YC Analysis: "37signals/DHH style" companies?
A lot of his examples are from 'real world' products (Italian restaurants, say), that clearly have very different economics from on line businesses. The marginal cost of another bottle of Bardolino is not indifferent, even though the markup is also going to be good. The marginal cost of another basecamp customer is very small. Also, his Craigslist example was not particularly compelling for me. Those guys dominated their market, but more because people flock to the site because everyone else does (network effects). Their choice to keep things small/real seems like a very conscious one, but not necessarily something they could get away with if, say, they were kijiji and eBay were the owner of Craigslist.
So, my question: what other web or software companies make a living the 37signals way? What are they key characteristics of their markets? Obviously they can't be in a winner take all market dominated by network effects.
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[ 3.3 ms ] story [ 148 ms ] thread[1] http://www.sourcegear.com/
In some ways, that seems more sane to me than DHH's pay-only ideology.
37signals does this differently. Their free products are far more limited, and their paid products offer quite a few more features than their free products. This limits the value to the freeloading customer, but I think this makes for a more sustainable business in the long-run.
Well, first off, there are free versions of all 37s's apps.
Second, RTM isn't profitable (yet/ever?). 37S is. That seems more sane to me.
Key characteristic: a real problem being solved and customers willing to pay for a solution. In the case of lessaccounting, mom-and-pop shops (online and off) that don't use quickbooks or find quickbooks too complicated.
Eventually, most things will be commoditized, but this happens slower for some things, and faster for others. How does the 'dhh style company' keep that at bay - or do they? How sustainable is the business in the face of cheaper competition?
The point is that you can do that kind of thing in that market sector. Can you in IT? Maybe, but certainly not in some areas. The economics and marketing are quite different.
That period of time includes the present.
companies made a lot of money selling Unixes
They still do, with Apple being the most obvious.
This is where branding and marketing come in. Ask Apple, BMW, Mercedes, Luis Vutton, etc etc.
These businesses all sell their products for much more than comparable products, and they do quite well. Why? Because there are two types of consumers that are sold by their marketing: those who appreciate high quality, and those that want to be seen as appreciating high quality.
You don't have to appeal to everyone.
...
Indeed, thinking about it a minute, a lot of my experience with 'branding' online is that small and independent is cool. How much cooler is it to have a @yourowndomain.com email address than @hotmail.com? Remember geocities? Another thing that was sort of the lowest common denominator.
Maybe Google has a positive brand at this point, but I pay for very few things there. I suppose I might pay a little bit more to them for some things in the future to have everything 'tied together', but that's getting away from 'branding'.
37 Signals
Salesforce
Flickr (picasa is free, and people still use flicker)
expedia/travelocity (not startups anymore mind you)
That;s the brand right there. At least my definition of it.
> people use because they know it (which is one kind of branding), or because they want to be seen using it, as with your previous examples?
Point is, they're using it and not phoning a travel agent. They're getting something from it, that much is given.
Branding definitely is not network effects, though. Branding is what your earlier examples are about, like Apple. Network effects can be present even if you're not really that excited about the company - like eBay or Paypal. Actually, in some cases, where there's some exclusivity in the brand, they may actually work in opposite directions. Network effects push you to 'go with the crowd', whereas, say, Apple says to 'think different' and get a computer that not everyone else has.
I think expedia is a good example in terms of advertising/marketing, where people use it because they get out there and sell it. So perhaps that's part of the answer to keeping a DHH style company out front - sell it lots and sell it well. That's not something 37signals has ever shied away from. However, something like expedia is also probably not likely to ever be completely commoditized/open sourced, so there's always going to be some scarcity there.
I thought that idea was one of the highlights of the presentation. If you can sell 400 accounts at 40 USD a month, you're going to live very comfortably. If you can't find a market niche where 400 people would be willing to pay 40$ (or 4000 people pay 4$), you might need to reconsider your idea.
This was a big point in the Italian restaurant analogy as well. You don't have to redefine Italian cuisine, you just have to build a restaurant far enough away from the other guys and make good enough food (among other things) to attract a large enough customer base to meet your goals.
The economics of the "Fortune 5,000,000" are very different than true enterprise software, as it avoids employing a direct sales force. Obviously 37signals wouldn't turn away a team from General Motors who wanted to use Basecamp, but they don't actively market their products to large companies.
You're right about the difficulty of charging for online products in the consumer market. DHH said that they were having trouble getting customers for their personal organization product, Backpack, even at $5 a month. After they repositioned Backpack to be used by small businesses, they were able to increase the price and sales still grew tremendously.
Why? Targeting large enterprises (what the company I work for does) is also an extremely difficult market, but for other reasons than the consumer market. Selling to large enterprises requires professionel and experienced sales people with very good industrie contacts. You also might run into the "small company problem", i.e. you don't sell because you look too small and you don't have enough customer references. Not much fun!
...except for Mac users, who support a healthy little industry made up of one- and two-person software companies.
In other words, consumers don't spend money for software, except for the ones who do.
Add to that that I'd venture 80% of the windows users have never "bought" software (except games). Windows is either pirated or comes with the computer... office is acquired from work, some other programs are freeware/never paid for shareware.
And, saying that Windows users are universally pirates is simply disingenuous. Paint Shop Pro made millions as a small software development shop, and then sold to Corel for millions and became part of a big development shop. This wouldn't have been possible if Windows users never paid for software from small shops. In fact, I suspect one could find more Windows-based small development shops making a good living than similar Mac-based shops just based on the size of the respective markets. (I'd never want to do it...but it's a viable model.)
I'm just saying, "don't be a smug Mac weenie". Many people are making a good living building and selling software on many different platforms.
To suggest that there isn't rampant pirating in the windows community by holding up Paint Shop Pro (generally a b2b piece of software) is ignoring the obvious, though.
Paint Shop Pro isn't b2b. It's the epitome of consumer software. Businesses buy Photoshop.
I'm not arguing piracy doesn't exist among Windows users, I'm arguing that you're being smug about being an exalted and holy Mac user which makes you uniquely capable of judging quality and uniquely honest enough to pay for the software you use--unlike the riff raff using other operating systems. Sorry you don't like the term...but that's smug.
I'll admit to being smug and thinking, like you, that Windows users are idiots. But, I take it one further and think that Mac users are idiots, too (and they paid too damned much for their computer to boot). Likewise for most Linux users. Users, in general, are idiots.
That's not always a good thing, and shouldn't be construed as such. For example, there are many great free products out there that won't appeal to some mac users at all because they equate price with quality. It's the same type of mentality that buys a BMW when a chevy will suffice. Sometimes the "buy quality" mantra is accurate, sometimes not. It is an aspect of that particular set of users though.
>And, you stated that 80% of Windows systems are running entirely pirated software, which is, frankly, a ridiculous claim.
No, I said 80% of windows users have never bought software that isn't a game. Given my experience of close to 15 years in various IT roles, I think that's not that ridiculous.
I think you're assuming you are talking to a particular type of individual and responding in kind, but rest assured, I'm not that person.
My point is: the consumer market offer less niche markets that allows you to build a sustainable business compared to the "Fortune 5,000,000". I know this is not good news, because building software for enterprises (no matter how big they are) is less fun.
I have always wanted to do a startup that has more mid to long term success as a goal- "37signals-like" if you want to call it that- but I've always felt that there is a HUGE amount of pressure to grow grow grow and sell.
And btw- I really do get the feeling reading news.yc and other venture related sites, that many who are into the startup scene right now look down on anyone who doesn't build-to-flip... but that doesn't jive with all the positive feedback given to companies that buck the trend and hold on longer. anyway that's enough rambling for now.
Oh, the sarcasm! Perhaps if you'd actually watched the talk before commenting on it, you'd have gotten the point and wouldn't be so unknowingly ironic. ;)
http://news.ycombinator.com/item?id=168378
* Apologize
* Watch the video
I don't think I'm going to have to do either.
The point I'm trying to make is, just because geeks love something (like, inexplicably, GitHub) doesn't mean it's necessarily a financial success. Also: hundreds of end-users? A tiny customer base.
All that aside, the whole point of the talk was that one can live very well off one's web application even if it's only moderately successful. I think the example he gave was 2,000 small business users at $40/month ~= $1,000,000/year in gross revenue. Or 400 users at the same rate if you don't mind only grossing $200,000 a year.
His argument was that you don't need to stress about investors, 12-hour days, and viral loops as long as you're willing to "settle" for a pleasant, financially viable, and capital efficient business with a niche of users who really appreciate your approach to solving their problems. That's the irony of making fun of an app in this thread for only having several hundred users.
You probably would enjoy the video; I certainly did.
(Incidentally, GitHub and Lighthouse didn't require massive capital investments [1] and I'm pretty sure that they're hosted "for free" on Engine Yard. Having a few hundred users would practically guarantee that they're cashflow positive.)
[1] http://www.akitaonrails.com/2008/4/21/chatting-with-chris-wa...
It's the orthodoxy that gets me. "You can't cite DHH's speech without watching it in its entirety! You can't talk to your team about DHH without everyone sitting down and watching it! What would PG think?" And yet, at the same time, we're willing to toss around totally unsubstantiated factoids about the success of brand new Rails apps as proof of a business model.
Rant off.
Very, very, hard. See my 1% comment.
Are we making enough within two weeks of the site launch that we're thinking about never consulting again? Yes.
-PJ Hyett
I think they're a great example of the types of companies in DHH's talk: have a product your users love and charge a price for it. As a bonus they also offer a free version for open source work for which they have my respect.
Building less of an app also means it will be easier for others to come later and build what you made and give it away. Look at how it took 2 people at Google a few days to build HuddleChat which some said was too similar to 37signals' campfire.
I can guarantee you huddlechat was not the only one, so now that its gone campfire can go back to enjoying their monopoly of the chat/messaging market.
This issue obviously cuts both ways. 2 people at a tiny consulting shop can probably whip up most of what VC-funded 2.0 companies build too. And those consulting companies don't have boards of directors that will flip out and fire the management team when that happens.
1) The fact that in SF and NYC, they charge directly per listing in certain categories.
2) The fact that they didn't take VC funding.
3) The fact that they stayed small.
4) The fact that they didn't sell the company.
All of these would have been extremely easy to stray from, but instead they stuck to the core philosophy. What DHH was talking about was just that: a philosophy. Any company can stick by that philosophy, regardless of how it attracts customers or the specifics behind their product or service.
Asking the question "what other web or software companies make a living the 37signals way?" is kind of a weird question. The 37signals way is actually the normal way to run a business. It just seems weird because the scale of the web has thus far screwed up everyone's minds to the point where everybody forgets the past.
In other words, things do work differently on line, in some cases. Understanding that, and understanding what happens why is crucial to being able to do a 'DHH style' company that doesn't get crushed by a big player, or undercut by a bit of open source software.
I highly recommend the book 'Information Rules': http://www.amazon.com/dp/087584863X?tag=dedasys-20
1) have 85K subscribers to their SvN blog
2) wrote a book that sold 75K copies
3) developed one of the most popular open source projects in the world
4) speak at conferences all the time
If you're just writing code, you'd better hope to get bought, because you'll never catch up to 37s as a business.
I'm constantly surprised when I see companies paying for a service that I get for free (Any premium chat/voice Vs. Gtalk). The thing is, businesses don't like to spend time looking into the best and most cost effective way to solve a problem - they like to throw money at it and make it go away. DHH suggests being that person who makes it go away.
To answer the article's question, the people who do winzip, pretty good solitaire, clipmate and desktop tower defense are probably good examples.
Bug.gd plans to do it by selling private P2P help desks directly.
We have another unrelated service launching soon that will directly charge users for anything above casual usage.
I'd also add that the single most important thing I've found in creating a business like this is keeping your costs low. The same two businesses, with the same income and customers will have very different times during a downturn depending on their committed monthly burn rate. I know it sounds obvious, but its amazing to me how many businesses handicap themselves from day one with large spending commitments.
don't just build a solution, build an elegant solution. ideally one that is practically transparent to the people using it. I think people constantly forget that the vast majority of computer users wouldn't know the difference between the internet and their desktop much less between campfire and huddlechat.