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Building for value and profit

Mar 22nd, 2010
by Farhan.

There’s an interesting discussion off of Jason Calacanis’s latest This Week in Start Ups with David Heinemeier Hansson (DHH) of 37signals about running a company and scaling. In a nutshell, Jason’s point is that there is finance available and companies should try and raise money to “swing for the fences”. DHH say’s that’s crap, companies should focus on making money. Contrast that with Ben Horowitz talking about building a case for the Fat start up, one that raised buckets of money to really operate at a high level and Fred Wilson disagreeing with that. So who’s right? They all are.

There’s no right way to build a big business, I don’t believe raising buckets of money is a bad thing, I also don’t believe focussing on being amazingly profitable as soon as possible is wrong either. It’s all about how you measure success. Companies may not be profitable but they may be providing a bucket load of value that doesn’t make tonnes of profit – for now, with a return coming at some time in the future. Twitter was raising money figuring stuff out, and then turned a switch and got to broke even. Facebook raised a bucket of money as well and is just getting to profitability. YouTube sold for a boatload and wasn’t making much money till recently. But could we imagine our lives without YouTube, Facebook and twitter? I don’t think so. These services provided a lot of value before they made a lot of money. But they will make a lot of money in the future, but they created a lot of value.

Leaving Yahoo! and starting my own thing has lead me to worrying about the same fork in the road. Do we get investors and try to invest in the product to produce the most value while playing around and figuring out the value or do we turn on the revenue tap and hope that we’re able to get to profits quickly to fund development? It’s a question we’re struggling and we’re trying to go for both. Turning on and working in quick development cycles, but trying to raise money as well to invest in some of the ideas we have that will build out more value.

There is no wrong answer here, you have to do what’s best for yourself, your company and your users and sometimes the answer isn’t totally clear. Building for value or building for profit or building for both, as long as you’re in touch with which direction you’re going in, can help you create a big sustainable business.

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Posted in: business, entrepreneurship, internet, technology.

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  • isofarro2

    The decision is very much a risk/reward. Taking a small risk that generates a steady profit means the business is self-sustaining. It stands and falls on it's own business model, and steady progress building up a company is a cautious way through. Sure, it will take a long time, or perhaps never, to become a massive organisation, but do you have to be a massive organisation to be a success?

    The batting for the fences is building new ideas without a business model. That's a substantial risk. Burning through someone elses' money building the idea, and when that's conceptualised into a working product only then try to find a way of monetising it. Yes, Twitter and Facebook came that way, and thousands of other equally minded startups didn't. Massive risk, and a potentially massive payoff for that tiny majority that succeeds.

    I think DHH makes an incredible point in the Twist interview when he pointed out that the new definition of “success” means having an exit strategy where another company purchases your startup for a big chunk of money. That's not profit, well, the founder profits, and in his mind it's a success because he exited profitably.

    But is it really profit? You mention YouTube are now making money, but how long will it take to pay back the billion plus Google paid for it, and the engineering hours spend developing on it since? It seems to me YouTube is now on a slow path to maybe becoming a self sustainable entity.

    Maybe the question isn't whether to be self sustainable or hit for the fences but something like: “When are we going to seriously consider when to be a self-sustainable business”? With Yahoo, Facebook and Twitter, the answer was a couple of years after spending boatloads of cash. For countless thousands of startups, the strategy of deferring sustainability was pushed beyond their existence – the startup died before it could safely get to the self-sustainability.

    I am however surprised by the number of startups who's sole success motif is to be acquired, so a self-sustaining business model seems to be an optional extra, or someone else's problem, if there's anything there by that time.

  • http://www.fiftybyfifty.com/lifeoffarhan/ farhanlalji

    Fantastic points and comment Isofarro2.

    I think Goog will eventually make the money back, and they can take the hit of spending to make the money back over the long run. There's a bit of competitive nature in the acquisition there, “if we don't buy it our competitors will and then they'll own video and everything you could do with video”. To me that's still a success for the YouTube founders and the community who benefit from the service YouTube provides.