Why We Choose Profit at 37signals
For over two decades, we’ve been outspoken about running a profitable, financially responsible company in an industry that has become incredibly proficient at losing buckets of money. While everyone else was celebrating burning cash, we chose profit instead. We still do. Here’s are some reasons why.
No one ever went broke taking a profit
Unlike companies that reinvest all or most of the money back into the company every year, we take money (profit) out every year in the form of distributions (we’re an LLC). This means every year we take risk out of the company. Companies that keep reinvesting keep adding risk to their companies. And when the company ends one day, as they all do, we’ll have enjoyed the upside as we went, vs. never if all the reinvestment didn’t lead to an outcome which is greater than the annual distributions. Basically, we work to enjoy the now that’s guaranteed, not the future that isn’t.
Profit buys you time and flexibility
Profit is the ultimate flexibility because it buys you the ultimate luxury: time. As long as you remain profitable, you can go in any direction you want and take as much time as you need. But if you can’t generate enough of your own cash through operations, and you have to go outside to borrow or sell off pieces of your company to generate the cash you need to continue, then the ones you owe are the ones who own your time. If someone else owns your time, you aren’t free. And if you aren’t free, you can’t be flexible. We value flexible independence above almost anything else.
Profit is true vertical integration
Cash is an unusually special raw material because you can transform it into anything (cash is basically like a stem cell). And when you make your own, you can use it any way you want, no strings attached. You can take it all home. You can give it all to your employees. You can put it back into the business. You can do stupid shit with it since it’s your shit. But when you have to source raw materials from a very limited number of suppliers (investors), the money comes with all sorts of strings attached. Money with strings attached isn’t really yours, it’s someone else’s property that you’re renting on their terms. We prefer to own.
We don’t care about valuation
If generating revenue can hurt your valuation, making a profit can have an even more deleterious effect. Silly, isn’t it? We don’t know what we’re worth and we don’t care. The fewer things you have to worry about that don’t affect your day to day, your customer’s experience, and the actual operating of your business, the more energy you can put into the business itself. We spend zero hours a year on valuation and fake-number nonsense. Too many companies spend countless hours pitching for money, marking up term sheets with lawyers, fixating on cap tables, sweating over other people’s make-or-break decisions, etc. No thanks. We choose not to waste our time and energy on that nonsense.
Profit is the ultimate shield against bullshit
When you’re profitable you don’t have to play games, succumb to smoke-and-mirrors metrics, cross your fingers, or grovel for other people’s money, validation, or acceptance. You simply make more money than you spend — and run a fundamentally sound, economics 101 business. When profit’s a requirement, it becomes a lot harder to step in the bullshit.
Profit protects you from your ego
One of the easiest things to do in business is get ahead of yourself. To be obsessed with growth and potential and “if only…”. To hire too many people, to take on too much rent, to do one too many things, to complicate your business by tying strings around your money. The list goes on. But when you set out to be a profitable company, you watch your costs. You don’t hire that extra person if you can’t afford them. You don’t get into an office space that’s too big for you. You don’t sign a long-term lease that you can’t afford. You don’t sink a pile of money into things just because you can. You consider your spends more carefully. There’s nothing easier than spending other people’s money — and that should concern you. When you’re running on your money, and you want to make sure you have some left at the end of the year, you spend it wisely. You build good, responsible habits this way. Profit creates reasonable borders and boundaries, and that’s a very healthy thing — especially early on.
All we owe is our best effort
When you’re profitable and debt free, you don’t owe anyone anything other than your best efforts. And who do we owe that to? Ourselves and our customers. The peace of mind, clarity, and calm that comes with that is immeasurable.
$1 in profit is the ultimate FU money
“Fuck you money” is an ugly term, but we’ll use it here to make a point. Typically when people talk about FU money, they think about millions. Once you have millions you have FU money. Well, actually, all you need is $1 in annual profit. Because once your company is self-sustaining and profitable, and you don’t owe anyone anything, then you can say FU to just about anything. You don’t need to do anything you don’t want to do when you don’t have to rely on anyone else to be sustainable. You don’t have to dance on anyone else’s stage, or play by anyone else’s rules. FU money isn’t about buying an island, it’s about being an island — your own sustainable entity.
Profits provide insulation
When tastes change, when trends shift, when the markets flutter, funding freezes up. And if you depend on investor cash to keep the fire burning, you might be caught out in the cold and freeze to death. Remember 2008? 2009? The nuclear winters of funding? Those were some of our best years! Profits insulated us from jittery investors, and our customers still kept paying for Basecamp. And now in 2022, the bear market is back again, interest rates are through the roof, and our competitors are dealing with stock prices 90% off their highs. We have none of that to worry about. We’re debt free, don’t have to cater to the whims of the public market, and have no explaining to do when employees wonder why a huge part of their compensation — their stock options — are worthless.
Profits are just simpler
We’re still an LLC at Basecamp. The simplest pass-through structure you can have at our size. That means fewer lawyers, fewer accountants, less paperwork, less hoop-jumping. Our books are so silly simple, our operating agreement hasn’t changed in a decade. Keeping your corporate structure this lean means making time for much more interesting things, like building a better product and taking even better care of your employees and customers.
Profits focus the mind
There are so many things we could do as a company, but far less that really constitute the essence of why we’re here. Profits helps us concentrate on what to do and what not to do. It helps us shed things beyond the scope, it helps us keep the company fit, without accumulated layers of fat from chasing a thousand potential directions at once.
Profits create stability for customers
Companies that lose buckets of money, or are beholden to public market swings they can’t control, or perpetually operate in the red, or require outside funding to fuel their growth and operations are putting their customers at risk. They mask the risk with big customer lists and big brand advertising, but the truth is if the company isn’t on stable footing, customers inherit the risk. It’s hard to depend on something that’s shaky at the core. Losing money often comes with layoffs, drastic cost cutting, reduced customer service, suffering quality, damaged morale, infighting, and loss of focus. Meanwhile, profitable companies have none of these issues, pressures, or forced compromises. Profitable companies are stable companies, and stable companies spell reliability for customers.
The 37signals Employee Handbook is worth checking out. It explains how we’re structured, how we define titles and roles, our full benefits package, our company values, the responsibilities of individual contributors, managers, and executives, and other essential bits.
Our books go into great detail about how we see the world, how we run our business differently, how we make decisions, and how we stand apart. Each book is tight and short so you can finish them an afternoon. After all, you have work to do, too.
And of course, the products of all our work: HEY for email and Basecamp for project management.
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