“Profitability is Freedom”: 37signals’ David Heinemeier Hansson on the Underdog Mindset

David Heinemeier Hansson, Co-owner and Chief Technology Officer (CTO) of 37signals, joins Opto Sessions to discuss the creation of Ruby on Rails; his businesses Basecamp and HEY; the underdog mindset, and what makes Elon Musk a good example of it; the key characteristics of businesses he invests in; and why profitability is crucial.

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David Heinemeier Hansson is the inventor of the development framework Ruby on Rails, the web application that underpins companies such as Twitter, Block [SQ], Airbnb [ABNB] and Shopify [SHOP], among many others.

His Wikipedia page describes Hansson as “a Danish programmer and racing driver”, and he has won stages in the 24 Hours of Le Mans endurance race. He tells Opto Sessions that the link between racing and programming is the obsession both prompt in him to figure out the system.

“You have a racetrack that might go two minutes, and you get a verdict every two minutes as to whether you improved the system or not: whether the inputs that you delivered as a driver, or the tire choice that you made, or the engineering, or the preparation, were correct.

“I think programming has a lot of similar characteristics.”

Hansson started developing Ruby on Rails soon after discovering the Ruby programming language in 2003. He says that Ruby “ignited my brain”, and he credits the language with inspiring him to become a full-time programmer.

Ruby on Rails is, in Hansson’s words, “a toolkit that takes the general-purpose Ruby programming language, that you can use for anything, and makes it particularly good for creating web applications”.

Complete Systems

Hansson has built his own products on Ruby on Rails. One of these is Basecamp, a project management tool aimed at improving collaboration within small teams.

“Basecamp is a place to keep track of the work, to invite people to collaborate together on the definition of the project, the pitch of the project, the progress of the project, the to-do items, the files, the everything,” says Hansson.

Part of Basecamp’s success is rooted in the fact that it combines the best features of various other products. “You could describe it as a combination of Slack, Google Docs, Dropbox [DBX] and Asana [ASAN], taking all those pieces, giving you one application that you can use to bring wonderful projects to their completion.”

This wide range of services offered within the platform makes it easier for new users to adopt. “That’s the nut we’ve really cracked with Basecamp: to make a piece of software that someone can adopt without training… and then they can do the whole thing.”

He goes on to say that “it’s only complete systems that deliver results. You can take great individual parts, and you try to put them together, and you actually get a crappy system.”

The Underdog Mindset

When launching email service HEY, itself a challenge to the giant incumbent Gmail, Hansson quickly found himself digging his heels in for a protracted legal challenge with Apple [AAPL] over what he calls “a ransom letter” for 30% of the app’s takings on the App Store. HEY won itself a carve-out, which Hansson says it couldn’t have done without the “underdog mindset” that he and his co-founders had internalised.

While being an underdog can feel like an uphill battle, Hansson believes underdogs actually have many advantages of which larger incumbents could be envious: they “are far more agile, can make decisions very quickly and can move very quickly”.

Larger companies struggle to maintain the advantages of smaller companies because of their inherent bureaucracy, which Hansson thinks stifles innovation. However, a tiny number of founders are able to replicate the underdog mindset in larger companies. Hansson singles out Elon Musk as one of the best current exponents.

“Moves that Tesla [TSLA] made on the pricing of their Model S and Model X cars over the past year have been a textbook business case of how novel and rare it is to see a large corporation… act in a way that feels like it is a start-up.

“The magic of Elon Musk's leadership is that he’s embraced this underdog ethos. It's not just about him being the biggest carmaker in the world. It's him against all other carmakers. By that definition, you will be an underdog until basically the end of time.”

“Profitability is Freedom”

His sympathy with underdogs inspires Hansson to consciously limit the pace of 37signal’s own growth. He contrasts this with the opposite and more familiar approach, which sees the goal of a business to be growing as fast as possible.

“The kind of businesses that follow growth above all else tend to be high-stakes and high-risk. They tend to have massive burn rates. Very often, that just doesn’t pan out, and they flame out spectacularly.”

This view has led Hansson to become a long-standing critic of the venture capital (VC) model, which he says is “is very good at creating a tiny number of high-flying companies or unicorns, but it sacrifices an enormous amount of entrepreneurial talent and potential businesses to get to that point”.

Hansson views profitable, self-sustaining businesses as the key to freedom from the demands of VC.

“Profitability is freedom. That is the fundamental premise that we build our business on. As long as we're profitable, we do not have to ask other people for permission.”

He says that there is a need for VC, but he believes it should involve more modest amounts of money building a greater number of smaller, sustainable businesses.

“They may not become unicorns, but they may become some of those $20m or $100m businesses that are sustainable for the long term and help build that middle part of the economy that we really need.

“The model is currently premised such that we take bets on such speculative ideas that have to go so far that we have to place 1,000 bets to get one that’s going to make it all the way.”

Hansson has applied his own logic to a handful of Danish start-ups that he has invested in, with the view being that his will be the last capital injection before the company becomes self-sustaining.

“The general thesis is that you can make a small investment to get someone over the initial hump, and then the wheels can start turning on their own.”

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