Only when the greater fools become more disciplined will the discipline back-up into the ecosystem and impose discipline on all. I have a simple yet slightly lightweight theory. What would the dragons have to say about my venture. No fuzzy lines, no blurring the reality. Great post Jason! The exactly same thing happens down here in Brazil. It seems that the farther you are from having a clear business model, the greater the chances you have of getting shown on the mainstream media or Techcrunch-like blogs.
Hear, hear! Though, I think this articles misses one big point: the employees of these companies are successful! A company has many stakeholders. However, the employees who the reporters are talking to are often personally successful. Valuation based on future profits many years down the road. In the interim these companies continued to burn thru cash and go public. Sounds like history is repeating itself again, but in a slightly different manifestation. Along the same lines I stumbled across a website called techstars.
Then at the end of the class they have a big VC day and they all do their pitches. I checked out some of the startups such as next big sound and everlater. All of these are free… I am thinking how in the world are these startups going to make money? In fact, the keep-it-simple business of 37 Signals was one of our main inspirations. Variable expenses are everything that scales with users. In our case it includes ALL hardware, software, infrastructure, bandwidth, electricity, hosting, storage, etc.
Variable expenses grow quickly. Fixed expenses grow slowly, if at all. Evernote is gross-margin profitable. That means that we are making more money every single month than our total variable expenses in that month. The gross margin will be large enough to cover the full fixed overhead next year.
There is another model called cheapium which is start cheap for a basic application and then charge for premium features. I wish more companies would charge for their products if it meant they could provide a minimal level of customer service. MS, Sony, Nintendo, they all make a bunch of money on the game licenses that are sold. Since nobody is just going to buy the console without games, they are guaranteed to recoup a good portion of the cost on the games.
Combine that with the new market of online services where people spend money on all kinds of chintzy crap, the model actually works pretty well. I remember when I lived in the UK — the darling of the time — Last minute. Early stage company not making any money is called a product. Early stage company eg 37 Signals making a profit is called a business. Keep up the good work! Anyway, I agree with you. Good business is ethically turning a profit as quickly as possible—not relying on investors for a decade until you finally do turn a profit.
Noise with others, via email, twitter, digg, etc. I know this is not the most suitable place for suggesting a feature for Signal vs. Noise , but I do hope you guys read it and eventually consider it. Please, keep hammering this point home, Jason. You may as well play the lottery or go to vegas. I would much rather create a compelling product, charge something reasonable for it maybe even offer a free version or free trial , turn a profit and maintain control of my business and my lifestyle any day.
The internet has accelerated ideas about how quickly many things should happen — including turning a profit. When did businesses EVER think they would be profitable right out of the gate? Or even in less than time measured in years? What I found most telling about the post is how critical it was of the media today, not Evernote.
I think with both your voices we have the makings of a really good article that all of us wish the NYT would have written to begin with. By this logic, I would hate to own facebook. Sometimes it just takes some time to become profitable. Look at Tesla. This has been a part of business for decades. Investors take a risk on a number of startup companies knowing that some will never reach profitability. Big woopy.
It was the perfect example of when to rely on investors. Is Twitter a bad business?
Nothing in this entry or in these comments disproves free or freemium as a valid business path. This all — after 8 years of losses and one quarter of profit and many, many, many media praising the company, their service, lines, passenger numbers etc. Love 37S and started using all your products free, then upgraded later. Or that a company on the way to profitability should shut its doors now.
Or anything like that. Our own model could be called freemium — we were one of the first web-apps to go that route in Maybe one day, but not yet. You are right, and wrong. Rare exception. Example: Some millionaire decides to fund company that will make product range like yours. And he can wait for ROI for a long time. What you think, your customers will not like same functionality for free or symbolic price? I doubt it:. End then everything will be about the price not about the value but in some cases low price is real value.
But I think you went a bit far here.
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Your column is based solely on the NY Times headline. Great post! I have a business degree, dabble in webstuff, and my day job is an office position at a profitable right now web 2. No surprise here: we charge for our subscription-based product! Especially considering that business projections are rarely conservative!
Actually, investors are indeed to blame for this. This kind of hype allows them to sell out early and make a handsome profit without any concern for whether the company has long-term viability.
Not trying to be an accounting nit, but the difference is especially important to pre-revenue startups. We mostly think these guys are a bunch of folks trying to turn a buck just like the rest of us. And they make their money writing stuff that sells, which favors fluff and hype over solid financial analysis.
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So how about the NYT holds off on making a big deal about it until you achieve the latter? Until then, there really is no there there. Chris Anderson has a tendency to conflate those two markets, which are radically different in terms of how they perceive and pay for value. I LOVE this post. Fantastic stuff. Also, re: Amazon — I think they are something of a singularity.
The path they traveled meant they had to either be 1 or go home, kind of like YouTube. Finishing second is tantamount to bankruptcy from an ROI perspective.
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It is simple for a company like 37s that built the product on the site while they maintained and kept their current customers happy. It is more entertainmaent then anything else, just a fight for eyeballs. And dollars to donuts, somebody got some sort of payoff for profiling Evernote, one way or the other. However I think that Phil Libin chiming in to set some things straight was great! This is why I so enjoy where we are as a society that continues to embrace social media. Their business models grew organically and were not artificially propelled by large stores of investment capital.
As someone that runs a tech company in a very defined vertical market, organic growth is a model I must live by. These folks have completely lost their mind and forget that there is life outside the valley. Evernote desktop app, iphone app, web app, infrastructure cost something to build. So they started off in the hole, and they continue to accrue dev and ops expenses maybe marketing etc too to this day and forever in the future.
Evernote had a bigger frontload on their multiple platform product than 37S, so it takes longer. If Evernote has numbers that suggest they are trending adequately quickly toward expense recovery and investor-profitability versus cash-flow-profitability, which they say they already are , then they are a great example of a company that can succeed by giving away a useful but limited version of their product and charging for more features.
If you see a company in the news there is one reason for it. Unless it is Enron or an Exon oil spill, or the CEO is doing a perp walk, there is only one reason to get your company in the news, Techcrunch included.
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By they I mean Evernote, or Zappos back a few months ago , or any company in the news. A nice fluff piece gets the attention of investors and they get more cash to burn. Always follow the money. A lot of people have learned that an idea is worth nothing and a actual product is necessary. Well, this seems to be the next part these same people need to learn, that your average company is not successful until you turn a profit. All I can say is we need to talk more about this and get real.
You had a good article here until you down-played the merits of businesses that knowingly delay profitability to grow big. Potential is a good word for this, and why not celebrate potential as success? Blog posts tend to be simplistic and one-sided, just like newspaper articles ;. Maybe the bar for success is too low in the press, but who ever expects the press to be realistic? It creates a bit a cowboy and we-dont-know-what-were-doing image, but as a customer the first thing you want is stability.
A software subscription means also an investment for the customer: he puts time in it through data input and a learning curve. It guess it means less companies try out new software. Think 37signals is stronger because it offers a range of products and decent updates on the evolution of them. I think Evernote is a great business and have a great app, but their up-front costs had to be big — just like Phil said — they have very high fixed costs — especially engineering and management salaries — they have teams for very different apps — Web app, Windows app, Mac app, iPhone app, My application, Nozbe is a typical bootstrapped startup where I needed to have fixed costs down to minimum in order to profit quickly and be able to re-invest later.
At each stage I have to watch out in order to maintain my fixed costs at a reasonable level and not hire too many engineers so that they eat all my revenues. These are tough calls one has to make. After all, 37signals is now a man operation and it all happened over time because both Jason and David had to watch out the bottom line and make the decisions NOT to hire so many people right from the start.
My company was a one-man shop, now we are 3 people and 2 more are coming and there are freelancers who also do stuff for us on a per-project basis. The media encourages that approach, highlighting success stories like youtube. Your article is great to bring the discussion from cyberspace back down to earth. On my example, I can say that the trial version of Basecamp works a bit like freemium. I worked a lot on it and then decided to buy it. I am a customer of both, and my brother works for Cricket.
Amazon is probably one of my favorite companies. In the case of Amazon, I can see why investors wanted to invest. They had a relatively sound business model and a clear way to profit. Although it took a very long time for Amazon to finally turn a profit. After re-reading my comment, I probably could have worded it better. My basic point: The sooner a business can ethically turn a profit, the better.
In the case of Twitter, I would suggest they do not have a good business model. From what I can tell, they did not have a clear way to make money when they started. So from an investing point of view, I would not invest in Twitter. Billy, huh? Phil Libin: Evernote is gross-margin profitable. I think this is exactly what this article was about. I call this Monopoly accounting. You are not profitable until you bring more money in than you spend.
That is so simple. This artificial separation of variable and fixed expenses is gimmick, it is false and misleading. Fire your fixed expenses and see whether you can run the business. Why separate them when talking about profitability? Because you want to present something that its not.
Because you are trying to put spin on things. Or you are lying to yourself…. They start believing their own bullshit…. Dead on article, totally on point! Business is simple… build something and charge for it. If the bills are paid, hand something out. Until then… make some cash!!!
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However, there are several other metrics that could be quantified as success, depending on the goals the company has and how it is meeting those. Remember, facebook for a long time was a money burner until they made it profitable or did they? Twitter is in a similar position today, as it has not found the right business model yet. There is a very large industry that is built around losing money on product sales and success metric is more units sold — and that is the video game industry.
Each console sold is money lost, but the business model relies on licenses for game development and profit share with developers. And it works very well. Great post and better comments, but I think the comparison is somewhat wrong. There are two things, related but different, being discussed here: the freemium model, or free — only, and the profit issue.
The solution to turn a profit is not charging either, or at least not only. The return bonus will give you additional coins scaled to the number of consecutive days you have visited the game to play the maximum is 25 days. The hourly bonus is located at the top right-hand side of the game window and you can collect it every hour for 10, coins. This bonus will accumulate up to 30, coins in three hours which will max out the bonus and wait for you to collect it.
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