Why Jason Fried & David Heinemeier Hanson Are Wrong About One Thing
I just finished reading Rework and am pumped to continue working on my side projects. I also just read an interesting post titled ‘I am a racist’ by Mark C. Chu-Carroll and they both really got me thinking.
I am a huge fan of 37signals (who isn’t these days?), and typically agree with their business philosophies and software development approach.
DHH recently had an interview with Jason Calacanis, where there was an interesting face-off between the two schools of thought. DHH is a major proponent of building your company from internal cash-flows and eventual profits, while Jason C. believes you should take outside funding when you can (I am simplifying here, so please don’t send hate mail if this doesn’t spell out their philosophies exactly).
During this interview, DHH mentioned that you should always be working on your best idea – i.e. there is no reason for you to want to sell your company because there is no guarantee that you will come up with as good an idea, or even a better idea, the next time around. In his case, he can see himself still with 37signals in 20 years, because he is confident that he is working on his best idea now. He has no plans to exit. Jason Fried even went so far as to write a blog post blasting the sale of Mint.com to Intuit because Aaron Patzer (Mint’s founder) ‘sold out’.
During another interview with Jason Fried on Mixergy, Andrew Warner (the interviewer) challenged him about wanting to build a large business and Jason pushed back defending his stance about staying small.
There is a certain zen-like quality to these notions that Jason & DHH espouse, and I whole-heartedly adopt many of them. I understand, and agree with, Jason & DHH’s point about focussing on building a solid company based on profits and real customers rather than VCs and eyeballs. I also agree that large companies tend to be inefficient, cumbersome and slow-to-respond. I do acknowledge that there are inherent risks with leaving one successful venture behind. In that, it is possible that you will never be able to ‘strike gold’ twice and come up with more than one businesses that are as successful as the first.
However, where I fundamentally disagree with them on is the notion that we should never sell and stick to one company for many, many years (if not our entire entrepreneurial lives).
The reason I disagree is because by the very nature that I have the ability and wherewithal to build a large successful company and sell, there is a high probability that I can do it again (when I say I, I mean anyone – not me specifically, but hopefully me in the future:) ). This ability is so rare, that those that have it, should not squander it – for the advancement of our civilization and the betterment of society. I once heard, can’t remember from where, that the most effective poverty-reduction mechanism that mankind has ever seen is capitalism. Capitalism has raised the standards of living of more people than any other initiative and system before it – by a factor of many multiples.
As Warren Buffet said, the mere fact that we (able body entrepreneurs) won the ovarian lottery and were born to the right vagina comes with a certain amount of responsibility. Lady Luck (nothing we did to deserve it) allowed us to go to school, meet the right people, have access to information and resources – which hundreds of millions were not so fortunate. On top of that, we were given the ability to create companies that can create wealth for many shareholders, customers, clients & employees. I believe, this obliges us to build the best businesses we can (grow as much as we can – not necessarily in terms of bulking up employee count, but grow revenues and profits). If we get an offer to sell, which could have a material impact on improving the financial security of said stakeholders, it should be seriously considered. Then do it again.
So, while I understand that they (Jason & DHH) are basically pushing back against the Silicon Valley ethos of coming up with an idea, seeking VC money, hiring a bunch of people, selling to the biggest gullible buyer and then chilling on mojito island for eternity. I think they tend to be a BIT too overzealous with the opposite stance.
Aaron Patzer (of Mint fame) is now free to start a foundation and have a more significant impact on many lives, than he had before, all the while investing in other companies and starting another one for himself.
The fact that he can, and hundreds of millions can’t, I believe means he has a fundamental responsibility to maximize his capabilities as much as possible.
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July 16th, 2010 at 4:46 am
[...] During a recent interview with Jason Calacanis, David Heinemeier-Hansson say you should always be working on your best idea “there is no reason for you to want to sell your company because there is no guarantee that you will come up with as good an idea, or even a better idea, the next time around.” Hansson still sees himself running 37signals in 20 years time because he is working on his best idea now. Jason Fried went further to write a blog post blasting the sale of Mint.com to Intuit because Aaron Patzer (Mint’s founder) ‘sold out’. (Hat tip to Marc Gayle) [...]
April 18th, 2010 at 12:19 am
Hi Marc,
I’ve been thinking about the ethics of selling a little differently, and i’d be interested to know what you think.
Let’s say you’ve got a successful, profit-generating, ethical company. If you’re smart, you’re taking all of the profits that you feel you can ethically take.
Now imagine someone wants to buy your company. For you to want to take the deal, they have to offer you at lest as much as you would stand to make if you just milked the profits yourself, right?
But then they want to make some money too, right? They don’t just want to break even. So they will only give you this deal if they think they can squeeze a little more profit out of this thing than you could.
Now, how will they do that? You, as the founder, are probably in a better position than anyone to maneuver the company. It’s not like they’ll step in and run the place better than you did. So how will they earn their paycheck?
They do it by slackening those ethical standards I mentioned.
I would argue this is a fundamental truth about equity. Equity is a contract by which you trade stewardship for money. You can call this Erik’s Law of Equity:
Equity only ever trades hands to a less ethical steward. And it does so because every time it trades hands it has one more mouth two feed.
What do you think?
Erik
April 18th, 2010 at 12:40 am
Erik,
Thanks for stopping by and adding to the convo
Ok, firstly I would say to your first point, not taking all of the profits you can ethically take doesn’t have to be a ‘dumb thing’. As in, say you are running a successful, profit-generating company that is in it’s mature stage (i.e. not growing), then yes…perhaps taking all the profits would be the smart thing. But if you want to grow, re-investing those profits into the company could be considered ‘the smart thing’. So I wouldn’t necessarily agree with you on that point
In terms of someone buying your company, for starters, what you have to remember is the notion of Time Value of Money which tells us that $1 today is worth more than $1 tomorrow. So, by that measure, it usually is in your best interest to take less but get it all now, than take more but get it later. i.e. A bird in the hand is worth two in the bush. If you think the ‘going rate’ for selling your company (based on the valuations that three highly competitive buyers put on it) is $50M today (for argument’s sake), but you think you can IPO in 4 years and raise $500M, which is better? Well…I would argue, that in most cases taking the money upfront today is better. The reality is that you don’t know what will happen in 4 years. Suppose you get hit by a bus and are disabled. Suppose an earthquake hits and devours the data center with all of your servers and the only copy of your production code. Suppose your market implodes – a la real estate circa 2007. You never know, so yes you COULD get $500M, but you would be gambling not just your fortune but the fortune of all the shareholders in your company (not just investors, but employees that have taken lower pay for equity, partners and suppliers that have forgone payment for equity, etc.). You have a fiduciary responsibility to those parties to maximize their returns.
It’s the same question of if you win a $300M mega-jackpot, will you take the $150M today or $10M/year for 30 years? According to our Time Value of Money principle, $150M today is the better answer.
I also disagree with your notion about equity only ever trading hands to a less ethical steward. When Google bought YouTube, was Google less ethical than YouTube? The truth is, that’s pretty subjective, but I would probably say they weren’t. The same with any company that Warren Buffet buys. I don’t know him personally, but he seems like a pretty ethical guy to me.
Now, I do agree that many people (especially in finance) are unethical and can be dubious and try to be the Gordon Gecko of modern times and milk companies for all their worth. But I wouldn’t say as a general rule that’s the case. There are many investors and companies that act ethically (well publicly anyway).
Those are my $0.02.
Look forward to your response
April 18th, 2010 at 4:57 pm
Well I don’t have much of a response. Those are all really good points.
At the moment I plan to maintain ownership of my company. A company is a resource, like a flock of sheep or a coal mine. And because there are human stakeholders, and environmental stakeholders, it matters whether someone is stewarding that resource, or simply owning it.
Most of the VCs and angel investors I see and read about never talk about ethics. It’s all about “value” and exits. I have yet to find an investor who I would trust with an important resource.
I often feel like I’m pretty alone in caring about entrepreneurship and also believing in real responsibility.
But maybe you’re right and one day I’ll meet someone with money who I do trust.
Erik
April 18th, 2010 at 5:34 pm
Very valid concerns Erik. The beauty about entrepreneurship is that it gives you the power to do what it is that you want. So you definitely are in the right seat.
Just something to think about, remember that there is a difference between a ‘stakeholder’ and a ‘shareholder’. Stakeholder being someone that has an interest in the organization (e.g. your secretary is a stakeholder because she is employed by the org.). Whereas a shareholder is a holder of equity.
I totally understand your skepticism of people (especially VCs and their seeming lack of ethics). However, I think we (critics of the industry) tend to get a bit over exuberant by painting with a broad brush. Yes, there are some unethical VCs (perhaps even many) but VCs and financiers (many times) were also entrepreneurs and are just savvy deal makers. It is our responsibility (as entrepreneurs) to put ourselves in a stronger negotiating position by building a profitable company that doesn’t need external capital. That way we can ensure the terms are to our liking.
April 10th, 2010 at 1:41 pm
One more example I just thought about is Tony Hsieh. If he never got out of Link Exchange @ $200M to Microsoft, he would never have gone on to Zappos. Imagine what the world would have been like without Zappos. Not only did he enrich all the shareholders with the sale to Amazon, but he is now able to achieve even bigger scale with Amazon (well, that’s the theory anyway and we will see how it pans out ).
If Tony leaves Zappos, I am sure his next project will likely be just as significant as his first two.
Just one more example I thought I would pass along
April 9th, 2010 at 11:55 am
@Andrew Fair enough. I understand where you are coming from, however Warren Buffet is not really a good example here. He buys and builds company. By his very nature, value investor, just doing what he is doing will have a greater impact on the world than if he ran a regular company. He is creating wealth not just for his own shareholders, but also for the shareholders, employees, etc for each company he owns.
So he doesn’t QUITE fit the bill..but I respect your opinion
April 9th, 2010 at 7:58 am
I agree with DHH. The businessmen I admired most as a kid were the ones who stuck with their businesses for their whole lives because that’s how long it takes to have maximum impact.
If Warren Buffett sold out a couple of decades after he started accumulating companies, he’d have been successful, but he’d also be just a footnote instead of the leader he’s become.
April 8th, 2010 at 5:06 pm
@DHH I do agree that in some instances (ignoring private equity acquisitions) acquisitions tend to not be as beneficial for the industry than if the founders grew the company. You cite Bill Gates, he is a perfect example of what I am talking about. Yes, he didn’t sell the company, but he eventually handed over the reins to Ballmer and went on to his second act. In my humble opinion, I believe that the 2nd Act of Bill Gates will be even greater than his first.
In terms of Steve Jobs, look at what happened when he left Apple the first time. He created NeXt and funded Pixar. The impact of NeXt we are still seeing through OS X and Pixar…well….that writes itself. Imagine if Steve Jobs left Apple today. I think Apple could continue innovating if Phil Schiller, and Johnny Ive stick around (plus whoever else supports Jobs right now). But I definitely think that Job’s next act would be just as momentus as Bill Gates’ next act. I think Jobs could do it again and again and again. He is one of those. He probably won’t, because of the stage of life he is at.
Look at Woz. I haven’t heard of any ‘major successes’ since Apple (this could prove your thesis), but he has placed his own unique stamp on many hardware companies – including Segway. Also look at your mentor Bezos, with what he is doing with Bezos Expeditions. It happens that he doesn’t have to leave Amazon, but Bezos is one of those guys that have the vision to execute many ideas and businesses exceptionally well. I am excited to see the products of Bezos Expeditions in a few years.
YouTube is another classic example. You are famous for not particularly liking the YouTube acquisition, but had Google not bought them, where would YouTube be today? Probably being butchered by Yahoo or Microsoft. I doubt they would have been able to achieve the things they have since the acquisition (24 hours of video uploaded every minute?? That’s insane!!). So I would argue that YouTube (and the world) is MUCH better now that it is protected by the deep pockets of Google. Ofcourse, the argument could be made that these are the exception, but I doubt that. Flickr comes to mind. Post the yahoo acquisition, it has really taken off – in terms of reach to users and enhancing photographers lives.
@Justin That is a solid point, and applicable in many cases – but not always. I do believe that if you sell your company to an entity that doesn’t passionately care about what you are doing, there is a high probability that it will be a very bad acquisition. E.g. selling to a private equity firm that just wants to strip it & flip it. However, if the acquirer is a good fit (e.g. Google in YouTube’s case), the product of the acquisition can be much more beneficial than the founder leading the company.
Also, to your point Justin, there are many studies that have shown that starting a company and growing it, and managing large expansion are two different skill sets that most entrepreneurs don’t have. There are some, especially in the tech industry, that are exceptionally good at both (see all of David’s examples above) but there are just as many that aren’t. Paul Allen clearly wasn’t one of those, for Microsoft. Neither was Steve Wozniak for Apple, or Vinhod Kosla for Sun, etc.
@Greg I agree with you that if you build it JUST to sell it, it definitely will likely not end good. But more to DHH & Jason F’s point, if you focus on building a good business (focus on the product and customers) you will become an attractive acquisition target – no two ways about it. Once that happens, I think that if you are the type of person that knows you have other ideas and can significantly impact the world another time, you have the obligation to take one of the acquisition offers and move on. However, the truth is, not everyone has that in them. Some people do just have that one idea, and so may be better off sticking to that one. But I think the vast majority of successful entrepreneurs don’t have just that one idea and can significantly benefit the rest of the world in their second and third acts.
Thanks for all the comments guys, you are really challenging me to think this through some more. Appreciate all the feedback
April 8th, 2010 at 2:22 pm
Good points; but I think the item you miss is that if we’re “obliged to build the best businesses we can” it’s very likely that no one will be able to “run it” like we could.
If you sell, and get out completely (as many founders do), the company could lose it’s vision, it’s drive… it’s “soul.”
April 8th, 2010 at 2:14 pm
Marc, obviously there’s room in the world for many points-of-view on this subject. Thanks for sharing yours.
I happen to agree with Jason and DHH on this, primarily because I believe that building a business with the purpose, or even the willingness, to sell it inadvertently clouds your judgment. It changes how you run your business, possibly without even knowing it. When you start worrying about how decisions will be viewed by potential buyers or VCs, instead of following your instincts, in the end the business will suffer.
April 8th, 2010 at 1:25 pm
I completely agree on the moral obligation, but I disagree on the way to get there. Think of it like this: Of all the people who’ve had a lasting impact on our industry, where are they now?
When I think of the giants, I think of Steve Jobs, Bill Gates, Larry Ellison, Keith Collins, and so forth. All people who’ve stayed with their life’s work. Steve Jobs is Apple, Bill Gates is Microsoft, Larry is Oracle, Keith is SAS. Do you think any of them would have been any bigger if they had sold their companies early to the big incumbents of the day? No.
So I think that you’re absolutely right that there is a sense of a moral obligation to use the power you have for good. But I think the best use of that power is often to stick with something for decades, see it through, and make lasting impact. Apple is now 30 years old and has never had a bigger say on the way of technology. That’s where we want to be. 37signals, 30 years old.