Building to Flip is Building to Flop (replay)
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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 Hansen share their thoughts about building a business for the sole purpose of selling it. They write, quote, 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 Sean Hildner to talk more about that.

This is Building to Flip is Building to Flop from February 2022. What is your beef with building to flip? 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 experience, 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 the flip is that it's extremely dismissive of customers right off the bat. It's like saying, I'm going to build something for someone else and then I'm going to take it away from them. Like, I know this is going to go away.

They don't know what's going to go away. I know what'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 the things that bug me about it. One of the comparisons that I've been thinking about when it comes to this is spec houses. Yeah.

So when someone builds a house that they have no intention of living in themselves, they build a house that like 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 there.

And all the contractors were like, yeah, it looks good, but holy shit, make sure you do never buy this. Like it was things like the, it had heated floors or something and the heated floors were done in some extremely inefficient way where like 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 that like 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? Right.

Maybe, I don't know, is that good? Is that bad? I think there's just 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 are 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, like behind the facade, is built totally shittily.

Because like, I'm not going to be around. Like, 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 it. I'm going to be out of here in whatever the average tenure at most tech companies is like two years. There's just something repulsive about it.

to me about that. I understand it's 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 platinum to the moon, but we're going to build something that's cohesive and good. And this is the thing that I find with the 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. 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 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 it somewhere else that it's, 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, we,

really makes the point like we've been here for 20 years imagine if we had built to flip in like 2005 and we then had to live in that shitty spec house for another 10 years after that would have been miserable we're building a home here a business home that we want to stay in for 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. Like, 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 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 of your life. It just means that like, hey, you could. If you watch these shows like on 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 because 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. 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

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. 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. I've met...

a few people who are the kind of people who build the spec houses where the things are 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 like 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 and

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. 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 build to flip route, that you don't end up becoming a flipper.

a short cutter. 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 short cutter. I want to take the shortcut here that no one sees. And then it becomes a calamity. 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 short cutters 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. 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?

You know, 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 because you're not going to worry about them in eight months when you sell the damn thing anyway. You know, I think there's all those kind of commitments that you make and they all add up to, you know, 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 or going into our 23rd year. 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. Okay, they probably care. And we just put out yesterday our uptime results from 2021. We're

which were fantastic, 99.99X%. 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, I 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. Have the odds of getting acquired changed in the last now 12 years? Is it harder now? Is it easier? What do you think? 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...

back end here. I could just imagine that that's the case because building something that's good, like actually good as in valuable to sell, like it's still very difficult, even if you do the shortcut route, right? Like 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 loop-sided 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.

That's like, well, I have like 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. Like, 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 so that they can get another shot at something that is going to become a unicorn. And I just think it's like such a wasteful thing. First of all, like, why does everything need to be a unicorn? Right.

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, like it just doesn't matter.

almost if you had more of like 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 a 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, small businesses. Part of that, I think our mission here, both with the book and our advocacy in general, is to give all those businesses

donkeys and mules and horses, that sense of like, you know what? Our place in the world here is good. 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 commitment strategy to making something that's decent and good.

is, 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're going to look back on that and like, do you know what, that was good. I feel like my place in the world here has been validated and like 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. 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. What would if you guys fucked up and accidentally, you know, slipped and fell and accidentally sold base camp?

three, four years after creating it, what would you be doing? Are you a Mojito Island person or are you a, would you start something new? I have, I have no idea. I'm not a Mojito Island person. I couldn't just sit around that said, I don't, I don't think my natural inclination would be to start another business though. I don't really have a desire to like start a business from scratch.

The only one I would maybe start would be one that's just me. So it's not really like 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 like 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 like keep it going as long as we can than to like...

try to do it again. The other 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...

that's quite the same as like starting at zero for real. But, you know, there was a point in our history, we used to be called 37 Signals. We changed the name to Basecamp. We sunsetted a few products. We started a new product recently called Hay. Like you can kind of do a bunch of new things. And that's what's cool about a company is it's actually a vehicle for whatever you want to do within reason that works. And, you know, we might do some more of that stuff moving forward. So I think that's how we, I

is by transforming what we have versus feeling the need to do it all over again from scratch. 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, it'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. Like the fact that you know things is a disadvantage on the 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

in the thing. Second of all, there's so much you have to do when you start a new business from scratch, right? 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, do you know what? 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 I'd 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. Do you know what? That was a good experience. I'm 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. Like 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, 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. Like all those things happen when you do stuff.

Not so much when you just spent stuff. 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 slash podcast and video episodes are on YouTube.