37signals isn’t mythical, you’re not paying attention

My friend and fellow bootstrapper Allan Branch, of LessAccounting, also wrote a response you will enjoy. Read it here!

The Myth of the Design Studio Turned Product Company is a screed, penned by a consultancy owner who tried, and failed, to move his design consultancy to a product business… and who blames the 37Signals for putting such thoughts into his head.

You know I love a good polemic and I’m not above blaming an industry for twisted priorities. But this bugged me, big time, because it’s so unfactual and blamey.

In short, the author claims he copied the 37signals and it didn’t work. Ergo they’re a wild and crazy outlier, and you can’t learn from them. And thinking you can, well, that’s a destructive myth plaguing the consulting agency world. And damn them for making it so irresistible, against his better nature! You shouldn’t have worn that short skirt, Jason Fried, it’s all your fault!

*cough* Pardon me. I got a little overexcited there.

I, as someone who has truly, slavishly copied the 37signals, am here to say: It absolutely works. And also: The author guy skipped a bunch of steps. He got a lot of facts wrong. He willfully misinterpreted what they wrote. He imagined things that were not there. He lays a lot of imaginary bullshit at the feet of 37signals, and blames them for it not working.

He also conflates “startups” with “product companies” — and if you’ve ever read my blog before, you know that’s a deadly mistake.

So, if you’re curious about how I got where I am today — by following 37signals’ lead closer than anyone knows — then read on, because I’m going to rip apart the myth of “the myth” and reveal more detail about my backstory than ever before.

Rant Stick: ENGAGED. Ready to read it with me, critically? Let’s go!

Myth: They launched their first product, and BOOM! SUCCESS UNICORNS!

Let’s look at the myths that Richard Banfield has told himself:

“Early in 2005, as their first product, Basecamp… grew in popularity[,] something happened to the web development industry.”

Fact: Basecamp was not 37signals’ first product. Nope. It was their third:

  • First: E-Commerce Search Report: $99, launched January 8, 2003.
  • Second: Defensive Design for the Web: traditionally published March 12, 2004, which means it was under contract and finalized months before…

Yikes. How wrong can you be? Seriously, ouch.

Jason Fried & co didn’t appear out of nowhere with a massive hit. They also never claimed to. The evidence is all over their blog, the archives of which are still online.

They started with a book. And a report. They built their readership. They taught people things. They learned how to sell.

You might be saying, “Well, Amy, Defensive Design actually was published a month after Basecamp had its public launch!” (In Feb, 2004.) Yes, but the book had been bought by the publisher probably at least a year before — and printed, and pre-sold to bookstores quarters in advance. That’s how publishing works.

And anyway, the ecommerce report shipped right after the new year in 2003.

Which means 37signals had been working on products since 2002.

Three years before Basecamp allegedly “blew up” in the scene.

Point of fact: I wrote a whole essay about this exact story, “Why you should create a tiny product first.”.

Why is this myth — created by the people who believe it, not 37signals — so pervasive?

Because it lets the believer do whatever they want, and then blame someone else for it.

Because intellectually incurious people believe the observable universe only exists when they are there to observe it. “If I didn’t hear about it, it didn’t exist.” They first heard of Basecamp, and never stopped to wonder:

What came before? How did they get there?

Incurious people fail. Because incurious people don’t rely on facts, they rely on story — a story that begins only when they, Homo Lethargicus Mythicus, appear on the scene. They wander in at the third act… then they wonder why their version of the story didn’t work.

OK, enough lecturing… back to… lecturing? Wait a minute! Back to myths. That’s it.

Myth: Product building is at odds with consulting… ditch those clients!

Guys, guys, GUYS:

“Some studios went to extremes. They dove headlong into the task of creating their own products. Their stunned clients stood by as their design and dev partners now shuttered themselves in and announced they would be working on their own products.”

This here seems to be the real thrust of Richard’s polemic:

It’s a distraction! People are going CRAZY and forgetting their station in life! And their clients are suffering! Poor, sweet clients… if only someone would help them… Someone who consults with TechStars and other big names… and who’s completed so many projects, see, that number right there… Someone who’s given up on this harebrained scheme and will devote themselves only to you and who is writing this blog post right now!

(Am I cynical? Guilty as charged, then. But read the whole thing again and tell me if it’s not a bit of very clever marketing.)

But, ahem, let’s take this complaint at face value. Let’s say there are foolhardy and impressionable agencies out there dumping clients willy and nilly, and “diving headlong” into creating their own products and neglecting, you know, their actual source of income.

Whose fault is this? Theirs. Not anybody else’s. If you want to copy 37signals, by all means copy them. This is not copying them.

37signals began building Basecamp no later than mid-2003. While working for clients. In fact, the earliest mention of Basecamp I could find is here, from a little guide they titled Why Should I Hire 37signals?:

Screenshot_11_6_13__12_37_PM

The source? Dated December 18, 2003.

Fact: Basecamp didn’t detract from client work… it aided it. 37signals build an internal tool they could use as a competitive advantage to seduce consulting clients. They made one hour of product effort do the work of two: not only did they build a product, they built a product that helped them make more money consulting.

“A small irony is that their story distracted the very people that they had created their tools for. Now their very customers were distracted from the tasks that made the tools necessary in the first place.”

No, the small irony is that if you believe this, you have ignored the most important fact that enabled 37signals to do what they did.

Myth: You need infinite time and CEOs and ops people and and and!

Hoo, boy. So, I’m not being entirely linear in my takedown… but here’s where the product-startup conflation starts to get bad.

One of Richard’s biggest arguments — in terms of words expended — is time. He expends a lot of words about time. I almost get the feeling that he’s concerned about time. Certainly he thinks everybody else in the agency world seems to be talking about their internal project time, and that’s super scary because…

“For a small design or dev firm 20% time is often the difference between profit and loss.”

Which is in truth a completely separate point from the following sentence, but he treats it as if they are connected:

“If startups can’t produce guaranteed success even with all that support and a full-time effort, what makes us think that 20% of unstructured effort will get us?”

Let’s break it down, shall we?

First off, there’s one little word hiding in that last sentence of his. Why does he write “20% of unstructured effort“?

Why on earth would you spend so much time and not bother to structure it? Was he, in fact, plagued by random creative “noodling” on “ideas” — genuine time wasting — and not engaged in a serious effort to make products? I wonder.

Fact: “internal” doesn’t mean “product.”

A healthy agency requires all kind of internal (aka non-billable) internal projects… what else do you call hiring, marketing or training? These three activities are critical; nobody will tell you otherwise. Why? Because they deliver a ROI… IF you do them right.

Developing additional income streams is simply another internal line item. If you treat it like it’s special, different from necessary tasks like marketing or training, you are doing it wrong.

Fact: If you’re 20% from bankrupt, you have serious business issues.

Richard magnanimously warns away small agencies from products, because they “can’t afford” to lose 20% of their billable time to develop new sources of income over the long term. This may not be untrue… but even if it’s true, it is an absurd argument.

Here’s the thing, agency guys: A 20% loss could strike you at any time. It doesn’t take much:

  • A major client could stop paying on time.
  • The industry that feeds you all your clients (*cough* funded startups) could have an “upset.”
  • One of your team could fall seriously ill, or quit.

If your business could not survive any of these things, you are in constant danger. And you have to fix that first. Luckily for you, there are entire books on this topic (the dreaded E-Myth, anyone?).

By the way… one great way to avoid being killed by a lost client, or industry having a “Series A Winter”? Create a diverse income stream portfolio. You know what that means, right? Products.

Myth: It takes years to see any return on products, unless you’re 37Signals.

He writes,

“Even the most efficient and well managed studio would struggle to lose 20% of their billable time each year without a tangible return.”

This is an interesting statement. He says “each year” — that implies that it will go on for several years, or at least more than one.

Now, you may know that I often write about exactly how long it does take to reach $100,000+/year from software as a service. (The consensus seems to be about 2 years of serious effort to reach $180-200k.)

But that’s not what Richard is saying. He’s saying: That time is GONE. ZIP. ZILCH. NADA to show for it.

To credit his honesty, he seems to admit in the essay that this is exactly what they did… but then he concludes “Maybe we’re not smart enough” to make it work. For that, he loses points. It doesn’t take special intelligence to see how “unstructured time” would fail to lead to structured results.

Here’s the thing:

If you actually copy 37Signals, you’d start with a white paper for $99 or so, which could not possibly take 20% of an entire year to produce. You could start to see some ROI very quickly. Maybe not enough to match your hourly rate — not at first — but there’s where your investment mindset comes in. You give up a little now, in exchange for a bigger return, later.

Once you’ve made a product, you can keep selling it, meaning that your initial hourly rate can get higher and higher from the future.

Fact: I am out of energy.

OK, I’m done for now. Seriously, there are so many other myths and half-truths in that one power-packed polemic, I’ve gotta split this sucker into 2 parts.

But I won’t leave you hanging without some actionable advice.

FACT: How 37signals ACTUALLY did it, and what you can copy, right now

37signals did not: quit consulting, work at odds with their clients, start with software, act like a VC-backed startup, hire a CEO and ops people right out the gate, tempt you like a Greek siren to ruin your life, etc., etc., etc.

So, what did they do?

Fact: 37signals created a very safe, risk-averse approach. One that is not hard at all to copy.

Here’s what they did:

  • They had fixed price consulting packages. This helps everyone: clients know what they are getting, for a low (and fixed) risk; and the consultants have an easier time selling, easier time scheduling, easier time carving out time for internal projects. Link, screenshot.
  • They created marketing material that brought clients to them, including their blog, their infamous manifesto, the 37Better project, Design Not Found, and more.
  • They dipped their toes in with a Tiny Product First, the E-Commerce Search Report. Note that this product was not only tailored to their clients, but also the clients they wanted to have.
  • They repurposed their content marketing content for their first book — Defensive Design clearly grew out of their free web site, Design Not Found… started in 2001. Double the results, single effort.
  • They created products for people in their audience — not some niche industry they discovered maybe needed software or books… they focused on helping people who were like them (something I beat the drum for every damn day).
  • They built reputations by educating — sharing techniques, tricks, foibles, and opinions with both fellow designers / agencies, and clients alike. Their content helped so many of us learn so much.
  • They built a software tool that did double duty: As I showed above, Basecamp was a competitive advantage for 37signals: The Consultants. And they turned that into a product for other people in their audience. (This was no new approach for them. All their marketing and books, reports, etc. did double duty, too.)
  • They did not quit right away. No, they streamlined all their efforts, so each activity they undertook fed into the next. Their consulting informed their product informed their marketing attracted customers.
  • They knew how to Be Your Own Angel. They sold a book (Defensive Design), a white paper (E-Commerce), an ebook (Getting Real), held workshops (Building of Basecamp), to pad out the slow-building SaaS revenue. I don’t know if this was by design, but I am sure that it helped.

All of the above can be copied by anyone who has a skill that clients will pay for, be it design, code, writing, etc.

They had two advantages you are probably unable to copy: Ruby on Rails, and the first-mover advantage. But as you will see in my next essay (sign up for my newsletter below), you can still do great even without them. (We sure as hell are, and we are far from first!)

That said…

If you’re familiar with my business at all, you know I’ve run completely off this playbook — from the blogging and fixed price consulting, to the fun free projects that doubled as marketing for client work, to tools they served both us and our clients internally as well as other people like us who suffered the same issues. Oh, and there were the ebooks and workshops that helped us pad our coffers while weaning ourselves off consulting.

You’ve seen the 37signals versions… here are ours:

And while I don’t have any big OSS projects to my name, my husband, Thomas, certainly does.

The one place I failed to copy properly was: we started with software a little too soon, and bit off more than we could chew. In the first couple years, there were months where we couldn’t balance Freckle with consulting, and so Freckle was neglected. But it still grew.

And when I simply had to quit consulting, but the revenue wasn’t there yet, damned if I was going to give up. We filled in those long, slow months of SaaS growth with those other products & workshops.

Now, I teach my 30×500 students explicitly to avoid this particular mistake. I teach them to copy 37signals more accurately.

There you go… there’s the way 37signals actually did it. That’s the way you can do it, too. That’s the way I teach my students to do it. That’s what I blog about.

And I’ve given you proof that it can be done by utterly non-mythical creatures, like me. Our revenue is only a fraction of 37signals’ revenue, but that’s by design: we don’t work 40 hour weeks, and we don’t stress, and we have only 2 employees. Freckle will cross $1 million in lifetime revenue this month, and it’ll also be our best month ever by a long shot.

We’re happily, and very profitably, doing it our way… using the 37signals playbook.

Unlike Richard Banfield, who admits at the very end of his own rant:

“As 37Signals releases yet another book and another great new product I’m reminded that I still haven’t got round to finishing my first book.”

Perhaps, just perhaps, that has something to do with it.

Comments? Drop me a line @amyhoy.

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