SEASON 2 - EPISODE 125 - OCTOBER 2, 2024

Achieving Optionality

37signals’ co-founders Jason Fried and David Heinemeier Hansson explore the many benefits of having full control over their business. They talk about the importance of taking measured profits and running an efficient operation, which allows freedom to create without constraints. This approach gives them room for trial and error and plenty of flexibility for expanded opportunities.

Watch the full video episode on YouTube

Key Takeaways

00:41 - The launch of Writebook confirmed 37signals’ achievement of optionality
03:19 - Ideas and decisions don’t have to be perfect when a company is run efficiently
09:26 - 37signals history with buyout offers
11:22 - When it was tempting to consider venture capital offers
18:03 - Finding fulfillment in doing what you love rather than creating solely for profit

Links & Resources

Transcript

Kimberly (00:00): Welcome to Rework, a podcast by 37signals about the better way to work and run your business. I’m your host, Kimberly Rhodes, and as always, I’m joined by the co-founders of 37signals, Jason Fried and David Heinemeier Hansson. Well, if you’ve followed 37signals at all or listened to REWORK the podcast, you’ve heard us talk about the importance of being able to control your entire business, not taking VC funding, not having a board to report to. Jason and David feel very strongly about that and recently Jason wrote about this as “Achieving Optionality.” I’ll link to that in our show notes. But Jason, why don’t you take us through kind of what you’re thinking. Optionality, what do you mean by that in this context?

Jason (00:41): This came up because we just launched this new product called Writebook, which is a free product and we give away the code and the whole thing for free with no obligation. You can’t pay us for it, it is just free, free. And I was thinking about that and I go, we did that because we could. It’s a luxury, frankly, to be at the place where you can spend three months or four months on something and just decide to give it away for free, not intending to initially. If you’re going into something saying this is going to be an open source thing and we’re going to give it away for free from the beginning, one story, but we actually were planning on charging for this when we decided at the end not to and just give it away for free. And it just struck me as like that is a rare thing and it’s a luxury and it’s an option and it’s only an option because nobody would tell us that you shouldn’t do that, that you couldn’t do that.

(01:26): That would be a mistake, that why dare you do that? And I kept thinking like, well, what does that really mean? It really means we’ve achieved optionality. It means that we can essentially do what we want to do without having to report to anybody or ask people’s permission. We don’t have to go to a board and we don’t have to explain ourselves. Now you can also do this and go put yourself out of business by being an idiot. Sometimes these additional structures can be useful. Someone can be like, that is actually really stupid. You shouldn’t do that. And they’re probably right, ok? But in most situations you couldn’t do what we just did if you were beholden to somebody else or to something else. And I just felt like I wanted to write up something about that idea because that really sparked it in me. We were just talking on another podcast about how at one point we were experimenting with what if we doubled the size of the company, what would that look like?

(02:18): And we set out to do that and then we decided we don’t want to do that. And we stopped doing that. And it feels like a little bit like whiplash, but to me it feels more like optionality. We can try something, decide if we want to keep doing it, decide if we don’t want to do it, change course if we want to. Hopefully you don’t do that all the time, but you can do it when you want and you don’t have to explain yourself or make excuses or save face in a way where you have to explain a decision away in a way that you don’t even believe just to sort of get over it. We can just say, you know what? That’s not right anymore. And there’s a lot of things that businesses can achieve. People talk about all the time. You can achieve profitability, you can achieve certain revenue growth, you can achieve user growth, you can achieve all these things. I think achieving optionality is sort of above them all. Ultimately, of course, if you’re not profitable, you don’t really have optionality in many ways. So I think that’s tied to it, but I do think it’s sort of broader than just profit. It’s a bigger thing and I don’t hear about it talked enough about, and so I figured I’d write it up and share the idea.

David (03:19): What I love about optionality is the liberation from having to squeeze the lemon too hard, that we can allow some drops to be left. Jason’s had another good way of putting it. We can allow to leave some money on the table. We don’t have to take all of it. There’s not a drive that it has to be just all, all, more, more all the time. Now again, the reason why you don’t have to take all the money off the table is that your chest is already quite full, that you already have something there, that there’s a buffer and that buffer and that margin is really what allows the optionality. It’s allowed us to go like, you know what? Let’s just give this one away for free. Another example of this, Jason and I have talked several times about pursuing certain business opportunities like new apps that we know or feel highly confident we could make a good buck here.

(04:15): And the reason we don’t do it is that just we don’t want to. We don’t want to solve that problem perhaps again or in a new way, even if we feel we have a clear shot at potentially quite lucrative of an opportunity, we just don’t have to do that. There’s enough of a buffer, there’s enough of a margin, there’s enough juice from that initial squeeze that we can say we just work on things we want to work on in the way we want to work on them, and that’s enough. It doesn’t have to be more than that. Now, that optionality, again, for the fifth time, is a product of running things well, running things prudently, getting out in front of your skis, don’t taking big risks with the company itself. Taking risks in all sorts of ways that are risks on ideas or risks on a product, or all these other you’d call them perhaps minor risks that aren’t about risking the whole enterprise.

(05:17): When you do that, you don’t have to be right all the time. That’s one of the optionalities I really enjoy. Not having to be right all the time. Being able to go, do you know what, let’s just try it. Another example of this was we tried fairly large, at least for us, marketing campaign that we started I think two years ago or something. We committed multimillion dollar budget to it and we tried a bunch of things in that and do you know what? A lot of it didn’t quite pan, didn’t quite work. And yet when we look back upon the experience, I’m really glad we did it. I’m glad we tried. I’m glad we took a gamble on a bunch of things and a bunch of experiments even if they didn’t pan. That’s the pleasure of playing the game. There’s enough chips on this side of the table that we’re not going all in on scarcely anything at all, but we have enough chips that we can keep playing for a very, very long time.

(06:09): We can even go through some cold streaks if that is what it is and the cards don’t come up our way and we can simply enjoy the game. And I think this is one of the things I’ve really changed my perspective on over the years. I used to look at bets that didn’t pan out as regrets, things I should have avoided or problems that came up as nuisances and inconveniences. And I’ve really changed my mind to the fact that like, no, that’s actually the fun part. It’s the fun part when you take a bet and you play a game and you don’t win and you can still go, that was enjoyable. I don’t have to win every round to enjoy sitting at the table. I don’t have to be right all the time. In fact, it’s better when I’m not. If some of the times we’re wrong, it means we’re still learning.

(06:58): We’re right about everything all the time. A, we’re probably not taking enough risks. B, we’re probably delusional. C, we’re not learning. And again, after 25 years of this enterprise, if I’m not still learning, then what are we doing? Again, there’s enough chips on this side of the table that’s not what’s the driving force anymore. The driving force for me is to show up and be wrong so that I can learn something. Not wrong all the time. I hope that some of those lessons inform better decisions going forward and we also book some wins, but being wrong enough of the times that keeps it interesting. And then also facing enough problems, enough difficulties or dilemmas that I have to stretch that I have to actually see what I’m made of either in terms of my technical competency or ability to run a good company or our ability to create attention as part of our marketing exercise. That should have some problems in it.

(07:54): If it doesn’t have some problems, it doesn’t have any challenge, it doesn’t have any tests. So I’m left with just thinking, do you know what? Yeah, a little bit more wrong or not even more wrong, just like out of the slice. Another way to look at it, if you’re constantly winning at whatever table you’re at, you’re at the wrong table. You’re playing people below your skill level, you’re not going to level up. I face this in racing. I get good enough for a certain circle to be the fastest and I’m like, if I’m going out on track and every single time I’m the fastest, I’m not getting any faster. I’m probably actually getting slower. You will blend to whatever the average is of the group you’re in. And that’s not a way to improve. So whenever you’re in that realm, you got to go like, alright, let’s try a little higher, let’s try the next division up. And I think of the same way for us when we try products and so forth, we should be setting our sites not just as what do we think could be profitable, but what’s the next division up? What’s another step where we think, do you know what? That’s not a slam dunk. That’s not a sure thing. That’s going to require us to be on our toes and actually get a little better. Such that, again, whether it turns out well or not, we come out on the other side stronger, wiser, smarter, maybe even a little humbler.

Kimberly (09:14): Okay, well this idea of being in total control of your business, I’m curious, and you can tell me, it’s none of my business honestly, over the 25 years, I’m sure you’ve had offers to buy out your company. Have you ever been tempted?

Jason (09:26): Yeah, we’ve had a lot of offers. Not like really offers put on the table in front of us, but we’ve had, I could go into my HEY account and look up, I have a tag called Investors.

Kimberly (09:37): I love that.

Jason (09:39): And there’s hundreds and hundreds of emails in there over the years of people who’ve reached out either to invest or to acquire or whatever, but we’ve never let it get to the place or the point where we would actually ever entertain any of those things. We had a few conversations with people because it’s just a prudent thing to do occasionally. I dunno what’s going on out there? We could learn something here perhaps. There’s a private equity firm that reached out years ago and we spoke with them a handful of times because the guy was really interesting and we learned a bunch about how things are valued and what’s going on and how much they paid for someone else and whatever.

(10:13): That was interesting. But yeah, we’ve never really entertained selling the business and people ask this all the time and it’s like at some point a business either dies, continues on forever, which it doesn’t unless you’re, maybe you’re some Japanese company that’s been around for like 3000 years or whatever. There’s some really old companies there but either dies or it gets acquired or it merges or something will happen at some point to the company. I mean it could last a hundred years under other people’s ownership or management, I don’t know. But there will come a time when it’s time to consider that more strongly. But up until now, we’re just really thrilled about doing what we’re doing. And in fact right now we’re actually, I think we’re the most focused on making new things than we’ve ever been. We’re currently making two new products right now at once, the same time, I should say ONCE is another brand that we have, but at the same time. We just built two other products last year, actually three, and we’re making a lot of stuff right now. So we’re in a good place. I think if we were thinking about winding down, we wouldn’t really feel like we’re in a good spot. We wouldn’t be building more stuff. But again, who knows what the future holds, but it’s just not something that’s been on our minds.

David (11:22): I will like to admit to a phase when the temptation was greater, and that was prior to Jeff Bezos buying a small slice of the company from Jason and I directly. Not to put money into the business because the business has been profitable for day one, but to frankly put money into the two of ours bank accounts just that we would not be tempted. And this is all the way back in 2006, and I remember the pivotal moment, which was when Flickr got acquired by Yahoo for I think it was $20 million. $40 million.

Jason (11:51): $20 million. Yep. Twenty.

David (11:54): $20 million. And I remember thinking that is such an astronomical sum of money. And of course it is by today’s standards, it’s an absolute pittance, right? VCs barely seem to get out of bed unless there’s a promise of a billion dollar payoff. So 20 million’s ridiculously small. But that number was one of the first numbers that were widely known as we came out of the.com bust. And at the time we were doing well, the company was growing, but not to the tune that there were millions of dollars just gushing into our bank accounts from some spigot somewhere. And when the VCs showed up and started sort of dangling the prospects of tens of millions of dollars, it wouldn’t necessarily go out into our bank account, it go into the business. But it felt like, oh, that’s tempting. I’m forever grateful that we ended up with an arrangement with Jeff where he took this minority stake that didn’t give him any control over the business, that didn’t limit our optionality in any way whatsoever.

(12:54): In fact, Jeff is still on board now. What is that going to be? 18 years later, we paid him back many times over. He continues to get his check whenever we do distribution from the company, but no incursion or no limitations on our optionality. And in fact, we were given that gift of not having to look at another offer for quite a while because there was enough there, there was enough chips taken off the table that we could go, even if this thing crashes and burns we’re not going to regret not signing up with some fancy VC and steering the ship in whatever direction they were interested in doing. There was enough off the table. And I do think that’s important. And for some companies like ours, it happened in that arrangement with an investment. For other companies, it happens as part of the bootstrapping. This is why I’ve always been a huge advocate of continuing to take money off the table.

(13:47): I think Jason, you have this saying from your dad, something like no one ever went broke taking a profit. And if you continue to take a profit every year, yeah, the company might very well end. Most companies do. We’re already long, long into the tail end of how long, especially companies in technology lives. I mean 37signals has been around since 1999. That is quite the run. Very small number of companies staying around for that long. But do you know what? If it had ended after 10 years or 15 years, we would’ve taken enough chips off the table. We’ve taken enough profit off the table to not be full of regret. And that’s one of the things I like to emphasize when we talk about profits is it’s a way of minimizing your eventual regret when things end because they can end at any moment.

(14:34): That’s one of the negative visualizations I’ve had with me almost since day one. Things are going very well. Some years it was going so well I got very skeptical in the sense of, do you know what, there’s no way this could last. And in some degrees it didn’t. There are some circumstances, some years of particularly extravagant margins or whatever and they don’t last forever. But, we took enough off the table with the realization that we are mortal as a company. No immortality here. We have not found sort of the holy grail of what is it in the first Indiana Jones? The cup of immortality there. No, we are as mortal as any other company. We are one terrible scandal, blow up two data centers going up in flames at the same time because a meteorite and an earthquake hits on either side of the continent.

(15:28): There are all these things that can happen, sometimes even less spectacular than that. Do you know what, Jason and I could be on a plane at the same time and that plane doesn’t land on a landing strip. It happens. I mean that is literally the history of business things ending, right? So how can you prepare for that both mentally that you don’t become this bitter person if it’s over. In fact, for 10 plus years of doing this negative visualization, I usually end it with a saying to myself, do you know what? If this was over tomorrow, I would look back upon the experience with immense gratitude. What a privilege to have had all these years to work on really interesting problems with amazing people able to share open source here, there, and everywhere, able to give products away when we didn’t need to squeeze that lemon, ability to impart some lessons onto others.

(16:23): What a pleasure. We are so far into the gravy train of this operation that we should just think of every additional day as, I mean now it gets really sappy, but like a blessing, not taking it for granted. If it ends tomorrow, we will still be thankful for the entire ride. And it is, I will also say in sort of a very material sense, it’s much easier to have that disposition if you feel like you’ve taken enough chips off the table. It requires quite the strength of character to have that disposition if you’ve taken nothing off the table and if it ends tomorrow there is nothing and you literally start from scratch, bare bones, stripped out. There are plenty of entrepreneurs who’ve gone through that. I have not ever heard of a tale where they didn’t think that was a major challenging hard life experience versus for the kinds of setups where you’ve taken enough off the table that it doesn’t ruin your immediate prospects for figuring out what to do next.

(17:22): That’s a lot easier to do that. And it is within your power, at least for a lot of entrepreneurs, it is within their power. There’s always the trade off. Are we just investing in tomorrow or are we taking a little bit off the table for a rainy day? The natural trajectory of most American technology companies is all in for tomorrow, double down on nothing. One more time. Hit me again. Double down on nothing. Double down on nothing. And you do that enough times. You know what odds are, it’s eventually not going to come up in your favor. And a million entrepreneurs in the US have learned that. Oh shit, 21. Oh, I was 23. I went all in. Crap, nothing left.

Jason (18:03): Another thing I would add is something that comes up often as people say, like David was talking about the beginning of the company and your question was, have you ever thought about selling? And we’ve had all these VC offers over the years, but you could have been so much bigger is what people will say. You could have been Slack or whatever. It’s like, I don’t want to be that. Who’s running Slack? Not the guy who started it. He’s out. I’m still doing this. I like doing this. I’ve been doing this for 25 years. I have a better outcome. He has more money than I do. Don’t care. I have a better outcome. I’m still doing what I want to do in the company that I started with great people and it comes back to optionality. So this idea of getting big for most people just means making a lot more money because a lot of those entrepreneurs who too went down that road, not all of Chesky’s still around.

(18:53): We’ve talked about a few in other episodes, but most of them are out and they never get to do again what they did the first time and they’re young when they’re out. So I feel very, very fortunate that we didn’t do that and that we never got so big that I’d be out anyway. I would not be very good at running a huge company. I would definitely be pushed out by the board for sure. I’m not skilled in that way. I don’t want to do that. And even if I could do it, I don’t think I would want to do it. It doesn’t seem interesting to me in any way. So victory can come from staying small as well and from having something that you’ve managed to right size and to run your own way. And yeah, you might not end up with a bank account that some other person has and I just don’t care. It doesn’t matter. We’ve done incredibly well on our own, well enough to never have to worry about so many different things. That is plenty. And we still get to do what we do for as long as we want. Of course, like David was saying, could be an asteroid, could be a competitor, could be a million different things that could happen. But if it does, it does. I wouldn’t have traded this run for anything.

Kimberly (20:02): Well, that is a perfect place to wrap up. Rework is a production of 37signals. You can find show notes and transcripts on our website at 37signals.com/podcast. Full video episodes are on YouTube and X. And if you have a question for Jason or David about a better way to work and run your business, leave us a voicemail at 7 0 8 6 2 8 7 8 5 0. You can also text that number and we just might answer your question on an upcoming show.