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<sigh> 37Signals' products weren't profitable for a year or more, if memory serves. They took "investment" from the other side of their business (consulting).

<sigh> 37Signals' products weren't profitable for a year or more, if memory serves. They took "investment" from the other side of their business (consulting). Every month, when their product revenue grew, I'm sure they were thinking, "Wow, we're going to be profitable in X months"... and eventually, they were. Product profitability takes resources. You need: 1) Time (you can accelerate this with cash if you're disciplined) 2) Money (you can use savings, investment, or you can "buy" money/time with consulting) That's immutable. EverNote and their ilk ("our ilk", I should say, as RescueTime falls squarely in that world) is trying to build a business formula that works... And it looks like they're succeeding. Presumably they could cut dev staff, stop all experiments, and get to profitability MUCH sooner-- maybe even today. But that's how business works, right? It's all about intelligent debt to ultimately maximize the metrics you care about (presumably some combo of growth, revenue, profit, and lifestyle). You hire an employee, and you are spending time and money on them for a while before they are really contributing. You take funding so that you can run the experiments that require capital. You take your consulting profits and pump them (and your spare time) into product efforts. And some businesses scale differently than others (Amazon is a great example). That's ALL DEBT. And it can all be smart debt (like a mortgage used to be!). Just because companies are choosing a different flavor of debt or choosing markets that scale differently doesn't make them bad. I personally am THRILLED to give up a relatively small stake in our company so I don't have to consult and can run experiments about as fast as I want to. Scarcity FORCES you to be smart-- but the lack of scarcity doesn't mean that you CAN'T be.

defunkt 17y ago
I think the point is that the article is talking explicitly about how to "turn a profit" and using, as an example, a company which does not turn a profit.
- webwright 17y ago
  Yep, and I think that's stupid. Strictly speaking, they aren't profitable. Of course, GROSS profit (sales - COGS), they might be. We don't know. But consider the following scenario: I have an apartment building, and I clear $10k per month on it in clean profit. Yum! But I've got bigger dreams, and I know that if I had ANOTHER apartment building, there'd be scaling economies in terms of management and maintenance staff as well as marketing. But $10k a month isn't going to build/buy another building. So I take out a loan whose monthly debt service is $30k per month. All of a sudden I'm unprofitable, right? Except that as soon as I get my 2nd building up and full (a 2+ year process, quite a long time to be "unprofitable"), I'm clearing $70k a month. Until the end of time. Short term (voluntary) pain for a long-term gain. Evernote is doing the same thing. You don't build something like Evernote and get to profitability super quickly because of the economies of scale (much like Amazon). But the other place where 37s is wrong is totally dismissing forecasting, which at this scale works pretty well. When dealing with signup and conversion rates like Evernote has, it's actually pretty statistically significant. You can predict where you'll be in 12 months and it's pretty easy to calculate how what your COGS is going to looking like when you're serving 10m users instead of 100k. Just like Facebook, Evernote could reduce their investment in growth. They could trim staff and they could turn the screws a bit on their free users to up their conversion rate. But given how the scaling works out, I think they are likely making the right choice with their investment/debt. By delaying this as long as they can, they can ultimately have a higher margin business.
  - tjogin 17y ago
    True enough. But still though, why not wait until a company is actually profitable before we herald their business as a great example of profitability. Lots of things can happen along the way — a lot of the times it doesn't end well at all. Given that there actually does exist plenty of companies that are profitable, why not let one of those provide the shining example of profitability, rather than one that isn't yet profitable (but might, or might also not be in the future).
boucher 17y ago
Nobody is arguing those facts, and I don't think anyone at 37 Signals is naive enough to claim that you can't grow faster by spending more money (and going into debt, in whatever form). From where I'm sitting, the point is that such a company shouldn't be called a success. Projections may be good, it may be very likely they will pan out, but until they actually do, the business is not a success, it's still theoretical. If it turns out, because of unknown factor X you completely deplete the market before you become profitable, your business model is no longer a success. There are too many unknowns to guarantee that any company which looks likely to be profitable actually will be.
- webwright 17y ago
  I dunno. This is deserves a celebration. It's a fucking triumph! These guys made a product that no one really competes with and are making real money largely giving it away. It seems pretty clear that it scales pretty beautifully and that they could turn the screws a bit, experiment a bit, and make a huge pile of profit off of this. I'm all for thumbing your nose at some/most free apps, but EverNote has really proven something and deserves praise. There seems to be real (reinvested profit) buried under the growth/r&d spending.
  - ekiru 17y ago
    The whole point of the article is that Evernote is not making money and aren't even expected to break even until 2011.
    - boucher 17y ago
      They are very clearly making money. They are just spending more than they make. Revenue is still an important metric. Many companies which are supposedly successes still have $0 in revenues. Saying such a company is already successful is much worse than saying the same about a company with significant revenues but still no net profit.
    - webwright 17y ago
      Yeah. Same with Amazon when they were a few years in. Were they worth writing about back then? I think so.

defunkt 17y ago

I think the point is that the article is talking explicitly about how to "turn a profit" and using, as an example, a company which does not turn a profit.

webwright 17y ago
Yep, and I think that's stupid. Strictly speaking, they aren't profitable. Of course, GROSS profit (sales - COGS), they might be. We don't know. But consider the following scenario: I have an apartment building, and I clear $10k per month on it in clean profit. Yum! But I've got bigger dreams, and I know that if I had ANOTHER apartment building, there'd be scaling economies in terms of management and maintenance staff as well as marketing. But $10k a month isn't going to build/buy another building. So I take out a loan whose monthly debt service is $30k per month. All of a sudden I'm unprofitable, right? Except that as soon as I get my 2nd building up and full (a 2+ year process, quite a long time to be "unprofitable"), I'm clearing $70k a month. Until the end of time. Short term (voluntary) pain for a long-term gain. Evernote is doing the same thing. You don't build something like Evernote and get to profitability super quickly because of the economies of scale (much like Amazon). But the other place where 37s is wrong is totally dismissing forecasting, which at this scale works pretty well. When dealing with signup and conversion rates like Evernote has, it's actually pretty statistically significant. You can predict where you'll be in 12 months and it's pretty easy to calculate how what your COGS is going to looking like when you're serving 10m users instead of 100k. Just like Facebook, Evernote could reduce their investment in growth. They could trim staff and they could turn the screws a bit on their free users to up their conversion rate. But given how the scaling works out, I think they are likely making the right choice with their investment/debt. By delaying this as long as they can, they can ultimately have a higher margin business.
- tjogin 17y ago
  True enough. But still though, why not wait until a company is actually profitable before we herald their business as a great example of profitability. Lots of things can happen along the way — a lot of the times it doesn't end well at all. Given that there actually does exist plenty of companies that are profitable, why not let one of those provide the shining example of profitability, rather than one that isn't yet profitable (but might, or might also not be in the future).

boucher 17y ago

Nobody is arguing those facts, and I don't think anyone at 37 Signals is naive enough to claim that you can't grow faster by spending more money (and going into debt, in whatever form). From where I'm sitting, the point is that such a company shouldn't be called a success. Projections may be good, it may be very likely they will pan out, but until they actually do, the business is not a success, it's still theoretical. If it turns out, because of unknown factor X you completely deplete the market before you become profitable, your business model is no longer a success. There are too many unknowns to guarantee that any company which looks likely to be profitable actually will be.

webwright 17y ago
I dunno. This is deserves a celebration. It's a fucking triumph! These guys made a product that no one really competes with and are making real money largely giving it away. It seems pretty clear that it scales pretty beautifully and that they could turn the screws a bit, experiment a bit, and make a huge pile of profit off of this. I'm all for thumbing your nose at some/most free apps, but EverNote has really proven something and deserves praise. There seems to be real (reinvested profit) buried under the growth/r&d spending.
- ekiru 17y ago
  The whole point of the article is that Evernote is not making money and aren't even expected to break even until 2011.
  - boucher 17y ago
    They are very clearly making money. They are just spending more than they make. Revenue is still an important metric. Many companies which are supposedly successes still have $0 in revenues. Saying such a company is already successful is much worse than saying the same about a company with significant revenues but still no net profit.
  - webwright 17y ago
    Yeah. Same with Amazon when they were a few years in. Were they worth writing about back then? I think so.