SEASON 2 - EPISODE 0041 - NOV 30, 2022

Come Small, Come All

There’s a lot of talk in the tech world about getting bigger, growing as fast as you can, and getting investor money so you can scale quickly.

But that’s not the only path. And recently, we’ve seen that being bigger only sometimes works well for companies.

Jason Fried and David Heinemeier Hansson, the Co-founders of 37signals, discuss the bigger is better culture in tech and why the human connection inherently built into small businesses can actually be an advantage. Plus, their invitation to small businesses to think differently through their open letter called, Come small, come all.

Show Notes

00:44 - Jason shares why it’s important to note that Basecamp is interested in helping the Fortune 5 million and the small shop down the street.
01:49 - David shares why it’s important to him to be honest about the company’s target audience.
03:29 - The key to finding the right dance partner that’s your bread and butter.
05:30 - David shares the funny anecdote about when Twitter was a customer of Campfire and how they tried to “scare them away.”
08:50 - “We found our space. Can we just stay here?”
09:59 - Jason shares why leaning into the space you are uniquely suited for and being closer to the work is an advantage.
12:08 - Why it’s essential to cultivate confidence in the human connection built into small businesses.
13:36 - The unsustainable quest for a big market share.
15:10 - How starting out during the original .com boom and bust cycle taught Jason and David to make sure the company has margin times three.
18:28 - How to look like both an idiot and an oracle without changing a thing about the way you do business.
21:10 - Where business breakthroughs come from.
23:45 - How large companies devour innovation.
24:16 - A special offer to help make Basecamp affordable for new customers that sign up by December 31st.

Links & Resources

Do you have a question for Jason and David? Send us an email or leave us a voicemail at 708-628-7850.

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. There’s a lot of talk in the tech world about getting bigger, growing as fast as you can and getting investor money so you can scale quickly. But that’s not the only path. And recently we’ve all seen being bigger, not always work out well for companies. I’m joined by 37signals co-founders, Jason Fried and David Heinemeirer Hansson, who’ve talked a lot about this tech culture of bigger is better. Instead, they invite small businesses to think differently, and recently wrote about it in an open letter titled, come Small Come All. I’ll link to that write up in our show notes. But in it you say that we’re for the Fortune 5 million, not the Fortune 500. Tell me about that.

Jason (00:44): Yeah, so this idea of the Fortune 5 million is sort of an old idea that, that we, I, gosh, I don’t even know where this came from. Maybe REWORK, maybe it was in there first or perhaps even before that. And we sort of then put it aside for a while. Uh, and we’re coming back to it because it’s, it’s sort of who we really are, uh, where we are a relatively small business. We build things for small businesses. Our customer base is small businesses primarily. And um, we just want to be honest about it, I think and, and sort of this is our, this is who we, who we make stuff for. And of course there’s larger companies that use our stuff too. But really, um, uh, we, we we’re more interested I think in helping the smaller business with some of these problems than the big huge companies. And primarily because not only are we relatively small, but our company’s not set up, uh, to sell enterprise accounts or big, huge accounts or try to land big accounts. We don’t have salespeople, we don’t have account managers. We’re not customizing our product for, you know, an 8,000 seat company. It just doesn’t interest us. It’s a lot more interesting to help the small shop down the street or the small design firm or the freelancer than it is to help, uh, the, the much, much bigger company.

David (01:49): And I think this has gotten more relevant in recent years. I mean, we’ve been around for 20 years and we’ve been selling Basecamp for, what, 18 years or something like that. And for a very long time, curiously, we had surprisingly little direct competition. I mean, there are always other tools you could use, and Microsoft Project was the first sort of competition that we were calling out, but it was never really a competition in a direct sense, uh, in terms of what Basecamp is. But these days there is just more competition and I think being honest about the fact that there is more competition and what did those companies look like, who are their main target audience? And if you are prospective customers, you should have some information about that, right? Like, are you buying for a company that’s more like you or are you buying for a company where you’re perhaps just the stepping stone to an enterprise sale, a bigger account, something else.

(02:40): And I think that that’s the reality that, um, set in. Jason, you called this out on a, on another blog post, um, on our company size where you contrast us with Monday and Asana and Click up and Slack and Smartsheet and all these other tools that people might look at if they’re also looking at Basecamp. And it’s really interesting, like they all have well over a thousand employees. Some of them have multiple thousands employees, yet they have about the same number of customers that we do, yet we’re 80 people. So I think there’s, there’s something in that, right? Like how do, what is the priorities for companies of that size with the kind of tools that they sell? Even if it appears as though these things are interchangeable, are you actually the target audience? Right? This actually also ties into, uh, our discussion about per seat pricing.

(03:29): So we’re trying this experiment where we’re, um, charging per seats. And for a really long time, this was something we were very hesitant of doing because we were actually really afraid of turning perhaps into those other companies that do just use the smaller clients as a stepping stone to land a huge account worth tens of thousands or hundreds of thousands of dollars, might even. But I think seeing the reality of the market, the fact that at 80 people with no salespeople, no enterprise set up, no long sales cycles, no, none of that. You just, you don’t land those accounts. It just doesn’t happen. We’re not at a risk of getting taken over by a handful of super accounts. We have the same number of customers as these other competitors have just mentioned, but in a, in most cases, the, the customers we have are just smaller. And that’s exactly how it should be, right? And that there should be this meeting that if you are a huge company, if you have 10,000 employees, I can totally see why you want the whole purchase order flow, invoicing, talking about discount, having a sales cycle that’s months long. You need like another behemoth to transact with. If you’re a small company of five people, 10 people, 40 people, 80 people. Is that your world? No, it’s not your world.

Jason (04:44): Yeah. It’s like we’re the more appropriate dance partner, basically. Like you wanna find the right dance partner, you know, in a sense. I think the other thing is in this sort of, David alluded to this when it comes to pricing, is that we, um, when we changed our prices 7, 6, 7 years ago or something, went to one to one fixed price, 99 bucks a month. And with that we end up losing, um, I think touch with a lot of our really small customers. And we just sort of lost that market actually. And it’s our market. And so this is a attempt to get back to that and, and really remember, you know, who we’re building this stuff for and who, who the right customers for us are. And it’s much smaller businesses or small teams inside larger companies as well. But uh, the idea of a relatively small team is sort of right, our bread and butter.

Kimberly (05:30): David, you kind of referenced something to this in the episode about leaving the cloud and you were saying like, we wanna do business with people who are like us.

David (05:39): Yes. And this is the same principle brought forward that when we deal with large companies, and we’ve had a couple of opportunities over the years, there’s a really funny anecdote here. Campfire, the chat tool that we ran from 2005, the Slack that was 10 years before Slack, um, ended up with this super large customer, which, uh, timely as it is in the nearest these days was Twitter. So Twitter was using Campfire at some point. This is quite a few years ago, but they had like 5,000 people on the software. In fact, I guess they were twice as large as they are right now. They were using Campfire to run essentially Slack. And they were just finding there were some things that weren’t working well. Yeah, they weren’t working well because we hadn’t built Campfire for a company of 5,000 people. Um, and we kind of just discovered that they were using half of all the resources we had on that platform because we’d already long since discontinued selling the platform, but Twitter was still using it.

(06:33): And it was really awkward. It was really awkward. We were not set up to have that kind of customer, to have a customer with 10,000 users on our system. And in fact, I remember when we then went in like, oh geez, they’re, they’re paying us I think like $50 a month or something ridiculous, right? Like they’re running Twitter on campfire, um, with 5,000 people or thousands of people at least, and they’re paying us $50 a month and they’re using server resources alone, just cost alone for way, way, way more than that. And we were like, you know what? We should give them some like ridiculous number to make them go away. And we’re like, all right, um, write them up here. Hey Twitter, you just, it doesn’t, is not working. You gotta pay us $5,000 a month or something. And, and I was thinking in my head like, that’s gonna scare them up really quick.

(07:16): And they’re like, oh, okay, yeah, yeah, let’s do that. All right, 5,000. And now I’m like, shit, they took the offer. That was not what was intended at all. And now we had them for like months on end. And I felt just from that one enterprise sale, which actually in terms of enterprise sales wasn’t even that big, right? That was a $60,000 a year account, which many of these companies will sell hundreds of thousands of dollars a year accounts, but for us, the largest corporate account or enterprise account we’ve ever had by a huge margin. And I instantly felt the pull that like, do you know what, if they’re writing in about an issue, I gotta respond. Like they gotta get customers, they gotta get a key account management for either me or Jason because they’re in this huge account now and we’re like, this is not who we want be.

(08:02): I wish that Twitter would leave. Which of course eventually they did. They moved to Slack and I’m sure then upped their bill like four times. And probably when there were seven and a half thousand people, I can imagine them paying a $200,000, $400,000 year bill to Slack. And we were like, whew, got out of that? It is just so much more in our wheelhouse to deal with companies of roughly similar size of dance partners, natural dance partners, not just in terms of what we feel we owe them, but also in terms of like who we are. Like am I fired up about helping some company of 5,000 what be slightly more efficient about? No, I’m just not. I’m super fired about helping a company of five people or 10 people or 20 people stick around, get bigger, solve their issues, all of those problems that I feel like is part of our history and world.

(08:50): That’s the problems that they’re dealing with. This is why we speak to them. This is whenever Jason and I go on a podcast or, or write or something, this is who we write to. I don’t have anything to tell a company of a hundred thousand or seven and a half thousand. I don’t really have a lot of lessons. We’ve not been there. So it doesn’t make any sense. This is our, this is our people and we should just be straightforward about that. We’re not going for somewhere else. You’re not in a stepping stone here. We’re not in some trajectory, there’s not a hockey stick. We’re climbing up on where we’re gonna say hasta la vista as soon as we get like three years into that playbook and then just like, Hey, well screw you by the way. And then eventually what a sale or an acquisition or something else and you end up in a completely different environment. No, this is, we found our space, we found where we like to be. Can we just stay here?

Kimberly (09:39): It’s interesting cuz I think a lot of small businesses don’t have that mindset. I know we’re talking about like this is how 37signals operates, but for small businesses who are listening, I think there’s a natural tendency to think, I need to be bigger. I need to be the biggest out there and not just stay in a kind of a small space. I mean, what are your thoughts about that?

Jason (09:59): I remember when I first got started freelancing, I had the same feeling cuz it was just me. And so whenever I would refer to my company, which was just me, I would say, we, we are this, we are that we provide this service when it was just me. So I understand the fundamental, you know, feelings of, of not feeling like you’re tiny or alone and, and it’s, it’s usually the sense of size that makes you feel like you can’t compete or someone won’t hire you. But in the end, you know, actually it’s really the advantage that you have is you’re, you’re a lot closer to the work you do, the work itself. You talk, when you talk to the people about the work, they’re talking to the person who’s doing the work. This is actually an advantage. And I remember winning a bunch of projects that I, on on paper shouldn’t have won cause I was competing against much bigger companies, but the much bigger company, their process was slower.

(10:49): They, they couldn’t talk to the team that was actually doing the work. And, and when you just kinda lean into the things that you’re good at and you go, what are, what am I uniquely suited for? Um, you have an advantage. And I think small companies just feel inferior. So they, they forget about the advantages that they have. And the truth really is, is that most larger companies wish they were smaller in a sense, maybe not. They, they may not wish they were smaller in terms of people necessarily, but they wish they could behave as if they were smaller, you know, more flexible, less rigid, more agile, whatever words you want to use, more direct. Um, and you have that as a small company and you will lose that if you get bigger and bigger and bigger. So take advantage of the things that you already have and that other people actually want back, which they can’t have.

(11:32): But it does take a different lens to recognize that and not feel like you’re just inferior because you’re smaller. So it’s, it’s hard. It’s a hard thing to do. So I get it. By the way, we’re not saying don’t grow. That’s, that’s not, that’s not what we’re saying. We’re saying grow in control, grow profitably. Don’t get ahead of yourself, don’t get over your skis, don’t keep playing from behind because you’re deep in the red all the time. That’s the wrong kind of growth. The right kind of growth is growing within your means and growing as you really need to and not as you want to. So I think that’s the way to do this and that’s the kind of message we’re putting out there.

David (12:08): And to cultivate that level of self-confidence that that small is not just part of this journey. Small is great, small is awesome, small is fantastic, small is so much fun. Now there’s a unique set of challenges with it too, but I find at least when I talk to a lot of entrepreneurs who’ve taken a company from small to large, they’re full of very fond memories if not hopes and dreams of one day being able to go back to that small company because that’s really just this magic face. And oftentimes you don’t realize it until it’s gone. So we are very much not just talking about what you can do, but the fact that you should feel something about that. You should feel like this is a wonderful opportunity and you play to your strengths. You don’t pretend to be huge. You act as you’re small, that you have this direct connection.

(13:04): This is one of the reasons I I love whenever we do sort of everyone on support or something like that where customers are just hearing from Jason or I or we interact directly with folks who, who write us directly. You can do things in a very different way, in a much more personable way when you just are small. You can’t do that with four layers of stuff if you are a huge company. And I think that sense of the human connection is, is part of the magic, is part of the magic of small that um, you should be an absolutely no rush to give up.

Kimberly (13:36): Okay, so Jason, you brought up companies operating in the red and honestly I don’t understand this. I mean I know so many companies are like bleeding money and losing millions of dollars a day. Like, help me understand that. I don’t understand how that’s even possible.

Jason (13:51): You’re asking the wrong person. Cause I don’t understand it either. , I really, I get it really, I mean I I understand how it happens. I don’t understand how it sustains,

Kimberly (13:59): Right?

Jason (14:00): I mean part of it is like, look, they, they can, well previously they’ve been allowed to afford to lose money. Um, there’s more money to come and it’s relatively cheap and people are willing to give it to you. So you just keep spending fuel at some point there’s scarcity and then you’re in trouble. Which is, I think what we’re backing into now or running into not backing into running into now is that money isn’t free or cheap or plentiful at the moment. And now what? So it is kind of a product of the environment. If you can keep losing money and people are gonna still feed you money and you can raise hundreds of millions of dollars, like why wouldn’t you? I still wouldn’t, but why wouldn’t you? Is it like all signs point to keep doing it. That’s kind of why, that’s why, and and a lot of 'em are are after, um, market share.

(14:45): So it’s a big market share game for them. They don’t care if they lose money per customer because if they’re just trying to beat everyone else else and so they just kind of pour money into marketing and, and lose money. I mean we’ve, we, we’ve competed with them on, on clicks and Google, you know, on on AdWords and you can just see what people are paying for things. You’re like, there’s just, that doesn’t make sense. At least it doesn’t make sense with our economics. But regardless they lose cuz they’re allowed to and in fact they’re encouraged to. That’s why. But it doesn’t make sense to me.

David (15:10): And I think one of the reasons it doesn’t make sense to us is we’ve been around through more than one boom and bust cycle. Both Jason and I started in this industry in the original dot com boom and saw the bust of that and saw what happens when you just go like, no, no, no, it doesn’t matter if we’re losing money. We’ll make it up on volume that if you disregard the economics for long enough, all of a sudden the music will stop and it’s always sudden, or it always appears sudden. When the original dot com bust happened two months before that, people were still racing money at these incredible valuations even though they had very poor ergonomics to under girth that. And then boom, snap it’s over. And I think same thing, 2008, great financial crisis, suddenly the music just stops and what felt like a no-brainer, why wouldn’t we take the money suddenly becomes like, shit, why did we take the money?

(16:08): Because now you have no choice. Now you’re left in, in, in a really precarious situation. I mean, I posted some numbers about some of these, uh, companies that have been losing hundreds of millions of dollars. They compete in the same space as us about a week ago and a couple days after that post, what came out like the first like, all right, one of the companies laying off 10% of its workforce, right? So you, you get back into this thing like, right, we boom up really fast and then when the balloon pops, Jesus, that’s not a nice feeling, is it? So I think the fact that Jason and I started with the experience of the original.com boom and bust just gave us a sense of rigor around running the business. You know what, we’re not gonna put ourselves in that situation. We’re gonna make sure that we have plenty of margin and then times three on that.

(16:54): Cuz we’ve seen what happened to companies who ran right at the ragged edge when everything was going fine and when the wind changed, all hell broke loose, right? So now we are here and the market is awful. If you wanna raise money right now, it’s probably hasn’t been a worse time to raise money then now compared to the last 20 years or something. And we can just go like, yeah, I, I feel bad for the people who have to do that. Oh, well why we don’t. And again, that, that’s a perspective you can take at the kind of business level. But if you look at the human level, the people for example, who have to be laid off like, fuck, Jesus terrible, like thousands of people, hundreds of thousands of people before all this is over, we’ll have been laid off in part because of this rapid expansion that just wasn’t sustainable in any way, shape or form.

(17:40): And this is why, I mean, when we’ve been singing these songs for two decades, um, they seem out of tune when things are just going gangbusters, right? So often we’ve been accused of being, uh, unambitious because like, why aren’t you raising the money? Didn’t, you know, you could just grow so much. Why are you taking profits? You could just take all that money, you could just reinvest it. What does it matter if the Google ads don’t pay out? Like, hey, if, if you model this out seven years or whatever and you don’t lose the single customers, this is all magically snap, snap gonna gonna work out. And you’re just like, yep, all right, well just just wait. And it, it looks silly and it sounds silly when everything is just going nuts. Like in, uh, if you were in like 2005 and you were in, uh, in real estate and you were going like, I don’t think this is gonna last.

(18:28): You look like an idiot for 2005. You look like an idiot in 2006, and then all of a sudden you look like a damn oracle in 2007 or 2008 or whenever the pop came, right? And you were saying the same thing. You were saying the same thing. And this is one of the things that’s so curious about the current moment is that Jason and I have literally been saying the same thing for 20 years on these topics about how to grow a business in a sustainable way about embracing small and so forth. And for periods of the maximum hype, it just, it looked outdated, it looked silly. It was like, like we were beyond that. Like economic cycles were a thing of the past or we could just print money until the end of days and we would never have a a downturn again. And then they’re like, yeah, alright, well been there a couple of times. It’ll, it’ll probably come, don’t know when. No one can predict that with certainty, but pretty good odds that eventually it’s gonna hit. And now it has.

Jason (19:21): The other funny thing about this, I was talking to a friend about this yesterday actually. If someone gave us $20 million, I wouldn’t know what to do with it. Um, if someone said, here’s an extra 300 employees, I wouldn’t know what to do with them, it would make our business worse. Um, and, and, and that’s, I think that also happens, uh, to companies. They have all this, they’re flush with money. Well, what do you have to do with that money? You have to spend it. That’s what it’s there for. And so you spend it on things that you can spend money on, which is hiring people and marketing essentially. Those are the two things you spend money on. And uh, that’s what you do . And then you’ve got all sorts of other problems that you now have. You have to manage more people. Um, you’re probably gonna be, have to spend more on things that, that don’t make sense, but you’ve gotta spend it. And, and it’s just, I, I wouldn’t, this is probably a failing of mine as a, as a, as a business leader or something, but I truly wouldn’t know what to do with two or three x the resources we have today. And I kind of feel like that’s where you should be. You should be on the edge of what you’re capable of doing and then no more. And that’s sort of where we’re at.

David (20:26): It’s almost like a version of the resource curse that both companies and countries can end up in a bad shape if they just have this spigot of money pouring at them that they can’t direct in sort of productive ways that they end up in this dysfunctional state where their habits are attuned to this very specific peculiar odd environment where there’s just this faucet of money spewing at you. And the moment that faucet is turned off, they’re like, oh shit, what do we do now? I don’t know. Do you know what we do? What do we do? Oh, let’s fire a bunch of people. Let’s re-jig, let’s do all of this stuff because they have not built the habits of running a sustainable business because they’ve never had to run a sustainable business. So of course you don’t learn how to make money in the profitability sense of that word if you’ve never had to.

(21:14): And I think that that’s a, a form of this, this tragedy here that inside some of these companies that ended up with really bad habits and now have a massive hangover, there perhaps could have been something good if it had started in more natural ways and allowed, been allowed to growth on a natural trajectory, right? This is this idea that the steroid injection of venture capital just creates these deformities that quite often then in, in the rear view mirror going like, oh geez, that was, uh, that was a real mistake. I think the other thing there too is Jason, as you say, like sometimes it could be even harder. Like how would we even have, what would we do with 300 people? I’ve seen the reverse. Someone commented from one of these companies, I don’t know, Click Up or one of the others, some guy commented on a LinkedIn article when it posted your thing, Jason, he was like, well this is, you just, um, you’re saying this because like you just don’t invest in r and d.

(22:10): And I’m like, what the fuck are you talking about ? Like at 37signals, we’ve literally created Ruby On Rails, we’ve created Hotwire, we’ve created, I don’t know how many profitable business apps over the years we’ve created. Hey, we’ve created all this stuff, right? But it doesn’t fit into this model that like, hey, if you’re a huge company who have thousands of people and are losing hundreds of millions, you think like that must be what’s required to do good work. You’re like, that’s just not true at all. Small teams do amazing things all the time. In fact, most of the time most great things are built by small teams. They may eventually grow into be a larger thing. But the nucleus of almost every breakthrough in terms of innovation is not a 200 person committee. It just isn’t. That’s just not where innovation comes from. It comes from a handful of people who are working diligently together under some form of constraints.

(23:08): That’s where the breakthroughs come from. So this idea that you need all of that, that mass, no, it’s the opposite. That mass is what absolutely quenches and crushes innovation. You can do a lot of shit. You can cover a lot of territory, you can clone a lot of things. You can copy a lot of things. Yeah, maybe, but innovation? T hat would not be the one I would pick as the hallmark of huge corporations. Like that’s almost the joke, right? Isn’t this why we have this um, lure of the startup, of the disruption of all Exactly. Because large companies are incapable of doing that kind of innovation that carries things forward.

Jason (23:45): And by the way, the evidence there is the fact that companies, larger companies end up having to acquire innovation. They have to buy small companies.

Kimberly (23:53): Yeah.

Jason (23:54): So who innovated? Well, this, the small company did and now they become part of the big company that swallowed out by the big company and then they need to innovate again so they buy another small company. So this idea that we’re not doing r and d or any whatever it is, or you know, we’re not researching enough, whatever it is, it’s like that’s actually not where it’s happening. It’s happening with the much smaller companies that get swallowed up by the big guys because that they have to spend the money and they can’t do it on their own.

Kimberly (24:16): Yeah. Well, I think we’ve made a nice little pitch for small and reasons to say small and to celebrate small 37signals has introduced a promotion that makes Basecamp especially affordable for even the smallest of small businesses. New customers that sign up by December 31st can take advantage of just $11 per user per month with the first three users entirely on us for the first 12 months. You can check that out at basecamp.com and also follow along with the podcast at 37signals.com/podcast.