I sat in ETL today at Stanford and picked up some nice bullet points on building a software company from David Heinemeier Hansson, creator of Ruby on Rails and partner at 37Signals. I thought I’d jott them down here:
1. Don’t accept VC money. I’ve heard this from a number of software/internet startup founders, but here is Hansson’s take on it. If your company is operating on your own dime, you will be much more motivated to find a revenue model and implement it much more quickly. Additionally, once you accept VC money, you broadcast a message that you will return 5-10x their investment, which can be a very tall order. It is much easier to create a smaller business (generating, say, $1-3million profit per year) and keep the profit (versus VC’s taking it) than it is to scale a huge company and have a smaller piece of the profit pie. 37Signals has not accepted VC money and remains a smaller company with more control.
2. Unlearn your MBA. Perhaps most relevant to me as someone who is getting a master’s in Management Science and Engineering. In school, we are focused on writing business plans, diagnosing the competitive landscape with Porter’s 5 forces, and using other frameworks to impress professors. The customer does not care about your frameworks. They care about a product which satisfies their needs.
3.Be profit-margin focused. Hannsson criticized Salesforce.com for having very low margins, citing them at 5.4% per account. Hansson called Salesforce a “stupid” company, which I personally disagree with, but he makes a decent point on the margins. He said it doesn’t matter if you have lower market share (by product), as long as you have good margins. He pointed to Apple having a relatively small marketshare with the iPhone but having huge margins…
4. You don’t have work an 80 hour week to be a successful entrepreneur. Working less forces you to prioritize your tasks and keeps you well rested to maximize your working potential.
Here’s a .mp3 file of the talk:
I had a talk with Tristan Walker of Foursquare a week ago, and I’ll post on that experience soon.
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