Startup School: David Heinemeier Hansson vs. Everybody Else

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Startup School: David Heinemeier Hansson vs. Everybody Else

 

The following is a guest article by Philip Crissman.  OnStartups partially sponsored Philip's trip to Startup School 2008 in exchange for sharing some of key lessions for those of us that could not make it.  -Dharmesh

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David Heinemeier Hansson's Startup School talk was probably one of the most popular, and the most out of sync with the rest of the day's talks. Where most speakers took for granted that the entrepreneur would be seeking VC funding, David took the opposite approach; he wanted to talk about how you could start making money on your own, growing your company without needing to go look for funding.

David opened with the canonical "business model joke", made famous on Slashdot:

1. Brilliant Product
2. ???
3. Profit!

His answer to this, was:

1. Brilliant Product.
2. Price.
3. Profit!

He went on to argue against the Venture Capital model, in general, in favor of simply building a business by the somewhat revolutionary idea of just charging money for your products.

Ironically, he was immediately preceded by Greg McAdoo of Sequoia Capital. McAdoo, naturally, was telling the audience what VCs were looking for and how to build a presentation or a company which would get their attention. Following this, Hansson's message seemed nearly the opposite.

I enjoyed both talks, and thought that they were simply talking about two very different ideas.

McAdoo is a venture capitalist, so a large slant of his perspective is going to lean towards the investors. This is not to say that Sequoia or other VCs are not interested in the entrepreneur's best interest -- obviously, VCs need entrepreneurs in order to do what they do. However, they also need to represent their investors. Without capital, they would simply be business consultants, whose attention and advice the entrepreneur would need to pay for. Since their beholden to their investors, it's well known that they are looking not just to double or triple their investment, but quadruple or quintuple their initial investment.

Heinemeier Hansson, on the other hand, is thinking about the developer. He's asking: wouldn't you rather simply run a profitable company with a product you enjoy? Why do you need to be a billion dollar company when you can more easily be a million dollar company?

From where I sat, they were both saying some of the same things. Both acknowledged the same odds -- how relatively few startups would be those huge winners, the billion dollar ideas.

The difference is,

  • McAdoo and the VCs are specifically, on purpose, looking for those top few percent; that's their role. That is what they do.
  • Heinemeier Hansson is looking at all the other successful-but-not-necessarily-world-changing businesses you could start, and asking "Why not just build something like this?"

We do want to be realistic; it's important to acknowledge the risk we might be getting ourselves into. It may be that, like Hansson suggests, we'd rather take a 1:10 chance of making a million versus a 1:10,000 chance of making a billion.

What seemed to have been skipped is that the nature of the idea will have a lot to do with which path you decide to pursue. It's difficult to see how a business idea like Google, for example, could have succeeded without seed capital. It's hard to imagine Google starting and succeeding with a 37Signals-style subscription model; especially in the time when Google launched, having to "pay" for the privilege of searching the web would likely have been a recipe for failure.

On the other hand, it's just as hard to see Basecamp as a ubiquitous piece of software that simply everyone uses -- not everyone needs to manage projects. There's a much smaller pool of people who would need to do that, but they are much more likely to pay for a good way to do it.

What I took from the contrast between Heinemeier Hansson's talk, and the majority of the other talks, was the importance of having a healthy dose of realism.

Some ideas might well have that billion-dollar potential, and may need that VC funding to get going. A lot more ideas really can be put together in 10 hours per week (as Hansson mentioned Basecamp was built), and then run as a profitable business. The important thing is having the ability to tell one sort of idea from the other.

Posted by Dharmesh Shah on Fri, Apr 25, 2008

COMMENTS

Great post and seems like startup school was well worth it.
"It's hard to imagine Google starting and succeeding with a 37Signals-style subscription model; especially in the time when Google launched, having to "pay" for the privilege of searching the web would likely have been a recipe for failure."
There are similarities---Google adopting the Overture CPC model was the equivalent of the "freemium" model today. While the other search engines were selling off results to advertisers at high CPMs and simply poor at finding what you wanted, Google made a better product and priced it right...five cents a click to start.
The risk of missed opportunities are never counted. How many Siebel VARs and consultants were there ten years ago? Could any of them become Salesforce.com? With VC maybe. Highly unlikely without it.

posted on Friday, April 25, 2008 at 1:57 AM by Mike


"Some ideas might well have that billion-dollar potential, and may need that VC funding to get going. A lot more ideas really can be put together in 10 hours per week (as Hansson mentioned Basecamp was built), and then run as a profitable business. The important thing is having the ability to tell one sort of idea from the other."
That is so true -- and yet -- so many times, we get carried away while envisioning the next big thing (well, according to us anyways ;)).
A healthy does of realism is what we need I think :)
Thanks for the very insightful article.

posted on Friday, April 25, 2008 at 2:05 AM by Saurabh Jain


Thought provoking post on a good talk.
The VC ecosystem treats entrepreneurs as a commodity raw material: about one team in 200 is funded, so they are looking for the top 1/2 % The rest are thrown away.
Compare that with the YCombinator model, with it's associated community and things like Hacker News that provide ongoing support for teams that were not accepted as well as many that didn't apply. YC may force at least seed VCs to reconsider their model for software companies.
I can imagine a number of business that could charge you to search the web, in particular the application would be very focused on helping you find what you are looking for and not wasting your time and attention on ads.
I don't think you can tell if you have a billion dollar idea: complicating factors include the risk of self-deception, survivor bias (we only hear about the winning lottery tickets), and the need for ongoing focused experimentation and execution to make a real business. I think you can tell if you have a good idea that's worth pursuing, but that's a far cry from a billion dollar idea.
I don't understand the meaningful differences between the Basecamp family of products and the Google Docs family. Couldn't they both be billion dollar ideas? Or perhaps neither.
Take for example McDonalds, Ray Kroc took ideas reduced to practice in an existing business and understood how to convert one hamburger stand into a franchise model. Yet nominally you would think a hamburger stand wouldn't be a billion dollar idea.

posted on Friday, April 25, 2008 at 2:51 AM by Sean Murphy


Is it really "either this or that"? It looks a bit binary to me.
Let's elaborate.
Def succeed
Depending on your personality
If you are a socially fluent person, sell your idea to VCs.
If you are a socially inept person, sell your product to customers.
If you are a dog, please contact me, I have a business proposal for you.
Else quit
end
Exception Genius
return !GallileoStyle?
end
;-)

posted on Friday, April 25, 2008 at 6:24 AM by JeanHuguesRobert


And I always thought that the purpose of a business plan is for the entrepreneurs to determine whether they need outside funding or not...

posted on Friday, April 25, 2008 at 8:18 AM by Berislav Lopac


Berislav, that is ONE of several purposes of a business plan, but hopefully not the only one :)

posted on Friday, April 25, 2008 at 9:46 AM by J Liles


"...in favor of simply building a business by the somewhat revolutionary idea of just charging money for your products". And to think of it, charging money to keep your business going has been around for eons :-) Its the other way round that is revolutionary.
Both camps have their points. Google could not have started without the seed money. They could not have charged for search results, because search engines before them were not charging anything. I am sure they would have considered that option if it was not so. Ebay started without any VC funding and did start charging at an early stage and no one even today thinks of providing auctions for free.

posted on Friday, April 25, 2008 at 11:27 AM by Sonal Pandey


The title is misleading, but the article is decent.

posted on Friday, April 25, 2008 at 1:19 PM by Matthew Baron


@Matthew Baron... the title could be seen as misleading, but I actually based it on some things DHH said at the very beginning of his talk. He talked about how alone he felt there, and made several references to the fact that his point of view was in opposition to much of what we were hearing throughout the day.
So, it wasn't meant to be misleading... he himself made the point that his was a minority opinion in that setting.
Glad you liked the article, thanks.

posted on Friday, April 25, 2008 at 10:58 PM by Phil Crissman


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