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Let's try more succinctly. "Stop claiming your lemonade stand is profitable if it only pays for itself if you don't count the person selling the lemonade." Th

Let's try more succinctly. "Stop claiming your lemonade stand is profitable if it only pays for itself if you don't count the person selling the lemonade." That's fair. But the Internet doesn't work that way. If you develop something once, you don't need to keep standing there and keep developing it. The whole reason the article is wrong can be boiled down to this. For more nuanced response you can see my other comments. Basically, it would be like saying, "A restaurant that makes 50,000 per month in profit isn't profitable if the person who made it is Bill Gates." Since, "automatically" Bill Gate's time is worth a lot more doing just about anything else other than launching a restaurant. But come on. When it comes time to buy the restaurant and see how much it makes in profit so you can see how much you will pay for it - do you really think you'll reconsider the whole thing as unprofitable just because Bill Gates spent way more of his time on it than can possibly be valued at as low as that? Get real. From an investment standpoint, nobody cares about the founder's development time. And guess what the article is about? Investment standpoint.

tptacek 14y ago
Nobody disagrees with this. If the business runs without your consistent involvement, the value of your time doesn't factor in, because your time isn't one of the costs of the business. If you have a business that throws off $1500/mo and requires one hour of your time in each of those months on average, you absolutely are ~$1300/mo profitable. That much is obvious. The problem is when your business is throwing off $1500/mo and you are spending more than 8 hours on it in a month.
- its_so_on 14y ago
  The author does disagree with this. He's saying if you're still sinking your time into the development, you have to subtract it from sales before you can cry "profit!", even if the profit is the result of previously sunk development costs that don't require ongoing involvement. The author doesn't differentiate types of development costs on this point. Most Internet development is invested into future profit: it's not standing in front of your lemonade stand.
  - tptacek 14y ago
    He's right about that. Nobody, however, is saying that once you've recouped your investment, your hourly bill rate needs to somehow factor into your profitability.
    - its_so_on 14y ago
      I will just say that people very much are saying that. You're pretty much saying that as demand for you goes up and down elsewhere, the profitability of your business goes up and down. And if someone wants to make your business unprofitable, they can just offer you a hundred million dollars to go work for them and drop it - even if you continue on the business, it's suddenly unprofitable. This is obviously totally false. Let's do this thought experiment. Say I would accept this if the author said that true profitability is only the amount that the company would clear if you spent less than a minimal frictional amount of time hiring someone (from company revenue) at rock-bottom wages, to keep running the company. but if we accept this, notice something interesting. What if the way to get someone at rock-bottom wages is for the company to issue some shares (which means a percentage) and pay the worker in those shares? Can the company still be profitable (though you're diluting the profit) on those terms? From your point of view, OF COURSE! The author is talking about the point of view of an investor. ("Stop telling me your company is profitable.") He's not arguing from the point of view of what's worth your time: "stop thinking that if you're profitable it's worth it for you to do that." The two are totally distinct. If the company has someone on payroll at $0 because they think their work is worth investing in exchange for the 30% equity they have, then the profit the company generates for the 70% stakeholder who doesn't have to put time in is simply 70% of company revenues minus company expenses such as hosting. That doesn't mean the person who is working for $0 and equity isn't getting screwed. But it also does't mean the company isn't profitable. The whole article is completely wrong and I've told you why here and in my other comments. Would you buy a company for a thousand dollars that had paper profits of five thousand dollars a month and will for the next two years, but actually this isn't "real profit" because the founder, who had been earning five hundred thousand as a President at Microsoft, put five years of labor into it unpaid? Of course you would buy it. That's real profit the company's making. It doesn't have to recoup the founder's lost opportunity cost over the ENTIRE life of the company in order for it to be a profitable company.
hythloday 14y ago
More like "A restaurant that makes 50,000 per month in profit isn't profitable if the person who made it is Bill Gates, if Bill Gates has to work as the maitre d'hotel for 40 hours a week, and that's the only way the restaurant can get any foot traffic". And, actually, that seems like a reasonable analysis.
- its_so_on 14y ago
  Except what you miss is that Internet sites don't have maitre d's. They only have development costs and hosting/service agreement costs.
  - hythloday 14y ago
    You seem determined to not look for similarities, so, to spell it out, the "is Bill Gates" translates as "is willing to work for less than market rate" (presumably in the expectation of upside). If your work isn't so exciting that you can get people at less than market rate, wonderful, but I imagine most isn't.

tptacek 14y ago

Nobody disagrees with this. If the business runs without your consistent involvement, the value of your time doesn't factor in, because your time isn't one of the costs of the business. If you have a business that throws off $1500/mo and requires one hour of your time in each of those months on average, you absolutely are ~$1300/mo profitable. That much is obvious. The problem is when your business is throwing off $1500/mo and you are spending more than 8 hours on it in a month.

its_so_on 14y ago
The author does disagree with this. He's saying if you're still sinking your time into the development, you have to subtract it from sales before you can cry "profit!", even if the profit is the result of previously sunk development costs that don't require ongoing involvement. The author doesn't differentiate types of development costs on this point. Most Internet development is invested into future profit: it's not standing in front of your lemonade stand.
- tptacek 14y ago
  He's right about that. Nobody, however, is saying that once you've recouped your investment, your hourly bill rate needs to somehow factor into your profitability.
  - its_so_on 14y ago
    I will just say that people very much are saying that. You're pretty much saying that as demand for you goes up and down elsewhere, the profitability of your business goes up and down. And if someone wants to make your business unprofitable, they can just offer you a hundred million dollars to go work for them and drop it - even if you continue on the business, it's suddenly unprofitable. This is obviously totally false. Let's do this thought experiment. Say I would accept this if the author said that true profitability is only the amount that the company would clear if you spent less than a minimal frictional amount of time hiring someone (from company revenue) at rock-bottom wages, to keep running the company. but if we accept this, notice something interesting. What if the way to get someone at rock-bottom wages is for the company to issue some shares (which means a percentage) and pay the worker in those shares? Can the company still be profitable (though you're diluting the profit) on those terms? From your point of view, OF COURSE! The author is talking about the point of view of an investor. ("Stop telling me your company is profitable.") He's not arguing from the point of view of what's worth your time: "stop thinking that if you're profitable it's worth it for you to do that." The two are totally distinct. If the company has someone on payroll at $0 because they think their work is worth investing in exchange for the 30% equity they have, then the profit the company generates for the 70% stakeholder who doesn't have to put time in is simply 70% of company revenues minus company expenses such as hosting. That doesn't mean the person who is working for $0 and equity isn't getting screwed. But it also does't mean the company isn't profitable. The whole article is completely wrong and I've told you why here and in my other comments. Would you buy a company for a thousand dollars that had paper profits of five thousand dollars a month and will for the next two years, but actually this isn't "real profit" because the founder, who had been earning five hundred thousand as a President at Microsoft, put five years of labor into it unpaid? Of course you would buy it. That's real profit the company's making. It doesn't have to recoup the founder's lost opportunity cost over the ENTIRE life of the company in order for it to be a profitable company.

hythloday 14y ago

More like "A restaurant that makes 50,000 per month in profit isn't profitable if the person who made it is Bill Gates, if Bill Gates has to work as the maitre d'hotel for 40 hours a week, and that's the only way the restaurant can get any foot traffic". And, actually, that seems like a reasonable analysis.

its_so_on 14y ago
Except what you miss is that Internet sites don't have maitre d's. They only have development costs and hosting/service agreement costs.
- hythloday 14y ago
  You seem determined to not look for similarities, so, to spell it out, the "is Bill Gates" translates as "is willing to work for less than market rate" (presumably in the expectation of upside). If your work isn't so exciting that you can get people at less than market rate, wonderful, but I imagine most isn't.