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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.

by defunkt 17y ago

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).

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.

by 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).