When it comes to acquisitions, there are only two things worth buying: products and customers. When you buy either, you’re buying a solid stream of revenue. All you have to do is not fuck it up. That’s harder than you think, but the good news is that there is room for error. Fuck it up a little and only a few will leave. You still have the entrenched rest to make the purchase pay.

Not so with ideas or talent. These are the purchases of aspiration: Imagine if we took that scrappy idea with those underpaid, hungry champions, and we gave them all the resources in the world. They could paint all the colors of the rainbow and still have pixie dust left to spare!

Turns out that good ideas and strong talent is as fickle as it is seducing. As soon as you start making big-company compromises, the good idea turns average, and the average turns into a write-off.

Same goes with strong talent. As soon as they have to deal with three layers of reporting, quarterly budget cycles, and swing-door managers, they turn off the creativity and head for the exit. The latter part might take from three months to two years, but it will happen.

That leaves the acquisition with nothing but a dusty footnote in the P&L, but don’t worry, nothing will have been learned, so the cycle can repeat next year. There’s always a fresh crop of shiny ideas and sassy talent available to try that-which-does-not-work once more.

Every time a young, promising start-up is bought out by a stodgy, old incumbent, the world is flush with congratulations. Congratulations to the team, island mojitos now await them. Congratulations to the venture capitalist, their past nine flops can fade in the background for a week. Congratulations to the acquisition team, who can celebrate the win on their lawyer’s expense account.

But all the hoopla and excitement quickly dies down and the fresh-for-a-moment old incumbent goes back to doing what old incumbents do best: thwart new ideas.

As soon as Monday rolls around, it’ll be time for another management rotation, and the new guy surely has no interest in playing with the old guy’s toys. That’s not how you make a name for yourself and move up the ladder. Oh no.

Take Dopplr, for example. Nokia picked them up in 2009 for the going price of Web 2.0 vanity purchases without a business model: $20,000,000. The Guardian is running a rare where-are-they-now story on how predictably that turned out: “We have decided to bring it into a maintenance mode… but will not develop it further at this stage”.

Or what about Bloglines. IAC picked them up in 2005, did little to advance the application, and then dragged out the inevitable. It’s being shut down on October 1st.

The acquisition graveyard is full of tombstones for the wasted efforts of bright minds. Minds that could have gone into building lasting companies with a shot at significance.

Next time a vanity purchase is announced, maybe we shouldn’t be so quick with the champagne.

Below: Q&A with Petr Palas, CEO and Co-Founder of Kentico Software (based in The Czech Republic). He also answered reader questions in the comments. This is part of our “Bootstrapped, Profitable, & Proud” series which profiles profitable companies that didn’t take VC and have over $1 million in annual revenues.

What does your company do?
We help web developers have more fun creating websites. We have a single product called Kentico CMS for ASP.NET. Now you may think it’s just another boring CMS. Well, it may be. But we believe it’s different. Most CMS systems are either very simple and thus easy to use or they are extremely flexible and complex. We decided not to make decissions between simplicity and flexibility and mix both of them in a single product. So we built a CMS that makes web developers much more productive, but also allows them to design the website in the way they need.

How did the business get started?
I was building some websites and web applications and realized there’s a lot of routine work I hated. I believed there must be an easier way to do things. I worked in a company that created several .NET components for developers and then I saw there was no good CMS for ASP.NET developers. I suggested that to the employer, but they didn’t see that as an opportunity since there were many web agencies selling their own simple CMS products. So I decided to start my own company in 2004, just with my savings. I gave up my master studies of computer science and put all my efforts and time into my company.

And I was actually lucky, since my first client was Gibson Guitars who decided to use Kentico CMS for their website, although the product was very immature (and they’re still our client!). At that time, I didn’t have any strategy or big vision. I didn’t watch the market and competitors. I just followed what our clients were asking for and tried to add those features as quickly as possible. Thanks to that, we’ve had some features, such as friendly URLs and SEO optimized pages, years ahead of big CMS companies. As we implemented what the clients wanted, we were growing rapidly with every new release.

I didn’t have any strategy or big vision. I didn’t watch the market and competitors. I just followed what our clients were asking for and tried to add those features as quickly as possible.

Then I was lucky again and got a contract for some development based on Kentico CMS for T-Systems, a division of T-Mobile. It gave me some extra money and I immediately invested it into further growth of the company.

I hired three university students as developers to speed up the development. We used students a lot since they were much cheaper and easier to hire for a start up company. At some point, we had 25 employees, 20 of which were students. We still have students in our team, but the ratio is much lower, it’s about 15% now.

As they graduate, they continue as full-time employees. The stability of our team is actually something I’m proud of – we’ve never lost an employee who was excellent and for which the job was a good fit. Now, after 6 years, we have 62 employess, 4 of them in our U.S. office.

That leads me to one important part of the story: We’re not an American company. We’re not even in Western Europe. We are located in the Czech Republic, a former communist country in Central Europe. Still, we managed to grow our client base to 2,000 clients in 84 countries without ever meeting most of them.

At the beginning, I decided I wanted to make the product for the global market since the market size was enormous in comparison to our local market. So I started to sell the CMS online, without any sales staff and with a very small marketing budget that I spent mostly on Google Adwords. We ranked very high at Google because most of our big competitors didn’t bother with SEO at that time. It gave us lots of traffic. We’re constantly trying different approaches to marketing, but it seems to me that the return for every extra marketing dollar is smaller and smaller.

Continued…

This is a Q&A with Jeff Butterworth (pictured below), Queen Bee (CEO when speaking to suits) of Alien Skin Software. This is part of our “Bootstrapped, Profitable, & Proud” series which profiles companies that have $1MM+ in revenues, didn’t take VC, and are profitable.

What does Alien Skin Software make?
We make Photoshop plug-ins for photography and graphic design. Our graphic design plug-ins tend to be glitzy effects like fire and lightning. Most of our photography plug-ins are more practical tools for things like resizing, but there are some cool photo effects too, such as film simulation and oil painting. Our strength is making research level image processing easy to use.

Unlike many of the other companies highlighted here, our software is on the desktop rather than on a web server. As a result, we deal with some old fashioned issues like piracy, resellers, and physical disks. Another difference is that we have been around for 17 years.

What’s your evolution been like with the company?
The early years were exciting because I was experiencing completely new things like travel, leading a team, and handling what, to me, were large amounts of money. On the negative side, we worked very long hours and there was a lot of chaos. These days we don’t experience quite as much novelty, but there is always something new to learn. Now we coordinate our efforts and get much more done in less time. I love our calm efficiency and would not trade it for extra excitement.

You dropped out of computer science graduate school to start the company. What was that situation like? How did you make the decision to jump ship?
I enjoyed computer graphics research, but I didn’t like the unfinished state of most software created in academia. When I figured out that I wanted to make bug free finished tools, it was an easy decision to move into commercial software.

My friend George Browning and I left school together to start Alien Skin Software. I have to admit that we partly did it because we thought we would get rich quickly. I’ll never forget a conversation we had with a friend who was an experienced software CEO. He laughed when he heard our predictions of easy success and said, “I promise that if you ever get rich, you will have earned every penny.” So true! We are successful, but it has been 17 years of challenging work.

An experienced software CEO laughed when he heard our predictions of easy success and said, “I promise that if you ever get rich, you will have earned every penny.” So true! We are successful, but it has been 17 years of challenging work.

How much cash did you need to get up and running? How did you get that money?
I don’t recommend starting a business the way we did. We quit our day jobs, had almost no savings, and I was borrowing my roommate’s computer to work on our products. When our first project was severely delayed by our publisher, we had no financial cushion.

George left for saner pastures and years later founded Zengobi, maker of Curio. I asked my parents for money, but they thought I was being irresponsible (correct at the time), so I got a $2000 bank loan to buy a low end Mac. It’s amazing what fear of starvation will do for your work ethic. I quickly made my first set of Photoshop plug-ins called The Black Box. It started to support me pretty soon, which was easy since I was just living off of burritos in a cheap apartment.

A few years later, I sold my father 1% of the company for $2000. I didn’t need the money by then, but it made Dad feel better about not loaning me money in the beginning. Also, North Carolina law at the time required at least two partners to form an LLC. Since then I’ve never received any type of investment or loan for the company.

How successful is the business?
The company became profitable in 1994 and has been profitable every year since then. We passed the $1M revenue mark in 1996 and have remained well above that ever since. The most important measure of success to me is whether everyone in the company enjoys their work. Money feeds into that, but so does the quality of our products, the competence of coworkers, and happiness of customers. By those measures, I think we kick ass.

The most important measure of success to me is whether everyone in the company enjoys their work. Money feeds into that, but so does the quality of our products, the competence of coworkers, and happiness of customers.

Continued…

The final guest speaker at our recent 37signals HQ meeting was Scott Harrison from charity: water.

charity: water is a non-profit organization bringing clean and safe drinking water to people in developing nations. Harrison’s personal journey is compelling and it was interesting to hear how CW’s unorthodox approach, especially when it comes to branding and transparency, has helped it stand out from other charities.

Branding
CW’s messaging emphasizes cool visuals, striking videos, and from-the-field reportage. It’s more like what you’d expect from a business or publication than a charity.

For example, the image of the yellow jerrycan — often used to carry water in third world countries — has become an iconic symbol used in CW’s advertising and videos.

This image of a baby bottle filled with dirty water is also used frequently by CW:

Below, a couple examples of the stunning field photography used by CW. Looks more National Geographic than NGO.

CW’s videos are sharp too. Hotel Rwanda Director Terry George directed this PSA starring Jennifer Connelly.

Transparency
Another key to CW’s success is that 100% of donations are used for direct water project costs. (A group of private donors, foundations and sponsors help pay for the everyday costs of running the organization.) CW even pays for the paypal and credit card transaction fees when people donate online so each penny goes straight to actually building a well.

Harrison chose this route because he felt many donors had lost faith in charities due to outsized admistrative costs. Many CW donors decide to give because they know for sure where their money goes. (It’s worth noting this policy presents a big challenge since it makes fundraising for operational costs difficult to scale.)

CW also works hard to document the results of donations. One way this is done: GPS and photos of completed projects.

When donors see photos and videos of the communities they’ve helped, they’re a lot more likely to continue giving.

It’s a great story and it’s neat to see this kind of approach brought to the charity world. Thanks for stopping by, Scott.

Learn more about charity: water or donate.

Sal Khan of The Khan Academy talking (via Skype) to 37signals at our learning theater yesterday:

It was an hourlong Q&A session. Some of the topics covered:

• How his videos are being used by schools and teachers
• How asynchronous learning is changing educational possibilities for the third world
• How his video format has helped him to be successful (e.g. not seeing his face helps viewers connect to his voice and the lesson)
• How he prepares for videos
• His priorities in teaching (e.g. getting people to develop intuition)
• How the YouTube video length constraint helped him create more digestible content compared to typical lecture lengths (10 minute clips actually match up nicely with typical attention spans)

A couple of interesting counterintuitive ideas: He mentioned that the more money people spend on videos, the worse those videos seem to get. Also, he thinks it makes more sense to have students watch lectures at home and do homework at school as opposed to vice versa.

Thanks Sal!

Related: Sal Khan and the Khan Academy to the rescue [Signal vs. Noise]

Earlier this year I was invited to New York for an interview with Big Think. Big Think interviews opinionated people from the world of business, politics, religion, charity, academia, science, etc.

We talked for close to an hour, but it was a 6-minute segment on why you can’t work at work that really resonated with their audience. In just eight months the interview has been watched over 1,000,000 times (thank you!). Here are some other popular Big Think interviews from 2010.

A couple weeks ago Big Think came to Chicago to film a second interview with me for their HP-backed INPUT|OUTPUT series. Here it is:

We talked about the modern office, VC funding, why to be less ambitious up front, common mistakes new businesses make, the difference between spending money and making money, the importance of hiring late, and how marketing departments get it wrong.

If you don’t want to watch the whole thing, you can jump to a specific segment on the Big Think site.

Below: Q&A with Chris Wanstrath, CEO and Co-Founder of GitHub. This is part of our “Bootstrapped, Profitable, & Proud” series which profiles companies that have $1MM+ in revenues, didn’t take VC, and are profitable. Chris and Tom from GitHub have also answered reader questions in the comments section of this post.

What does your company do?
We offer public and private source code hosting to companies and open source projects using either git or Subversion. What we want to do is lower the barrier of contributing to projects, both public and private. Submitting a patch to an open source project should be about the code, not the process of submitting the patch. Working with your coworkers, either in the same office or across the world, should be about moving your project forward and not about managing clumsy tools.

We also offer git training, provide git learning materials, and sponsor open source projects.

How do you explain to “normal” folks (e.g. your mom, someone you meet at a cocktail party, etc.) what your company does?
GitHub is like Wikipedia for programmers. You can edit files, see who changed what, view old versions of files, and access it from anywhere in the world – except you’re working with source code instead of encyclopedia data. Companies use it to build software and websites, while hobbyist programmers use it to find and share projects.

The business model is simple: if you want to share your source code with everyone and make it public, you don’t pay anything. If you need to hide your source code because it’s private and runs your business, you pay.

L to R: Rick Olson, Tom Preston-Werner, and Chris Wanstrath. (Photo by Dave Fayram.)

How big a part of the business is training?
Training isn’t a huge part of our revenue, but if we can make some money teaching people how to better use git then everyone wins. It’s also great to meet customers in person and develop a real relationship with them. Also, we like to send Scott Chacon (our resident git wizard) all over the world.

Sponsoring open source and git learning materials is good for the whole world, but we do that stuff because we love it. If a GitHubber wants to spend some of their time working on an open source project, that makes us very happy.

How did the business get started?
At first GitHub was a weekend project. Tom Preston-Werner and I were hanging out at a sports bar after a local programming meetup when he told me his idea for a git hosting site. It’d be a place to easily share code and learn about git, a git hub. It started more out of necessity than anything else: we both loved git but there was no acceptable way to share code with others. Tom thought I’d be interested in helping fix the problem, and I was.

We began meeting on Saturdays to build the site piece by piece. We’d grab brunch, talk about ideas we had for the site, then get to work. Tom would design pages or features and I’d implement them. As soon as the basics were in place we started using GitHub at my day job, a startup I had cofounded with PJ Hyett. It was a great way to improve the site, as PJ and I were using GitHub daily and really getting a feel for what was missing and what was working.

One thing Tom had learned at his previous venture, Gravatar, was that offering a resource intensive service for free was a losing proposition. In that case it was high traffic image hosting, but in GitHub’s case it was git hosting. Storing and transferring code was going to stick us with a large server bill. We needed a way to recoup costs.

With that in the back of our minds, we launched a free public beta for our friends. The site immediately started taking off. You could create public or private repositories for free and people were starting to use the site for their business’s code – not that surprising considering PJ and I were doing the same thing. Soon, however, we had people emailing us asking how they could pay for private repositories.

At this point we realized GitHub could probably do more than just recoup costs. It could be a real business. We decided to continue to offer unlimited public repositories for free, but we’d charge for private repositories. In other words, we’d charge the people asking to be charged.

PJ became a cofounder of GitHub and we stopped working on our startup. GitHub was now our startup. The three of us launched the site officially on April 10th, 2008 and have been running the business ever since.

Continued…