The prominence of venture capital in the software industry continues to shape how companies grow, set their budget and goals, and model their teams. It even affects how developers perceive their abilities. Nevertheless, Ruby on Rails creator and CTO of 37signals (Basecamp & HEY) David Heinemeier Hansson invites those looking to start a company in the industry to become skeptical of the need for financing and encourages them to apply the practices that have led his (and many others) companies to success.
David Heinemeier Hansson is a software developer and author. He is known for being the creator of Ruby on Rails, an open-source framework for web application development. David is also the co-owner and CTO of 37signals, a web software development company, and one of the creators of Basecamp, a project management platform released in 2004.
When David launched Basecamp, many features that are now a given in software development demanded more steps. “We were facing such banal things as ‘how do you charge a credit card?’ There was no stripe back then. You needed your own merchant agreement with a bank that was going to process it, and they were going to do a custom bespoke evaluation of your business, whether you were worth the risk,” he recalls. In like manner, Ruby on Rails, as a framework for working with Ruby, was extracted from their labor coding Basecamp, at that time in which, says David, Ruby “was not used in any wide sense commercially and certainly didn’t have a framework that just made it easy to get going”.
After building Ruby on Rails as tooling for using Ruby, David and his team released it as open-source software. He found it “really gratifying to see in those early years how quickly people realized, ‘okay, here’s a step change.’ ” Ruby on Rails allowed developers to create web applications faster and more straightforwardly and became widely adopted for web development, with thousands of people contributing to its code.
How venture capital and bootstrapping define companies
To David, part of the notoriety Ruby on Rails achieved back then was due to the timing: “new businesses were springing up all the time” as tech companies were leaving the dot-com bubble behind and receiving with open arms the idea of web 2.0 as a redemption away from the financial speculation that had fueled the bubble. This mix of skepticism toward investment capital on the one hand and expectations for the possibilities available in a new milestone in the digital age on the other defined what David understands was a healthy era for his company to grow in.
Similarly, just as a lack of money didn’t stop David’s projects, neither did the size of his team. The team behind building Basecamp was of merely four people, with David working on it part-time. Withal, David believes that remaining small boosted their productivity. “That ethos of productivity was something that left a very deep mark on Ruby on Rails, certainly left a deep mark on me in terms of setting the pace for what’s possible going forward,” he judges. Hence, David understands that building a great product does not demand having a huge team, infrastructure, or capital. Instead, startups can achieve great results by relying mostly on open-source tools and building the rest by themselves.
However, David has noticed that venture capital (VC) financing has gained terrain in the software development industry while diminishing the capacity of small and medium companies in favor of the business model of large ones. As a result, David sees that startups, despite their size, focus more on raising capital and enlarging their teams than on the actual product they are building and their profits. David traces back this tendency from the moment large software companies such as Facebook and Google “started sharing their technology, the kind of stuff that worked really well if you were a hundred thousand people or 50,000 people and then shoved it out as general purpose solutions that made sense to a startup of one, two, or three people.”
To David, the tooling big companies utilize cannot work for small companies organically. Further, the adoption of this tooling as the only way to success is why startups are bluntly looking to become larger and raise more money. Likewise, David believes that companies will create products for companies of their same size: “the kind of software that the companies with 5,000 employees are more built for are the kinds of software that companies of 5,000 or more would buy”.
In the VC business model, companies engage in a rat race for becoming larger and larger. These companies start small, but after validating their business idea and gaining enough traction they move upstream and start targeting larger, enterprise clients. David asserts that “for these kinds of companies, small and medium-sized businesses are just a stepping stone to get to validation”. This business cycle either concludes after the business is unable to sell to these enterprise clients or succeeds, yet they are acquired by other companies and the company ends up dismantled.
However, David believes credit availability in the industry is reverting to what it once was when Basecamp was released. He points out that the market implosion is showing wrong those who pursued working on red numbers and a sign of the fact that “there’s going to be a reset in these kinds of expectations that we can no longer approach technology and business as this area where the barrier of entry is the VC funding route.”
Hence, software development startups are bound to pick up the tools and means which were always at the reach of their hand. David believes bootstrapping will popularize and is destined to have a new golden age where companies will base their business model on profitability and the quality of their employees and customers exclusively. “I think you actually create healthier companies when you start them during recessions, they teach you to be more efficient with your capital, they restrain you; they put boundaries about the endless growth that you might otherwise get sucked into pursuing,” he concludes.
Generalist or specialist?
In like manner, David sees that the specialization of the industry and the creation of more developer roles cause people to think only a large team made of specialists can do something meaningful. According to David, specialization in the skills and domain of developers, as well as the “complexity that has a build-up in many of the popular approaches to building software these days,” can lead to a “state of learned helplessness.” Developers might perceive themselves as incapable of grasping the whole picture of software development and, hence, as incapable of creating anything by themselves.
But David believes this is not the case. He points out that “much of the popular technology that people are using these days and have been using for the past at least ten years came out of businesses at the other end of the extreme in terms of how large they were and how they needed to work.” David does concede that large companies are probably more inclined to work with specialists (“You don’t have a company of 10,000 generalists,” he ironizes), but the whole industry cannot have a mindset that “essentially guards the productive capacity of individuals.”
David insists that small teams made of people who are willing to learn how to use tools outside their experience or area of expertise can be successful. Moreover, he reminds us that most web applications are essentially database applications, meaning “forms that submit things to databases and present that data back to you”. As such, he believes web development is not nearly as demanding as it might seem to be. Working with native applications, for its part, might be more complex, but this doesn’t mean the task is impossible to tackle.
Is web development outdated?
In the task of “compressing complexity,” David recognizes that the software and hardware advances of the last decade had made developers’ work much easier. “Some of the workarounds that we used to do when we were dealing with the spinning rust plates inside hard drives are no longer relevant when you can take specialized systems and throw them away because generalized systems are now fast enough that they can solve the same problems,” he says.
Still, David recognizes that less and less often new technologies appear in web development. In turn, machine learning, AI, and even crypto are the vanguard of breakthrough technologies. Moreover, the effort it would take to create something new and helpful in web development will not have the same returns it would bring if put in one of the aforementioned vanguard domains. But David says that this shouldn’t be thought of as a limitation, but rather, as a feature that ensures web development is still required while remaining “a well-understood profession”.
The bottom line
David’s passion for programming is one of the main reasons he decided to keep his company small. “We’re not as small as we used to be, but I can fill my day with the things I really care about,” he admits. David encourages us to prevent burning out by finding life balance (or rather, work, life, and sleep balance) and making the business model compatible with a long journey. “You can absolutely build a great business in 40 hours or less per week. We’ve been doing it for 20 years. It’s immensely doable. Sometimes you have to sprint, but it should be a sprint where you stop afterward, catch your breath, and then don’t go for another one right after,” he affirms.