Yehuda Katz is a member of the Ember.js, Ruby on Rails and jQuery Core Teams; his 9-to-5 home is at the startup he founded, Tilde Inc.. There he works on Skylight, the smart profiler for Rails, and does Ember.js consulting. He is best known for his open source work, which also includes Thor and Handlebars. He travels the world doing open source evangelism and web standards work.

“The Bar for Success in Our Industry” — A Quibble

I read The bar for success in our industry is too low with interest. I generally like and agree with the argument that as an entrepreneur, people should build businesses around sustainable practices that involve actually making money in the short-term. The fact that the advice comes from a successful business like 37 Signals, which has actually made sustainable, long-term money, makes it further credible.

I also agree that the analysis of Evernote as a “success” on the basis of projected income earned incrementally (a month at a time) over a year from now is a pretty bizarre way to define present success.

That said, I think their success blinds them to alternative, more risky ways of being successful with technology. In Jason’s post, he analogizes web businesses to stores:

If there was an airline that flew more passengers than anyone else, but lost money on each one, would we call it a success? If there was a restaurant that served more people than anyone else, but lost money on each meal served, would we call it a success? If there was a store that sold more product than anyone else, but took a loss on each one, would we call it a success? Would the business press hold these companies up as business model successes? Would anyone? Interesting, maybe. Promising, sure. But successful? Then what the hell is going on with the coverage of our industry?

There are, however, an entirely different mode of doing business that is well-represented in the traditional sphere. While it is certainly more risky, large companies often sink millions or billions of dollars into research, hoping it will pay off by providing them a sellable product. Microsoft, for instance, spent more than 9 billion dollars on research in FY 2008, almost double what it spent on income tax. Around one in six dollars that comes in to Microsoft in revenue are spent on research.

By Jason’s argument, Microsoft Research is not “successful”, and if someone says it is, they are using an unacceptably low bar for success. It would be more appropriate to think of Microsoft as aggregating significant amounts of risky propositions into a single department, on the gamble that enough of those propositions will be successful to make the expenditure worth it, even if it takes a while for those propositions to pay off.

In effect, venture capitalists are making the exact same gamble. The underlying business model is still the same: plunk down a bunch of cash on research projects that, if successful, will result in significant payoff. The difference is that Internet businesses are very amenable to a more distributed model, where individual folks with ideas do the research, shouldering some of the risk of failure and some of the reward for success.

In other words, these sorts of businesses are simply accumulating value–in followers, users, or even eyeballs. They will be successful when they can sell that value (usually, all at once), just as Microsoft will be successful when they can ship products based on years of research (usually, all at once). According to Jason’s analysis, Twitter is not a success. That is a fundamentally flawed analysis as they have built enough value at this point to be converted into a lump-sum payoff, even if they have not yet cashed in.

However, none of this is to say that as an entrepreneur, you should build your business around the hope of such a payoff. It’s a highly risky way to build a business, and is subsidizing venture capitalists, who don’t actually share in the risk (like Microsoft, they are aggregating risk into a larger research pool). But if taking big risks is your thing, taking on a long-term research project is a perfectly reasonable way to build a business.

15 Responses to ““The Bar for Success in Our Industry” — A Quibble”

For me it’s all about risk management. Even tough I agree with you that twitter clearly has a lot of market value I like to think in terms of success rate when it comes to business models. And for me it still looks like I know (at least) a dozen traditional successful companies for each rocket like youtube or twitter.

I don’t disagree at all about the strategy most people should take as an entrepreneur. I mostly agree with Jason on that aspect of his argument. I’m quibbling with his argument that companies should not be considered successful until they are bringing in more revenue than they have expenses.

Because the payoff for a company like Twitter is all at once, it’s possible to look at the value the company brings to its investors (just as we could evaluate the value of a project to Microsoft Research), which would be measured in the things that Jason says are laughable metrics.

Good to hear your thoughts, but I stand by my point.

Might Twitter be a business success some day? Could be. Today? Absolutely not.

Same with Facebook. Maybe one day, but not today.

Is Evernote a business success if they’re making $79,000/month? Not if they can’t turn a profit. R&D, investment, and spending other people’s money doesn’t make you a success. What makes your business successful is when your business can breathe on its own. Profits are the breath.

Microsoft is a business success and has been for decades. Why? Profits. And lots of them.

@jason I’d assume that Twitter’s investors are a success (if they have money to burn). My point is just that Twitter should be evaluated by a similar analysis as you’d analyze other research projects, rather than comparing them to brick-and-mortar operations.

I think that Twitter may have been a research project for its first few years of existence (when they were developing the concept and making sure it can scale to a large enough community). Now that it is past that stage, it is a business that needs to be monetized (i.e. generate revenues to generate profits). So, while it may be fair to treat the formative years of a business as a research project, at some point, the fruits of the research are complete and a product is created. This product and its success in the marketplace is the only reason why there is a business with investors behind it.

@oleg I don’t really mean research in that sense. I’m analogizing to research to demonstrate that some endeavors are highly risky, cost a lot of money, but pay off all at once. Twitter is one such project, and the risk is being managed the same way Microsoft Research manages its risk–investors that lump it together with a number of other risky projects hoping one will pay off.

Microsoft dumping billions into research is one of the great advantages of being ridiculously profitable.

@pj right. And VCs have the same advantage — they’re doing the same thing, just distributed.

I would have thought Microsoft’s XBox division would be a more apt comparison. Microsoft sank Billions into XBox because it wanted a foothold in a market that could be worth much more.

People do talk about that as a success without any understanding of the business aims and realities that truly define it as a success or failure, but they’re teenage fanboys on video game websites, so I think I’ll give them a pass.

Actually, various journalists who you think would know better continually confuse a yearly “profit” with the whole project having a positive ROI, which is probably where the fanbois take their cue so it’s even more apt.

I also thought it’s telling that even in the middle of your analogy to research you say “research projects that, if successful, will result in significant payoff” in other words applying Jason’s metric of when and what to declare a success.

> There are, however, an entirely different mode of doing business that is well-represented in the traditional sphere. While it is certainly more risky, large companies often sink millions or billions of dollars into research, hoping it will pay off by providing them a sellable product. Microsoft, for instance, spent more than 9 billion dollars on research in FY 2008, almost double what it spent on income tax. Around one in six dollars that comes in to Microsoft in revenue are spent on research.

But this is not a /business model/. It is a profitable business deciding to take *some* of their profits for research.

@dave XBox is similar to Evernote, in that it has current revenues and is trying to bring those revenues up to profitability. I agree that claims of success in both cases are rather dubious.

Twitter, on the other hand, is making no claims to current revenues, and will cash out all at once. That’s more analogous to research divisions in general. Good catch on my use of the term “successful”. On the other hand, I think that it’s reasonable to look at the value in a research project before it has actually cashed out. In this case, Twitter’s userbase is representative of current success–it is universally acknowledged that they could cash out now if they wanted to.

@jeff sure it is. These companies are performing “research” for their investors in the hope that they will build enough value in their products to justify the original investment. Again, I consider what they’re doing to be distributed research for the VCs, who are the ones with the solid business model ;)

A “successful business” it too much of a composite property these days. I think it’s probably more accurate to represent “success” contextually. Some of these web companies that have many users but poor (or non existent) profit margins are clearly successful at attracting users, but unsuccesful at making money from them. Then, there are companies that are successful at turning a profit on higher ticket items, despite not attracting even a fraction of the number of customers.

Some would argue that a sucessfull business is one that makes money — and I’m not sure I’d disagree with them, but as you point out, one often has to spend money — first to build the product and second to attract users to have any hope of financial return.

Hello Yehuda, first of all let me thank you for your Blog, I have been reading it with great interest since the beginning of the year. I much appreciate all the work you are doing on refactoring Rails, and making it more performant.

I blinked when I read your Blog post, because its the first non-technical post I have read from you. Usually its about some realtively hard to understand, callback optimisations that I find fascinating to read because I only sort of understand what you are doing, and trying to figure out the rest.

I wanted to write a reply to this post 2 days ago, and then decided to wait… I counted to 1000 … and yes now I get what its all about. Its more of a religous debate which is currently going on all over the internet, and the Press is behind it. Its about the free culture of the internet being fundamentally questioned

I just want to remind folks how the internet actually got started. It was an infrastructure for research, created by Darpa and much of it was run on servers of public entities like University’s. Some individuals. Dennis Ritchie, Ken Thompson, Rob Pike und Brian W. Kernighan produced some important works and technologies that are still being used today, maybe I should also mention Linus Torvalds although that was much later. Its funny but I don’t think any of them were thinking about profit, and yet look what they did for all of us. Of course everybody has to pay the rent, but there is still a big difference, to being purely profit oriented.

I’d also like to mention that 79.000 per month is probably more profit then GM is currently making. and more than AIG and Lehmann were making in the last year, I mean just to be fair. So the debate is religous is it not?

I like the Ruby Business Model above all the others because it makes programmer happiness the top priority, putting the fun back into programming. This cannot be underestimated, because happy programmers will produce more good stuff in less time. And that is something I think we all deeply care about.

Google is a very unique story. What they did is truely a Web business model and they made it work remarkably well. They are the envy of every other Software business today. There is considerable debate going on if and how the classical old school software vendors are going to get into the Cloud and how they will do Software as a Service and if they can be successfull at it. I would note that google is being sued in France for making google-maps free…

I find Ruby and Ruby on Rails the most promising platform here today, I feel this way because I have been deeply involved in large developement projects done in Java especially in the scalability testing, and deep diagnostics. Hopefully also that new technologies will be rapidly enabled such as distributed in-memory databases.

Have a nice day, and thanks for the great work.

I had a tough time with that article by Jason as well.

New Leaders makes money so it is always tough to swallow when I hear companies base their success on weird metrics. Facebook for instance loves to say “People spend 3 billion minutes a day using Facebook” which means nothing. Calculating page views, users, downloads is just a fancy way to justify the investment made. All of which are just strange excuses to keep going and make people think “Some day they’ll figure out how to make money.”

Fascinating, I know…

On the other hand, renting web-apps to people seems fashionable but I have yet to see anyone beyond Salesforce.com prove the model financially. Salesforce really rams it down corporate customers throats which works well for them. There is no doubt that SaaS makes some money but is it really as lucrative as owning a clothing brand, writing a book or owning popular chain of restaurants? Probably not.

This leads me to believe only one thing — Who cares. Do what you love to do.

I can’t buy stock in 37signals, Facebook, Twitter or even Evernote. Any discussion about their success — real, fake or otherwise means nothing to me. If they have a service I like and that works for me — great. If they make money, lose money have a crap load of users really doesn’t effect me much. It isn’t of my concern because I can’t experience it.

So, each on to their own. I recommend not comparing each other and just do what you think is best for your customers and your company. Be positive as much as you can and pay no attention weird metrics that competitors base their success on.

Survival is success. You’re happiness is all that matters. Focus on that.

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