OnStartups

Startup School: David Heinemeier Hansson vs. Everybody Else

Posted by Dharmesh Shah on April 25, 2008 in ycombinator 9 Comments

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.