Full Transcript of DHH's Classic Startup School Talk
Get inspired and start making money online
David Heinemeier Hansson’s Startup School talk in 2008 is the stuff of legend by now. What we consider normal and practical today in our circles as Indie Founders, wasn’t as widely practiced back then. In particular, this talk went against all of the advice from other YC speakers at the event.
There is a video version of it from the official source. However, if you’re like me, reading something and annotating it, or printing it and using it as inspiration is really useful. If that’s you, here’s the transcript.
Also, I’ve attached DHH’s own PDF slides from the talk. I have emphasized the parts that I found inspiring or important.
“Hey everyone, I’m David Heinemeier Hansson, I work for 37signals. I’m also the creator of a web framework called Ruby On Rails. I am not going to talk about that at all today. Sorry about that.
What I am going to talk about though in a little bit is how lonely I feel up here. So I work for 37 signals. We’re not looking for VC funding, we’re not hiring, we’re profitable and it feels kind of weird to be in a collection of young smart people and feel a little bit alone in that sense. Most of the talks this morning and most of the questions were ‘How do I pitch my VC, how do I do this, how do I do the other things,’ 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 and picking me up.’
I think there’s too little talk among start-ups, 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’ve been accused a little bit of being arrogant – there’s one way; our way or the highway.
So to kind of pre-empt that; it’s ‘A secret to making money online'.’
There are probably other secrets out there too, but I’m going to present the one that we’ve been thinking about, and this is the classic conundrum, the slashdot question. You have a great application and then something magical happens and you earn profit.
So, we’ve been studying this conundrum for some time at 37 signals and 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, and we found out that having a price is really cool for getting profits.
I mean you have customers, they pay you money for your product or service and you get profit, and it’s such a weird notion, it’s almost too simple to work but I’ve heard that over time, over hundreds of years actually, that has been how most businesses 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’s and then getting bought out or going IPO or whatever. It didn’t really work then.
Now we’re 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 truly happy for the people who win that lottery, just like I would congratulate anybody else winning a lottery, but I think there’s a simpler way. I think there’s a simpler way of building sustainable businesses that are being neglected in the sort of community … which is to have a price.
The cool thing about having a price is that there’s 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 and 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 start-up world, for us it’s like four or five, but it’s 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 with different approaches, so they might not have a subscription fee you pay every time or every month. You might do something like Campaign Monitor which is an awesome service for sending out e-mail newsletters and tracking them; who’s clicking on what, and who’s reaching what. And 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.
I hear they’re actually a cool crew down in Australia and they are going surfing next week and I don’t even think they got any huge wave they have to catch – they are just happy making money . You can always use 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.
So FogBugz sells you a package for a price of $199, you buy it, you install it on your server and you are presumably happy and FogBugz gets money directly from that customer. You can also combine these things. I love this service. It’s called ‘Fax It Nice’. ‘Fax It Nice’ is a great way of routing around the fact that a huge percentage of businesses in the US still work over faxes, and faxes are really annoying.
But here you wrap it up into a nice web service, you send a single fax for 5 bucks, you can sign up for a retainer type scenario; pay 20 bucks, that’s what I do, and then you pay a little bit every time you send, or you can sign up on a subscription basis where you can send and receive faxes and you pay on a monthly basis for that.
👉 Now, 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. Here’s the kicker; it’s still hard, because you slap a price on something doesn’t mean you’ll have a successful business.
Most businesses fail, and I think this is where the problem kind of creeps in, so if most businesses fail anyway why shouldn’t I go and to try to be the next Facebook or MySpace or YouTube and get up 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, and the reason I don’t think that logic is very good because the odds are not created equal. The odds of you in here making the next Facebook or YouTube or MySpace are tiny. The odds of you actually creating a product that a few people would 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 are some odds, if you’re building just a simple company to charge a few people, what are the odds of that being a success? 1:5, 1:10 I don’t know. But the odds of you building that next Facebook or MySpace are probably not 1:10, if it was I would probably not be giving this speech, I’d be trying to build the next Facebook. The odds are a 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 MySpace’s and the YouTube’s are broadcast 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 on a plane is tiny. But the fear you have of it or the desire you have to be that next Facebook — they are huge because we broadcast them over and over again. You’re being brainwashed.
If you look at these odds and then you look at the probability and the outcome, you can compare them. So let’s take a business where you have a 1 in 10 chance of making $1,000,000. 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 VC’s are talking about is billion dollar companies or 300-million-dollar-company. I think you can be pretty happy with 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.
So a one in ten chance of making a million dollars should be roughly the same as a one in ten thousand chance of making a billion dollars, if you didn’t care about the first jump and I think that’s what people miss. The difference between having a million dollars and a billion dollars is a lot smaller between the difference of having -$10,000 on your bank account and having a million dollars. So I encourage a lot more people to take the better odds at the smaller reward and then perhaps worry about the billion dollars next time.
How do you go about getting that million dollars? I’m even making that sound kind of easy, and in some ways, it’s not as hard as you think, and I think it’s because most people don’t look at the simple facts for these things.
💰 So let’s take the idea of a subscription service. A subscription service which has 2,000 customers and charge $40 a month over 12 months make a million dollars a year, that’s not bad. 2000 customers out of the total amount of potential customers out there, that’s not a lot of customers. It’s still hard, not as hard, but it’s really not the same ting as trying to build that next one in a year Facebook or MySpace or whatever, it’s a lot simpler and it’s a lot more tried and true.
Dig a little bit further into those numbers, what do I need to do to get those 2000 customers? If you look at some numbers like conversion rates, let’s say you have a run of the mill subscription service, and let’s say you make it good enough so that 5% of the people who have signed up are paying you money. So you have 40,000 sign ups to keep 2,000 customers; that’s 110 sign ups 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 only 400 customers at $40. The marketing niches you can attack if you’re trying to get 400 customers or 2,000 customers or even 10,000 customers, they could be tiny, you don’t have to worry about these big waves, you don’t have to worry about discovering the next great thing. You just have to solve a problem a little bit better than the other guys.
If you’re opening a restaurant, you doing an Italian food. It doesn’t have to be the best freaking Italian food in the world it just has to be kind of convenient for the people around you and you can make a pretty good business out of that. I think there are too few people trying to make just a nice Italian restaurant in the web space. Now how do you go about finding these customers? Because 2,000 people paying you money is 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. We did Basecamp first, it was for businesses, for organizing projects, let’s do something for the consumer, so we did this application for the consumer to organize their nuisances bla-bla-bla. Really hard because getting a consumer to pay you money for something is pretty hard. We even had plans starting at $5 a month. Consumers are really fleeting things, they’ll pay you $5 for one month and they’ll decide they won’t need it anymore, turn it off and it’s really hard actually to establish a business here. So I’d advise if you’re trying to follow this model of selling services for money, going to the consumer shouldn’t be the obvious choice. There’s an easier way to go about this.
We kind of realized this over a few years of running Backpack and other apps and we relaunched Backpack about 2 months ago after it’d been out for 2 years almost or so and we aimed it towards the business instead. Well in those two months we’ve more than doubled our revenue of what it had before, by just adding a few more sustainable customers who were willing to pay more than $5 a month to use the service.
And we find that this is the market we are going to focus on, not the tiny enterprises and 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 that are not currently being addressed, either because people are too busy trying to figure out how we 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 dollars a month.
There’s a huge on tap market here in the fortune 5 million. Now the kind of the problem with all of this and the kind of the problem of 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, two old folk behind the counter counting the pennies and that’s kind of the life, and people look at that and say ‘that’s nice, you have a few customers, good for you.’
In the great words of Eric Cartman “That’s bullcrap.” It’s really not that notion that you’re going to be that 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 (Graham – YCombinator.com) brought up that example of Craig’s list because I think Craig’s list fits that definition of lifestyle business very, very well. Being able to run your own business without taking VC money, without taking all these things that put you in 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 of where your financials are fine, if you’re making a million dollars a year you’re doing pretty alright, you’re doing better than most other people out there. And once you’ve got that aspect of your life taken care of, there’s a whole lot of other things 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 and call your own shots is an immensely powerful motivator for just enjoying your life.
Craig Newmark has a great quote in an article I read, he said ‘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 meet a certain point everything beyond that is really just not that important.
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 consuming.’ If you can find a good cause in business making a million dollars a year that you enjoy actually working on, why would you want to give that up? What’s this overzealous intent of flipping your business? Where are all the people who are saying ‘I just want to build a business and I’m going to enjoy it for the next 20 years’?
Most of the startup people I’m talking to seem so narrowly focused on ‘We gotta to pump it up, and then we gotta sell out, and then we’ll live the good life’. I’m not sure that that life that awaits you after selling your startup is the good life.
I’ve talked to more than a fare share of company founders who have done exactly that. I have one particular sorry tale of a guy who was doing technology; I was talking to him about his laptop, he was saying ‘Yeah, I’m probably going to get a PC next time because it runs Outlook real good, and all I do these days anyways is schedule meetings.’ What? Are you willing to trade being an active developer who is passionate about what you are doing, for a bit of moolah to get into that hellhole? I don’t think so.
And the great thing about this is the notion that we have these big hits we have the YouTube, we have the guys catching these big waves. It kind of reminds me of the movie industry, and this is not it. Business in general is not like the movie industry, there is no need to dominate the box office. There can be lots of winners, just like there are lots of small Italian restaurants out there doing pretty great even though there lots other Italian restaurants.
There can be tons of companies out there who are out there solving small, simple problems. They might have 2,000 customers or they might 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 customers. The exceptions are the Facebooks, spending 2 years and being worth 15 billion dollars on paper; don’t use that as your role model. But then you have Sequoia asking ‘But where’s the network effect? How are you going to be viral? Are you going to infect the entire population?’ Forget viral, forget this notion of this automatic viral thing that’ll infect and spread.
You know what’s viral? Shoes, shoes are viral. When you buy them from Zappos at 10 in the evening, you get an email 15 minutes later saying; ‘You’re such a swell customer, we’re going to put you on expedited delivery, and you’ll have it tomorrow morning.’
And getting that box tomorrow morning and opening the package thinking ‘Hey there’re the Pumas I just ordered last night’. In other words just great service, just a great business. It doesn’t have to be this ingenious idea, often the simplest ideas in the world like treating your customers nicely and 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 this totally lop-sided. A lot of start up companies are thinking ‘How can I ram out the gates, I have so little time, there’s this magical market moment. If I don’t launch within 3 months I’m going to be toast.’ Zappos are selling fucking shoes. People were selling shoes before that, and yet somehow they are a great business today because they are just selling shoes better than the other guys. You can do that.
So, how did we get started? Basecamp was the first product we built at 37signals and we developed it with a team of three people who were doing other stuff. I was attending college, consulting on the side, 37signals was a side 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 having a few days a week to work on something really focuses you’re energy.
I was contracting with 37singals at that 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, and then nothing gets time that way. Having less time is a benefit to most people because if you have all the time in the world you’re probably going to yank it off anyway; yank it off in the business sense of the word. You’re going to waste your time on pointless features that you don’t need anyway.
Another thing that’s interesting about the Basecamp story, we grew Basecamp for a year before it was big enough for us to say we don’t need to do consulting any more. People are in too much of a hurry. You don’t need to build that huge company over night. Most companies are not built over night.
Like that statistic of 7 years before M&A happens. I think even that’s too short, most businesses take longer to become great businesses so don’t be in such a hurry. Another thing, just to have one technical thing here, we ran on a single server for the entire first year. The great thing is when you’re charging money for what you do is that scaling problems rule. Because scaling problems mean that there are more people paying you and then dealing with those issues isn’t 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 could be the most expensive server in the world and it wouldn’t matter.
Now, finally, take it easy.
This whole start up, this whole rush thing, you’re thinking about it as ‘I’m going to put in all this work right now, and then I can just coast away from there.’ There’s never going to be less work. In some ways there is just going to be more work, so if you set up your practices working 14 hours a day, 7 days a week you’re 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 starter will stick with you.
And finally, if you try this, actually build a service or product and charge money for it and it doesn’t work, here is the awesome news: You can just blame it on us and save your ego like that; this is a full proof plan. You can always get TechCrunch to write up that ‘37signals drove you to the debt pool for charging money for your stuff.’ Thank you very much.”
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If you found this post useful, please consider sharing it with others. The next book that I’m going to cover is the 37signals classic (now Basecamp), Getting Real. If you think this speech was inspiring, you’re not going to want to miss my deep dive into that book.
For $5 a month you’ll have access to the entire Getting Real series. Trust me, you’re not going to want to miss that.