Brent Frei

How many times will the lessons of business history be relearned? When it comes to the importance of being a marketing and distribution focused company primarily, versus a product company, it seems the answer is… an endless number.

I attended a round table a few months back at which Jason Fried of 37 Signals (creators of Basecamp, Highrise, Backpack and other applications in the task management – project collaboration space) and his colleague David Hansson delivered their thoughts on Software As A Service. I inherently liked Jason, possibly because he's clearly a very bright guy (on the order of as many IQ points on me as I have pounds on him). He also clearly believes passionately in his approaches and has had the will and talent to be very successful with them.

The approaches he believes in are easy to fall in love with. He talks about the focus on their team first and foremost. They have a 4 day work week, they pay for their teams' hobbies like banjo lessons and flight school. They build what they are interested in and what they themselves would use.

They have a maniacal focus on simplicity and fewest features. They wax eloquently about the evils of the enterprise market, on how they avoid taking more than $149 from any one customer so that they can never be beholden to any of them.

The Fortune Five Million are their endless font of prospects. They likened growth in the business to growth of cancer. That growth for growth sake is not good. Throughout, they clearly described a 'lifestyle' business in which they have the wherewithal to stick unflinchingly to their approach. And, Jason in particular, has a thoughtful, entertaining and enticing rationale for every probing question into their idyllic if not sometimes unorthodox approach.

The honeymoon period

I fondly remember the first 4 years at Onyx Software. We began with much the same idealism that Fried espouses.

We had a far simpler product in an industry that would drown buyers in complex architecture and features. We won business on the merits of our product not the depth of our sales or marketing efforts.

We kept ourselves lean and mean, profitably growing on organic revenues rather than relying on venture for payroll.

We were maniacally focused on building a meritocracy and looked down on those whose primary motivation was their own cash reward at the expense of the people doing the most impactful work.

We did whatever it took to maintain 100% customer satisfaction, and did not lose a single customer for years and years. Life was good, we grew with a CAGR of over 100% for 7 years to $118 million dollars in that 7th year.

We kept on proving that our way was indeed the better path.

Enter the competition

Then a funny thing happened. Some other companies saw that our consolidated approach to Sales, Marketing and Service Automation technology was winning a lot of business.

One of those companies happed to be Siebel Systems, arguably the most rapidly successful enterprise software company of all time. Even at the point of their IPO, their prospectus called out 'no customers in production' as a risk factor, but that did not matter. They used a combination of partnering, acquisitions, and savvy marketing and sales to sprint to a size so dominant, that virtually everything we did at Onyx became more than twice as hard to accomplish.

Getting press attention, getting customers to do due diligence on costs and satisfaction levels, keeping productive employees on board who saw the appreciation of stock options at Seibel outpacing those at Onyx. I can go on.

They and others in the CRM space with lots of distribution aggression sucked the oxygen out of our happy existence.

Perfect storm of distribution

37 Signals is currently enjoying the perfect storm of distribution. They have a very nice simple application in a space that has floundered for 25 years to produce a useful solution.

They have the cache of being the fathers of Ruby on Rails, and their avid followers in the web developer world are the 'designed for' audience of their flagship product Basecamp. These folks are technical and organized, they work with lots of clients who happen to be in other company's marketing and IT departments. Excellent second and third downstream bowling pins.

According to the founders, a lot of their new business is viral referrals, and this makes total sense.

Now I'm not going to say that someone as smart as Jason Fried won't overcome the impending competitive entrants as well as morph his disdain for customers that ‘don’t get it’, but the downside of super simple apps is that they are super simple to copy.

And who's the best copier in the world? Our good friends at Microsoft. Or, for that matter, the clever folks at Google will make an even simpler Basecamp alternative solution and give it away for free.

When a lifestyle business is easy and very profitable in a very large market, you can count on someone coming along to take your lunch money.

Brent Frei is the Chairman of Smartsheet.com and former Chief Executive of Onyx Software. You can read more of his writings on the Smartsheet.com blog. (Guest posts are the opinions of their authors and don't necessarily reflect the views of TechFlash or its staff.)