Why we choose profit
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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, joined as always by the co-founders of 37signals, Jason Freed and David Heinemeier Hansen. Well, you know, Jason and David have many books that they've published over the years, but they also have some writings on the 37signals website as well as the Basecamp website. And one of them I thought we would chat about today is called Why We Choose Profit. We've

said forever we're a profitable company, but it's actually a choice. So let's dive into that right now. I think that word choose is an interesting place to start. Jason, do you want to get us started with that? Yeah, I mean, you don't get to choose like and get it automatically, but you do get to choose and think about like, how do we want to run this place? Do we want to like

be behind the eight ball all the time? Do you want to just focus on growth? You know, this is one of the reasons why, you know, some people take money, they take money and they lose a bunch of money for a long time, spending other people's money to try to get mind share or market share. And then they try to work their way into profit later on eventually when they have to. We decided to go a different route, which is to keep our costs very, very low upfront and to not get ahead of ourselves and to try to make more money than we spend as early as we possibly could, which turned out to be the first year. And then we've just sort of stayed there.

our profit margins have fluctuated, but we've decided that we don't ever want to get to a place where we're spending more money than we're making to chase something that we don't have. So if we wanted to grow or get bigger or whatever it would be, we could probably do that profitably too. But there's also an unprofitable way to do that, where you suspend your profits for a while, spend a bunch of money, and then hope you can turn that profit spigot back on. We've decided never to do that. So the choice for us is

stay within our means, keep our costs below our revenues and grow comfortably in that sense, grow in control.

and make sure that we're always taking money home, basically. So that's sort of the kind of business we built. And it means that in some cases, people might say you've left money on the table. There's opportunities that you've missed because you're doing it this way. You could have been this company or that company or worth $5 billion or whatever. Could have been, would have been, maybe, could have, whatever. Who knows? What we know is that we're still in business 25 years later. And we're still in business 25 years later because we make more money than we spend.

We choose to be profitable because we choose to want to stay in business. That's the only way to stay in business over the long term, ultimately, unless you can continue to convince other people to give you money that you're not going to pay them back on, or you might eventually some way in the public markets. But for the most part, if you're a small company, especially, you've got to find a way to stay in business. And that means you've got to find a way to be profitable. And that's what we've chosen to do. What I love most about profit is the freedom it affords you.

When you are profitable, when you don't need other people's money, you get to do pretty much whatever the hell you want.

which is pretty convenient for us because that's how we like to operate. We like to do whatever the hell we want. We like to follow a whim sometimes. We like to follow a hunch. Once we might not be able to convince a set of investors is actually a good idea or board is actually something we should pursue. But because we're profitable, we have afforded ourselves the opportunity to do all of that in the way we see fit.

And that doesn't mean we're right. In fact, we've been wrong plenty of times. We've lost money plenty of times. But as long as that loss is contained inside the pool of profitability,

It just sort of sinks. You go like, well, that one didn't work out. And so what? Let's swing again. Let's try again. And I think that's the beautiful thing about profit is the wider that margin is, the more freedom you have to kind of just go with it. Just listen to the music of the business and not be so obsessed with profit.

Whether this pens out somewhere down the line on some hockey stick in some Excel spreadsheet or whatever. Now, at the same time, with all that freedom also comes a certain discipline that I find liberating. There's a discipline to make sure that we're not squandering our money, that the money we spend is

is actually in many ways as important as the money we earn. If we save one dollar, say on a cloud exit, we first of all don't have to make another dollar to make up for those costs, but we also get to keep the dollar. That's the wonderful thing about profits in a private company.

Jason and I and the rest of the employees at the company get to participate in the fact that there's more money left over at the end of the year than what we've spent. And we get to keep that money. That's one of those get rich slow kind of situations as it's been for Jason and I. There's been plenty of peers in our industry who over the years have gotten windfalls on a certain liquidity event where everything just

Worked out and they went IPO or they sold it or whatever. And all the money came in one big bucket at once. Lovely. I'm very happy for all those people. That's not how we made it to where we are today. We made it by taking a little bit or sometimes a lot of it, depending on where the profits were off the table every year for 25 years.

If you keep doing that, there's enough left over that it's a very nice, pleasant place to be. And I think especially since we introduced this, I don't know, five years ago, four years ago, something like that, the 10% profit share pool, it also...

leads that sensibility into the rest of the business. The sensibility that it actually matters whether we're just squandering our money, say in the cloud, or that we're investing, buying equipment that we're going to keep for the long term because we trust we're still going to be in business. And

That somehow trickles all the way through the business to everyone who stayed here for a long time. So I like both those aspects of it. I like the loosey-goosey of the opportunities of the profit margin and allowing you to experiment and not being sort of drummed up and all that. And I also like the discipline of it. And finally, of course, I like the fact that if this was to end tomorrow, which was something I actually just...

mused about today on X, that the next four years are the most uncertain four years I can recall in my time on this blue little dot. I cannot remember another time. And both Jason and I were around when the internet first started to happen. We were around when personal computers started to happen. We're dinosaurs in that way. And those were momentous moments.

where things really change.

relatively quickly. And it still seems to pale in comparison to what's going on right now. So that is to say that if two years from now, like everything is AI agents just doing everything for you and there's not even a user interface. It's just all in your ear. You're dealing with her and Basecamp doesn't make any sense anymore. SaaS doesn't make any sense anymore. It's all gone. Well, do you know what? We can look back upon that ride and go like, do you know what? I had a good time.

I also have a little bit of treasure that's left over from doing this for 25 years and taking profits off the table every which way along the way.

I'm also reminded about Jason's dad, who had this wonderful quote of no one ever went broke taking a profit. That's who I would like to aspire to be. The kind of person who did not go broke, investing everything, doubling down on every opportunity until the end of time, until you're out. We actually recounted an example of a company called Flip.com.

This was back in the mid 2000s before mobile phones could do excellent video. And it was this dedicated device that could record video. And it was a huge success. And the company behind it kept investing more into newer flips and whatever. And that opportunity lasted four years.

And as far as I know, the people who kind of ran it, they just there was nothing left because the opportunity disappeared. And it could happen with Basecamp. It could happen with SAS. It could happen with a lot of things. So if you don't take any money off the table along the way, if you don't take any profits, you may very well end up going like, well, that kind of sucked.

I really regret my time. The last 10 years I messed it into this because I have nothing to show. We're not going to sit with that regret. Okay. Let's talk a little bit more about taking money off the table, out of the business, profit for yourselves. Because I think a lot of entrepreneurs who start a business think as soon as I make a dollar, I got to put it back into the business, put it back into the business over and over and over again. Tell me your thoughts about that.

I mean, there's certain times when that's maybe a bit true. Like if you need to hire somebody, you might need to invest back in the business. But this idea of investing back in the business, I was wondering, like, what are you investing in?

And so oftentimes you're investing in spending. So investing in spending, spending for what? I would just continue to ask yourself some of these questions. Like, let's say I could have taken $65,000 home this year, but instead I took nothing home. I'm living off my savings and I put it back into the business. I would say like, for what and for why? So next year you can make a hundred that you're just going to put back in the business again. To David's point, like at what point do you see the results of that?

And if your thought is I just keep investing, investing, investing back into the business until and maybe I'll take a small salary or whatever for a while until something magical happens, like we get acquired or one day I change my mind and I start pulling it all out. I think it's pretty rare that people end up doing that. Actually, what ends up happening is, is you keep putting in, putting in, putting in, putting in, and then something changes and you're no longer on that gravy train anymore.

And so now there's nothing to take out because you need it all in the business that you've built. And then someone comes and eats your lunch and it's kind of all gone. So I just don't think it's a healthy way to do it. Now, there, of course, are many examples of people who have done that and have done really well, obviously, right? That happens too. I just think that what you want to do typically is be taking risk off the table as you go. Running a private small company is incredibly risky. The chance that you're going to survive is close to zero.

It's very, very, very, very hard. And the longer you go, in many ways, the harder it's going to get and the more risk you're taking on. So I would just start to pull that risk off.

and put it in the bank where it's safe or, you know, put it in the S&P or wherever the heck you want to do with it, but, but shift it over to a much less risky investment. And you can let that money work for you in other realms. So let's say you have 50 grand, like you can put 50 grand into your risky ass business, or you could put 50 grand into the S&P and maybe make 5% or whatever, whatever, who knows, right? Whatever it's going to be. You can put that money to work. It just doesn't need to work in your own business.

People just don't think about that. Like in many ways, you could say, I'm going to make money in my own business and then I'm going to put money into the market that's going to work for everyone else's business. I'm going to spread that across 500 companies, even though there's maybe seven that really matter. But like, I'm going to spread that out and I'm going to put my money back into other people's businesses.

That's another way to think about this. And I think, or just hold it and buy a house or do whatever you want to do, whatever. There's optionality there that I think is really important to think about versus thinking that your business is the only place you can reinvest that money if that's what you want to do with it.

I think this fundamentally comes down to these two opposing forces. To be a founder, to be a business owner, you have to be a bit of an arrogant fuck. It just comes with the territory. You have to believe in yourself. You have to believe that there's something that you're doing that's better.

Then when other people are doing, maybe it's just a better location. Maybe it's just a better timing. Maybe it's just a better something. A lot of them feel like they're actually, they're smarter. They have a better idea. They have better skills at implementing things. They have better taste. There's a million things you can think you're better at. And I do think you have to have some of that.

If you don't have any belief in yourself, you're not going to make it. So accept that you need some belief. But, and here's the big but, that that has to be paired with some degree of humility. I could be wrong.

I could be better at something that doesn't matter. I could be better at something that no customer wants to pay for. I could be better at something that matters right now and for the next 18 months. And then that skill is worthless in the market. So

Constantly going back and forth between I'm better than everyone else. And also that might not matter is a good way of trying to triangulate in on your risk appetite. And for me, I've always laughed at this idea that founders and entrepreneurs, they love risk.

And you can see how people would get that idea. You read a biography of Elon, for example, and he's like, I was down to my last two million and I just put it all into Tesla and I mortgaged my house five times over. And everyone thinks like, oh, that must be what every entrepreneur is like. And I'm just sitting there reading this. Yeah, I'd never do that. I would absolutely never do that. SpaceX would have gone bankrupt five times over under my stewardship. I can tell you that. And.

And it's wonderful that we have people like that who are so 450% on the arrogant part of the equation, but that's not every entrepreneur. And there's room for plenty of entrepreneurs who could be like, I don't know, 50, 50, 80, 20, something along the line and don't want to bet at all.

not even on themselves, who want to bet something on themselves and then also take a little off such that I get to play again if this game comes up bad. And I think that there's nothing wrong with admitting that. There's nothing wrong with admitting the fact that like, you know what, it might not work out forever. It's not even an admission. As Jason says, it's a statistical certainty. The chances that your small business is going to be around in 2020

30, 50 years from now,

rounds to zero. So you exist somewhere along that spectrum, somewhere along that timeline. If there's only two years left, maybe there's 10 years left. Maybe you really are the 1% and you make it to 30 years. That's great. But wouldn't it be nice that if you fell into the pot of the statistically most likely scenario, you don't go like, fuck, fuck! I want my money back, bro! Right?

It'd be nice if you could go, do you know what? That's okay. I got the time I got. We had a lot of fun. We made some stuff. We sold some subscriptions. And also I have a bit of money left over.

The other thing I would add to this, I've been involved with a handful of small private company investments and I've seen fortunes fall fast. I've seen people who were running a business that was considered by many to be a $200 million business that sold for pennies on the dollar three years later.

This happens all the time. And there's so many things you don't control as an entrepreneur. You don't control the economy. You don't control laws, policies. You don't control new technologies that come out. Things can end very, very, very quickly. And luckily, a few of these businesses I was involved with

The founder took a little bit of money off the table earlier on because at some point they were riding high, like I'm going to be worth tens of millions. And at the end they were worth, if they had taken nothing else, they'd be worth zero. And now like they have to have a full-time job somewhere else. Like,

It can happen really quickly. I think if you get the opportunity to take anything off the table, you should. It's a responsible thing to do. And people think about reinvesting. You can reinvest all over the place into other people's businesses that are less risky, that are more diversified. So it's not about not investing if that's what you really like to do, but you can pour your money into someone else's business while you're also building your own. And I think that's a much just wiser way to survive in this world than it is to put all your eggs in one basket.

Here's the beautiful part of this. If it all ends tomorrow, you'll be really glad if you took some money off the table. But guess what? If it doesn't end tomorrow, if it goes forever, you'll also be really glad if you put some money off the table because you got to enjoy life while it was going on. This is one of the ways that Jason and I have managed to enjoy still being in this business for 25 years.

is that we kept taking some off and we kept enjoying the time. It wasn't just feast or famine. It mostly goes in the other direction. Famine for the longest period of time, almost always ending in basically famine and then occasionally a shot of feast, right? We were able to enjoy it along the way, taking money off the table, putting that money into...

Lamborghinis, race cars, some other stupid shit like that. That is just a tickle of life that you just go like, I enjoy it. And now I can go back to work on Monday and I can do it with a smile and I won't be envious that there's some other folks who sold their business and made a bunch of money who can then do all the fun stuff while I'm here just grinding my life away.

There's a way to combine these things where, yeah, OK, maybe it's not private jet money, but there's scales of this where along the way and early on, you can enjoy the fruits of your labor. This is the other thing I really I don't like this concept of the desert walk. They're like for seven years, I ate nothing but ramen.

I was about to say good for you, but no, that's not good for you. That's really bad for you. Actually, if you live only off ramen for seven years, I don't want to see your intestines. Like you're burning with great shit, dude. So maybe just realize that it's okay to enjoy life along the way. It doesn't mean you're not dedicated. It doesn't mean you're not a serious entrepreneur. It doesn't mean that you don't believe in your business. It just means that you're not collusional. It

It means that you don't have 100% certainty that it's all going to work out. And that's not just okay. It's,

fine. It's actually sane. So Jason, you mentioned the responsible thing to do is take money out of the business. I want to go to a portion of this write-up, which says profits create stability for customers. Let's talk a little bit about that, our thoughts on that, and then also using that message to share with customers. Well, I mean, the fundamental point here is that you can't build a reliable product unless you build a reliable company.

The company doesn't exist in two years. I don't care how good your product is. It's gone, right? So that's the idea is if you want to make things, if you like making things, you got to keep making things. To keep making things, you need to be able to...

make a living. Hopefully that's what the profit side is all about. And if you want to support customers, you want customers to support you and trust you, you need to give them a sense that you're going to be around, that you're not just a fly by night thing that's doing something really quick and it's going to be gone in five days, which is kind of one of the things that makes me a little bit nervous about what's going on today where everyone's making these things really fast on the fly. It's like, there's a lot of people making a lot of things for sure. And it's incredible that you can make a lot of things really quickly. What you can't make a lot

of quickly our customers, actually. You can make a lot of tools, but are people going to buy your thing, trust you and stick around is a big unknown, right? And so I think stability and projecting stability and talking about reliability and stability is important. And you can only really, I mean, you can, I guess, do that if you keep raising money and your company exists for a while, but at some point that's going to get turned off probably.

So I think it's a really good idea to create a sustainable process in which you can make more money than you spend, stay in business, show a long-term survival, and sell that as a feature of your product. That if you use our stuff, it's going to be around. Something we've done for years is this idea of the end of the internet, which is as long as we're around as a company, we're going to keep our products around for you. Even if we stop developing those products, we're not going to take them away from you.

That's kind of a promise we've made, essentially. Of course, if we went out of business, we can't sustain that. If we sell the company, we can't sustain that. But as long as we're running the company, we're going to do that. And whether or not that matters to everybody, I don't know. Most people probably don't even know that promise exists. But to some people, it certainly does. And to us, it feels good. And I think we can feel good making that promise, given the fact that we have a profitable business that's sustainable.

That's sort of the whole idea behind that. Well, perfect. With that, we're going to wrap it up. I will link to this write-up, which is at 37signals.com slash thoughts.

Rework is a production of 37 Signals. You can find show notes and transcripts on our website at 37signals.com slash podcast. Full video episodes are on YouTube. 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 708-628-7850. You can also text that number or send us an email to rework at 37signals.com.