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It's insane how making a profit seems to considered "uncool" in the business world. Basecamp and particularly Jason Fried's writings (I realize this is particu

It's insane how making a profit seems to considered "uncool" in the business world. Basecamp and particularly Jason Fried's writings (I realize this is particular article is by DHH) are super inspirational. I wish that building a solid, profitable business as opposed to being so focused on growth and finding more investors was more of the norm. I want to work at Basecamp even more now, haha.

crdoconnor 9y ago
shrug VCs seem to prefer 1 hypergrowth startup and 20 failures in their portfolio to 17 solid, growing, profitable startups without hypergrowth and 4 failures.
- tinymollusk 9y ago
  This is because the portfolio strategy (1 hypergrowth + 20 failures) is the best strategy from the VC perspective. It's nearly impossible to know which startups will succeed (high uncertainty decision making), and very difficult to know how big the successful ones could be (open ended results). If it were simply as easy as building 17 solid startups to just 4 failures, I'm sure there would be more investment in that area. It seems much more likely to have maybe 5 solid startups (20% annual profit), 5 with possibilities (losing 20-30% per month) and 11 failures. Entrepreneurs suffer from their biased perspective; of course my startup could be solid and profitable, because otherwise why would I continue working on it? Therefore it seems rational to assume you can identify prospectively profitable startups. My opinion is that VC investment is a crapshoot, where nobody knows the odds of a given company. They're buying lotto tickets, and they'd rather buy $5mm tickets that have a max prize in the billions, instead of a $100k ticket that has a max prize in the millions. To change the current system, all we need to do is come up with a guaranteed way of evaluating whether a startup will be profitable.
  - itchyouch 9y ago
    They also want that billion dollar startup. Having 20x small, profitable companies netting say 1-5M/year isn't their modus operandi.
    - tinymollusk 9y ago
      A good and true point. How invalid do you think this counterargument is? If anyone could identify early-stage companies with a 75-100% chance of being profitable, wouldn't we see an investor niche that supports this? (I can think of one counter-counter argument: the hype created by VCs is so big that the investor and founder markets are acting irrationally.) Would love to hear anyone else's thoughts on this.
      - s73ver_ 9y ago
        "If anyone could identify early-stage companies with a 75-100% chance of being profitable, wouldn't we see an investor niche that supports this?" We can't do that for the current style of VC investing. Why would we need to do it for a more modest form? The other bonus is that profitable startups usually need less VC money. So given the same amount of funds, VCs could spread their investments out over even more companies.
        tinymollusk 9y ago
        I'm a little confused, but I think you restated my point. The portfolio approach appears to be the optimal strategy in an open game like startup creation, where the upside is potentially infinite and the uncertainty is really high. I guess I was asking if there are other explanations for why this is, or if the strategy appears to be optimal to others. If it is the best strategy, any discussion about unicorns versus profitably invested smaller startups is moot, because it's based on the assumption that the investment class should do something that's strategically suboptimal.
  - crdoconnor 9y ago
    >This is because the portfolio strategy (1 hypergrowth + 20 failures) is the best strategy from the VC perspective. Duh? You say that as if it should be considered surprising. It would be surprising if it were an irrational preference, not a completely rational preference. The real question is why the economy is geared towards such an uneven distribution of returns. I don't think it's a law of nature (e.g. economies of scale) because for pretty much all corporations there are massive diseconomies of scale that offset that. You just have to work at one of them to see how manifestly inefficient they are, and yet they still dominate and investors still exhibit an exceptionally strong preference for them. I think may be an artefact of the American tax and legal system which allows the use of size and wealth as market leverage to an extreme degree. Investors prefer to see one big Uber/Microsoft/Google over a hundred smaller Uber/Microsoft/Googles because that one big company, can legally use its size to crush smaller, more efficient competitors and thus achieve monopoly or oligopoly power which it can safely use to wring profits out of customers without fear of being undercut. If the legal and tax system cracked down on this phenomenon instead of covertly encouraging it (e.g. with stuff like tax holidays for Apple) I think VCs would probably adjust their preferences accordingly.
    - tinymollusk 9y ago
      Can't it simply be explained by the mathematics of decision making under uncertainty in open and complex systems? This is an interesting discussion; is it shapeable market forces (US tax and legal system) that creates these incentives, or is it something more inherent to trying to predict the outcome of a really complex problem? It sounds like you believe it to be the former, whereas I believe it to be the latter.
      - crdoconnor 9y ago
        >Can't it simply be explained by the mathematics of decision making under uncertainty in open and complex systems? Yes, my whole point is it is an inevitable outcome of the the confluence of immutable randomness, immutable human nature and the structure of our economy. However, that doesn't mean that it's a fait accompli - the structure of our economy is mutable via law and taxes. That tax system and laws help discourage lots of competing Ubers and encourage one big monopoly Uber. The question you have to ask is - is that really the most desirable outcome? >whereas I believe Belief is for gospel preachers and anarcho-libertarians. It's not rational to apply it here.
- manigandham 9y ago
  How can you predict a profitable company in the first place? If you could do that then you would just have all hypergrowth companies and make even more.
- ufmace 9y ago
  It seems they have calculated that they make so much money from having that 1 hypergrowth startup in their portfolio that it blows away a dozen total failures or even a dozen moderately successful companies. Tricky part is that companies that have the potential for hypergrowth look awfully similar to terrible ideas that will clearly crash and burn.
amarkov 9y ago
I doubt that anyone on the business side considers it uncool to build a small but profitable company. It's definitely cooler than having a VC shove you along the path to an acquisition by BigCorp Ltd. Engineers sometimes consider those companies uncool, but that's just because they usually can't pay market rate for the best engineers.
- sodapopcan 9y ago
  I just mean it seems to be the path-more-taken. I'm basing it on my limited experience and my reading about running a business (which a did a bunch of but certainly never did an in depth study). A lot of companies I look at while looking for employment either want to sell or trying to grow to a mammoth size. Don't get me wrong--there is nothing wrong with that! It's just that I personally prefer to take the paycut and work for companies whose owners are slowly building a lifestyle and tightly knit team and wish I would see more of that pop up in job listings.
  - manigandham 9y ago
    Its definitely not. VC funded startups are 0.1% of the global businesses out there. For every VC company there are 100k small businesses working on being productive and profitable.
    - sodapopcan 9y ago
      I'm talking profit focused vs growth focused. Guess that wasn't very clear. Obviously making a profit is somewhere on 100% of every company's agenda.
- sodapopcan 9y ago
  ...and yes, maybe saying "uncool" is a little hyperbolic... I sorta got that impression while reading about starting a business, but that was a while ago and I can't cite my sources.
- xchaotic 9y ago
  So much this (not the case with Basecamp who pay SF rates apparently), if one doesn't want to run the business side of things - propping up business, chasing up invoices, early HR etc, then such a small business will usually not be able to pay him as much as Facebook or Google... So it's it's good enough for the founders but not good enough for other talented engineers who'd otherwise join.
ppeetteerr 9y ago
Not sure which business world you're referring to. The only place where it may be uncool is in the heady realm of start up culture. Most other business only survive by being in the black.
- sodapopcan 9y ago
  Yeah, I'm talking about start-ups whose focus is getting and staying in the black (profits) as opposed to putting all the focus on growth and getting more and more VC. And as I mention below, I'm not ragging on the latter, just wish the former was more prevalent as that is the atmosphere I, as a developer, personally prefer.
- sodapopcan 9y ago
  Ok, I guess I was kinda ragging on the latter but I shouldn't have, haha!

crdoconnor 9y ago

shrug VCs seem to prefer 1 hypergrowth startup and 20 failures in their portfolio to 17 solid, growing, profitable startups without hypergrowth and 4 failures.

tinymollusk 9y ago
This is because the portfolio strategy (1 hypergrowth + 20 failures) is the best strategy from the VC perspective. It's nearly impossible to know which startups will succeed (high uncertainty decision making), and very difficult to know how big the successful ones could be (open ended results). If it were simply as easy as building 17 solid startups to just 4 failures, I'm sure there would be more investment in that area. It seems much more likely to have maybe 5 solid startups (20% annual profit), 5 with possibilities (losing 20-30% per month) and 11 failures. Entrepreneurs suffer from their biased perspective; of course my startup could be solid and profitable, because otherwise why would I continue working on it? Therefore it seems rational to assume you can identify prospectively profitable startups. My opinion is that VC investment is a crapshoot, where nobody knows the odds of a given company. They're buying lotto tickets, and they'd rather buy $5mm tickets that have a max prize in the billions, instead of a $100k ticket that has a max prize in the millions. To change the current system, all we need to do is come up with a guaranteed way of evaluating whether a startup will be profitable.
- itchyouch 9y ago
  They also want that billion dollar startup. Having 20x small, profitable companies netting say 1-5M/year isn't their modus operandi.
  - tinymollusk 9y ago
    A good and true point. How invalid do you think this counterargument is? If anyone could identify early-stage companies with a 75-100% chance of being profitable, wouldn't we see an investor niche that supports this? (I can think of one counter-counter argument: the hype created by VCs is so big that the investor and founder markets are acting irrationally.) Would love to hear anyone else's thoughts on this.
    - s73ver_ 9y ago
      "If anyone could identify early-stage companies with a 75-100% chance of being profitable, wouldn't we see an investor niche that supports this?" We can't do that for the current style of VC investing. Why would we need to do it for a more modest form? The other bonus is that profitable startups usually need less VC money. So given the same amount of funds, VCs could spread their investments out over even more companies.
      - tinymollusk 9y ago
        I'm a little confused, but I think you restated my point. The portfolio approach appears to be the optimal strategy in an open game like startup creation, where the upside is potentially infinite and the uncertainty is really high. I guess I was asking if there are other explanations for why this is, or if the strategy appears to be optimal to others. If it is the best strategy, any discussion about unicorns versus profitably invested smaller startups is moot, because it's based on the assumption that the investment class should do something that's strategically suboptimal.
- crdoconnor 9y ago
  >This is because the portfolio strategy (1 hypergrowth + 20 failures) is the best strategy from the VC perspective. Duh? You say that as if it should be considered surprising. It would be surprising if it were an irrational preference, not a completely rational preference. The real question is why the economy is geared towards such an uneven distribution of returns. I don't think it's a law of nature (e.g. economies of scale) because for pretty much all corporations there are massive diseconomies of scale that offset that. You just have to work at one of them to see how manifestly inefficient they are, and yet they still dominate and investors still exhibit an exceptionally strong preference for them. I think may be an artefact of the American tax and legal system which allows the use of size and wealth as market leverage to an extreme degree. Investors prefer to see one big Uber/Microsoft/Google over a hundred smaller Uber/Microsoft/Googles because that one big company, can legally use its size to crush smaller, more efficient competitors and thus achieve monopoly or oligopoly power which it can safely use to wring profits out of customers without fear of being undercut. If the legal and tax system cracked down on this phenomenon instead of covertly encouraging it (e.g. with stuff like tax holidays for Apple) I think VCs would probably adjust their preferences accordingly.
  - tinymollusk 9y ago
    Can't it simply be explained by the mathematics of decision making under uncertainty in open and complex systems? This is an interesting discussion; is it shapeable market forces (US tax and legal system) that creates these incentives, or is it something more inherent to trying to predict the outcome of a really complex problem? It sounds like you believe it to be the former, whereas I believe it to be the latter.
    - crdoconnor 9y ago
      >Can't it simply be explained by the mathematics of decision making under uncertainty in open and complex systems? Yes, my whole point is it is an inevitable outcome of the the confluence of immutable randomness, immutable human nature and the structure of our economy. However, that doesn't mean that it's a fait accompli - the structure of our economy is mutable via law and taxes. That tax system and laws help discourage lots of competing Ubers and encourage one big monopoly Uber. The question you have to ask is - is that really the most desirable outcome? >whereas I believe Belief is for gospel preachers and anarcho-libertarians. It's not rational to apply it here.
manigandham 9y ago
How can you predict a profitable company in the first place? If you could do that then you would just have all hypergrowth companies and make even more.
ufmace 9y ago
It seems they have calculated that they make so much money from having that 1 hypergrowth startup in their portfolio that it blows away a dozen total failures or even a dozen moderately successful companies. Tricky part is that companies that have the potential for hypergrowth look awfully similar to terrible ideas that will clearly crash and burn.

amarkov 9y ago

I doubt that anyone on the business side considers it uncool to build a small but profitable company. It's definitely cooler than having a VC shove you along the path to an acquisition by BigCorp Ltd. Engineers sometimes consider those companies uncool, but that's just because they usually can't pay market rate for the best engineers.

sodapopcan 9y ago
I just mean it seems to be the path-more-taken. I'm basing it on my limited experience and my reading about running a business (which a did a bunch of but certainly never did an in depth study). A lot of companies I look at while looking for employment either want to sell or trying to grow to a mammoth size. Don't get me wrong--there is nothing wrong with that! It's just that I personally prefer to take the paycut and work for companies whose owners are slowly building a lifestyle and tightly knit team and wish I would see more of that pop up in job listings.
- manigandham 9y ago
  Its definitely not. VC funded startups are 0.1% of the global businesses out there. For every VC company there are 100k small businesses working on being productive and profitable.
  - sodapopcan 9y ago
    I'm talking profit focused vs growth focused. Guess that wasn't very clear. Obviously making a profit is somewhere on 100% of every company's agenda.
sodapopcan 9y ago
...and yes, maybe saying "uncool" is a little hyperbolic... I sorta got that impression while reading about starting a business, but that was a while ago and I can't cite my sources.
xchaotic 9y ago
So much this (not the case with Basecamp who pay SF rates apparently), if one doesn't want to run the business side of things - propping up business, chasing up invoices, early HR etc, then such a small business will usually not be able to pay him as much as Facebook or Google... So it's it's good enough for the founders but not good enough for other talented engineers who'd otherwise join.

ppeetteerr 9y ago

Not sure which business world you're referring to. The only place where it may be uncool is in the heady realm of start up culture. Most other business only survive by being in the black.

sodapopcan 9y ago
Yeah, I'm talking about start-ups whose focus is getting and staying in the black (profits) as opposed to putting all the focus on growth and getting more and more VC. And as I mention below, I'm not ragging on the latter, just wish the former was more prevalent as that is the atmosphere I, as a developer, personally prefer.
sodapopcan 9y ago
Ok, I guess I was kinda ragging on the latter but I shouldn't have, haha!