SEASON 2 - EPISODE 137 - DECEMBER 24, 2024

Building to Flip is Building to Flop (Replay)

In this episode (originally aired February 1, 2022), 37signals’ co-founders Jason Fried and David Heinemeier Hansson sit down with Shaun Hildner to discuss the consequences of building a business solely with the intention to sell. They share their perspective on building a business for the long haul versus for an exit.

Key Takeaways

00:46 - Building a company to sell can encourage mediocre output
07:14 - Taking shortcuts is a reflection of one’s character
09:41 - Why it’s better to have a commitment strategy than an exit strategy
11:21 - Not all businesses should become unicorns
14:58 - What the founders would do if they had to begin again

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. We’re wrapping up 2024 and taking a little bit of a break from recording new REWORK episodes, but this week I’m digging into the podcast archives to bring back a previous episode you may not have heard. In their book Rework, Jason Fried and David Heinemeier Hansson share their thoughts about building a business for the sole purpose of selling it. They write, “Your priorities are out of whack if you’re thinking about getting out before you even dive in.” In this episode, Jason and David sat down with Shaun Hildner to talk more about that. This is Building to Flip is Building to Flop from February 2022.

Shaun (00:46): What is your beef with building to flip?

Jason (00:49): It’s not interesting to me. Let’s say. I think there’s a few things, so there’s partially that, but the other thing is that it feels disingenuous to customers to build something that you know you’re going to get rid of down the road. We’ve all had experiences, especially in tech, which is the one place where you feel like this shouldn’t happen as frequently, where you’re using a product that you like that you’re beginning to rely on, and then the company sells it to someone else, you know three years in or two years in because that’s the only way for them to make anything off it because it’s been free or the business model doesn’t work and then the new company kills it. They kill it for the customers and they wind it down and it’s gone. The problem with building a flip is that it’s extremely dismissive of customers right off the bat.

(01:30): It’s like saying, I’m going to build something for someone else and then I’m going to take it away from them. I know this is going to go away. They don’t know it’s going to go away. I know it’s going to go away. That just seems like a really weird thing to do in my opinion. And also just sort of a depressing thing because people get into products and they rely on products and I think it ends up hurting the whole industry when you just begin to assume that whatever you like is going to go away. I think there’s more to it too, and I’m sure David will fill in some of the other things, but those are a couple of things that bug me about it.

David (01:57): One of the comparisons that I’ve been thinking about when it comes to this is spec houses. So when someone builds a house that they have no intention of living in themselves, they build a house that will look good on paper, and I had sort of became aware of a project that was being built not too far from our house and talked to some of the contractors and all the contractors were like, yeah, it looks good, but holy shit, make sure you do never buy this. It was things like it had heated floors or something and the heated floors were done in some extremely inefficient way where you could check the box on the spec list and say, oh, it’s got heated floors, but yeah, okay. If you’ve run them, then your electricity bill or whatever it was, the problem was with them would just go through the roof, and there’s something of that to building to flip.

(02:47): That you’re building a spec business. You’re not building to live in that business. You’re not building it to stay with that business for the long term and you just end up building a very different kind of thing. If you’re building to flip it. Are you going to spend time worrying about the inbox versus inbox? No. Right. Maybe. I don’t know. Is that good? Is that bad? I think there’s a vibe of where you’re working. Are we doing this because we’re trying to make the best thing happen because that has intrinsic value in and of itself, or we just like whatever looks good on paper and let’s just get it out the door, and one of the reasons of course I’m eager for this is that there’s just so many tech businesses that on the tech side behind the facade is built totally shittily because I’m not going to be around. Who cares if we’re using whatever shitty framework or whatever shitty approach to it, or we don’t go back and clean up the code. We don’t go back and do, I’m going to be out of here in whatever is the average tenure at most tech companies. It’s like two years.

Shaun (03:48): Two years, yeah.

David (03:49): There’s just something repulsive to me about that.

(03:52): I understand it is working fine for other people and there can be businesses that are sold and they go on to do well enough and the customers can be okay with that, but there’s just something in that that just is yucky to me. I’d be a very poor general contractor trying to build a spec house because I’d be trying to build the house that made sense for me. That’s not to build the most luxurious thing at all times. We don’t do that with the products either. We put budgets in place and we say, do you know what? This feature can take six weeks and that’s it. We’re not going to let it take 18 weeks because we gold plating it to the moon, but we’re going to build something that’s cohesive and good, and this is the thing that I find with these spec products is that it’ll take a good picture, right? It’ll look really good from this one angle, but it’s not cohesive.

Shaun (04:36): Yeah

David (04:37): The quality is extremely uneven throughout, and I hate that with products too. You use a product where you’re like, oh, I really like this aspect of it, but then ugh, it’s just totally shitty, and these other parameters that are, I think perhaps we have another essay in this book or we wrote about to somewhere else that it’s at-home good. A spec business is in-store good. It’s term sheet good. It’s KPI good. It’s not living with it good. It’s not living in it good. I’m just like, I’m not interested in that. I don’t want to be part of that. I think you learn many of the wrong lessons, and this is the other thing that then for us really makes the point. It’s like we’ve been here for 20 years. Imagine if we had built to flip in 2005 and we’d then had to live in that shitty spec house for another 10 years after that. It would’ve been miserable.

(05:29): We’re building a home here, a business home that we want to stay in for the long term, and when you do that, do you know what you find out that, oh, this is a nice place to be. There’s no reason to flip it at all. What am I going to trade it for something else? What is that something else going to be? And I think that that sense of satisfaction and long-term possibility, it doesn’t mean you have to work at one place for the rest of your life. It doesn’t mean because you build a house, you have to live in that house for the rest your life. It just means that like hey, you could.

Jason (05:59): If you watch these shows on like HGTV, these flipping shows and stuff, you can just see shortcuts everywhere. It’s just shortcuts. Flipping means shortcuts. Maybe they spray paint the furniture so it looks fresh, but it’s kind of a lie. It’s not going to last. It’s going to chip easily. The chair is not comfortable. It’s just like this crappy thing, but it looks good in photos and I think that’s the thing with flipping is that the notion of flipping is cutting corners because you’re not going to do something that is going to be worth spending the money on that you’re not going to get the money out of. You have to do things on the cheap if you’re going to flip in order for it to be worthwhile. You’re not going to invest significant time, effort, money ‘cause you’re probably not going to get that back if you’re going to flip it, because flip it basically suggests selling it rather quickly in a sense.

(06:49): It’s not like, well, maybe you do build a business and you sell it in 15 years. That’s not flipping a business. That’s building a business and deciding at some point you want to do something else, fine. But if you’re going to build a business to sell it in two or three years, you’re going to take shortcuts all over the place and then the person who’s buying it may not even recognize the shortcuts are there and they’re going to be stuck with them. It’s just like sending bad, cheap decisions down the chain. It’s not a Ponzi scheme, it’s more poor stewardship. That’s some of the other reasons.

David (07:14): To me I’d say the other aspect here where the parallel with the spec houses sometimes go is that I think when you are the kind of person who’s constantly looking for the shortcuts that won’t get found out right away, it colors who you are.

(07:29): I’ve met a few people who are the kind of people who build the spec houses where the things that spray painted or there’s a shitty system installed because they know it just looks good and won’t be their problem when it’s a problem nine months later, and do you know what? It’s hard to say that that didn’t color their character. This is part of I think what’s important about if you’re going to spend years of your life building a business, I’d like for that to be sort of complimentary to who I’d like to be as a person. Like, hey, do you know what? Let’s make something proper, something that’s going to last, something that’s cohesive and not about, again, building the most expensive thing. I think that’s the easy straw man you can defend as well. I mean, if you don’t build a spec house, it’s just because you want to build a palace where everything’s made out of gold or whatever.

(08:18): No, fuck no. It’s not that. I look at the same way with cars. Some of the cars I respect the most are sort of cars on the low end. You’re like, they had to work within their constraints, but if the thing is cohesive and there’s an even level of quality in it, I respect the hell out of that. I think there’s just something in that that you have to be really careful with if you pursue the shortcut route, the built to flip route that you don’t end up becoming a flipper, a shortcutter. Is that who you want to be? No, and you can get dragged into this thing too. This is often I think very few people set out to like, oh, I want to be a shortcutter. I want to just take a shortcut here that no one sees, and then it becomes a calamity.

(09:02): No one sets out to be that, but this is also the realm here that when you get on this path, this is why we talk so much about taking outside money and so forth. The forces will exert on you until you become that person if you let it and if you put yourself in those circumstances. Would Jason or I would, we have ended up becoming shortcutters if we had been under some of those pressures of do you know what a bunch of money injected that needed a return very quickly and so forth? Maybe. It’s not because we’re particularly holy. We put ourselves under circumstances where we’re likely to flatter and advance who we want to be.

Shaun (09:41): There’s a phrase you use in this essay that I really liked in contrast to exit strategy. You talk about having a commitment strategy. Can you define what you mean by commitment strategy?

Jason (09:53): There’s a commitment to a variety of things. There’s a commitment to quality to employees, to creating an environment where people want to show up and work and put in their good work. There’s a commitment to taking care of customers and not knowing in the back of your head that you don’t really care. You’re not going to have to worry about them in eight months when you sell the damn thing anyway. I think there’s all those kind of commitments that you make and they all add up to we’re trying to put something in the world that’s good, that we care about, that we’re committed to continuing to improve over time. That’s ultimately the commitment is stewardship, is caring about the thing you’re making and building something of a certain degree of quality that’s going to last and letting customers know you’re going to be around. We’ve been around for 22 years, we’re going into our 23rd year.

(10:36): That would give me some confidence as a customer knowing I’m buying a product from a company that stood not the forever test of time, but been around for two decades in the tech world, like, okay, they probably care. And we just put out yesterday our uptime results from 2021, which were fantastic. 99.99 x percent. That’s commitment. That’s what that is because there’s a lot of ways to take shortcuts there too and be like, well, 97% uptime is pretty damn good too, right? Well, not if you’re committed to being around for a long time, it’s probably not good enough. So it’s all those things combined to think that lead to a mindset of let’s commit to this and let’s be respectful to the work, to the people, to the customers and to the product as well.

Shaun (11:20): Have the odds of getting acquired changed in the last now 12 years? Is it harder now? Is it easier? What do you think?

David (11:27): I think actually it might well be harder that there are more people allowed to take a shot at the similar number of slots, but I haven’t actually done the math on this. I’m just pulling things out of backend here. I could just imagine that that’s the case because building something that’s good, actually good as invaluable to sell, it’s still very difficult, even if you do the shortcut route, right? If you build a spec house, there’s pretty good guarantee that you’ll eventually find a buyer. If you build a spec business, very good odds that you will never find a buyer. That thing that you spend years building just does not pan out, and perhaps in part that is the odds of that is why we get this lopsided model where there is a bunch of VC money that knows that the odds are pretty poor, that something’s going to make it all the way from seed funding to the big unicorn slam dunk that’s going to pay back their fund, and that makes everything sort of disposable.

(12:31): That’s like, well, I have a hundred shots here in my pipeline. I just need one of them to pay it back. I think there’s some lack of commitment in that just like, oh, okay, it’s not on the path to becoming this unicorn. Shut it down, shut it down as quickly as possible so we can recycle the people who are in it just that they can get another shot at something that is going to become a unicorn, and I just think it seems like such a wasteful thing. First of all, why does everything need to be a unicorn? If you were a little more committed to it, if there was a little more skin in the game that wasn’t as diversified, right? This is one of those areas where diversification, if it’s too much, it actually means that each individual egg in the basket, it just doesn’t matter almost.

(13:11): If you had more of people going like, do you know what? This is my egg. I really fucking care about this egg. There’s some consequences here if I shattered this damn egg. Maybe that doesn’t turn into a unicorn, but maybe it just turns into a nice horse or a fucking donkey or mule more than they need damn unicorns, right? Is the unicorn going to drag the hay to the market? No. You need a damn donkey for that, right? And we need a lot of donkeys. We need a lot of businesses that don’t become unicorns. We need the fortune 5 million that are middle-sized and small businesses. Part of that, I think our mission here, both with the book and our advocacy in general is to give all those donkeys and mules and horses that sense of, do you know what our place in the world here is good.

(14:01): The fucking world would not go around unless we were here. You can’t make the whole thing just run on a handful of unicorns, so be proud in that work. Put the pride in it. That’s the other thing I find with the satisfaction of having a commitment strategy to making something that’s decent and good is do you know what? If at the end of the day you end up building a business that has six people and it runs for eight years, but you did it well, you didn’t take the cheap shortcuts. You got to look back on that, and you know what? That was good. I feel like my place in the world here has been validated and I did something proper and it doesn’t require this slam dunk hit whatever. I think of the day-to-day too. A bunch of the things I do at Basecamp, they don’t make the term sheet look better. They don’t make the spec sheet look better, but I do it because I’m like, do you know what? I’m building something proper here and we take the time to do things properly, and that in itself is just life satisfaction.

Shaun (14:58): You say you hear from people all the time that did get a little bit lucky and built something and sold early enough to retire on, I believe what you call Mojito Island, David, and then they come right back six months later, bored. If you guys fucked up and accidentally slipped and fell and accidentally sold Basecamp three, four years after creating it, what would you be doing? Are you a Mojito Island person or would you start something new?

Jason (15:27): I have no idea. I’m not a Mojito Island person. I couldn’t just sit around. That said, I don’t think my natural inclination would be to start another business though. I don’t really have a desire to start a business from scratch. The only one I would maybe start would be one that’s just me, so it’s not really a business as much as it is just like what can I do by myself sort of thing, but to actually go through the process of beginning a whole other business again, and I know a lot of entrepreneurs do that. That’s what they do. They build something, they start over, they build something, they start over, they build something, start over. The start over actually is not that interesting to me. I much prefer to keep it going as long as we can than to try to do it again.

(16:05): The good thing is you can reinvent your own company many, many times, so you don’t need to sell something or start over to technically start over in a way. I mean, it’s not this quite the same as starting at zero for real, but there was a point in our history, we used to be called 37signals. We changed the name to Basecamp. We sunsetted a few products. We started a new product recently called HEY. You can kind of do a bunch of new things, and what’s cool about a company is it’s actually a vehicle for whatever you want to do within reason that works, and we might do some more of that stuff moving forward, so I think that’s how we, I think get our renewal kicks is by transforming what we have versus feeling the need to do it all over again from scratch.

David (16:46): One of the things I fear the most is Groundhog Day. I don’t want to repeat the same lesson twice. I want new damn lessons, and if you start over again, there’s just a ton of lessons you got to do twice, and what I’ve seen too is a bunch of people, they’re just not as good the second time around. The fact that things is a disadvantage under your entrepreneurial space some of the times, and not only do you end up not being as good, you end up not being as interested in the thing. Second of all, there’s so much you have to do when you start a new business from scratch, and not all of it is super interesting, but it’s interesting because it’s novel to some extent. I look at the times when we were four people at the company. I’m like, you know what?

(17:28): That was a novel time and then six people and then eight people and so on, but there’s a bunch of the work I did at that time. Where like, do you know what? I don’t know if I need to be the person who wakes up at whatever 11 at night because I’m the only one who deals with the technical issues and there’s no one else to fix it if it goes wrong. You know what? That was a good experience, really glad I had it. I don’t necessarily need to repeat it. I’d like to create new experiences, new challenges, things that are novel, and having the company allow us to do that and pursue those things without having to repeat the rest of it is pretty appealing. I think the other part of it is that a lot of people think that they will be happy by whatever material success they get from selling the thing.

(18:12): Literally, I can’t recall anyone that I’ve personally known or talked to who were like, yeah, I sold the thing for a bunch of money and then I just lived the life of leisure ever since, and that was heaven. Absolutely not. Plenty of people try that for a number of weeks, some months, a few years, and then they go like, do you know what? This is not the meaning of life. The meaning of life is not to just live a life of leisure. It is to do something meaningful and have an impact and use my competencies and all the things that go into the happiness research, finding flow, getting into something, working with others that you’re inspired by. All those things happen when you do stuff, not so much when you just spend stuff.

Kimberly (18:57): We’ll be back with new episodes of Rework in the new year. Until then, you can find all of our previous episodes, show notes, and transcripts on our website at 37signals.com/podcast and video episodes are on YouTube.