2 min read

"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.