to sell access" Name a search engine that failed because they tried charging people.
"But you can continue to pad your ego and think you know everything there is to know about business." What's your qualification, oh internet anonymous? At least they're speaking from years of knowledge from hard work.
I would like to know how much David pays Google to use their service?
Depends which customer hat you're wearing, no?
To search I make a bargain with Google whereby I use their search service and they present me with (hopefully) contextual advertising.
To reach other people who have made the same bargain above, I make a bargain whereby I (or more correctly we, the corporate entity) pay Google a chunk of change each year.
This arrangement works because in each case I get something of a higher value than the price paid, and Google gets paid more than the cost incurred to provide it. 37Signals works much the same, as do most businesses.
Despite having burned through a significant amount of cash, it appears, although without the visibility of a public company it's hard to really know, that neither Ning nor Facebook have found an effective way to make such an arrangement. Whether this is or isn't a problem really depends the appetite for risk of their investors.
I'm still waiting for the day when I see a 37Signals post about how they intend to build great collaboration software, and not about how people should run their businesses. Making inflammatory statements statements about other people's companies is definitely one way to make it. But so is thinking and talking about your actual product.