David Heinemeier Hansson

November 9, 2022

The bubble has popped for unprofitable software companies

We've often been accused of being unambitious with Basecamp. Why didn't you just raise a bunch of venture capital and go for The Big Time? Why were you taking profits when you could have invested in growth? Don't you want to own a unicorn? Don't you want to be a billionaire?!

This is the Silicon Valley way. Ride the big money to the moon or die trying. Anyone interested in living on earth just don't have the vision or the courage to reach for infinity and beyond. Operating within your means, taking profits along the way, and aiming for a stable, long-term business is not just dismissed, but frowned upon.

The logic of venture capital is to rush every business it touches through a steroid program that accepts a mortality rate of up to 90%. All it needs is one moon shot out of ten to hit escape velocity, and the fund will be golden.

But golden for whom? For how long? The venture capitalists who invested in Asana, Monday.com, and Smartsheet surely all made out like bandits when these unprofitable software companies went public. Now every single one of these stocks is getting destroyed in the public market, as investors sour on the idea of them losing hundreds of millions of dollars every year chasing growth with no prospect of profits in sight.

Asana lost an incredible $285m in 2021, $210m in 2020, and $118m in 2019. They're on track to losing even more with over $370m in losses booked for the trailing twelve months. That's closing in on a billion dollars in losses over the last four years. Madness. To use the glib insult that we've also enjoyed receiving over the years: They make fucking todo lists!!

asana stock chart.png

Beyond the madness, there's a real question as to how long losses like that can continue. It appears they're down to just $238m in cash on hand, which wouldn't even be enough runway for another year at the current loss-rate. No wonder the stock has been absolutely crushed. Over the past year, it's down a catastrophic 87%. That's dot-bomb levels of bad.

And where is relief going to come from? 17% of the stock is held by shorts. Will Asana raise more capital with new issues at these levels, and essentially wipe out the investors who went in just a little while ago? Interest rates aren't about to let up any time soon either, and everyone is predicting the economy will get worse in 2023. It's ugly.

Not just ugly for investors either. But for employees too who will have seen their stock-based compensation crater – every option or warrant they might have minted since they went public would be worthless – and now have to expect that their job might be on the chopping block too, if losses have to be trimmed.

And of course customers might too be worried that with the stock getting wiped out, the company could become a take-over target for any of the bigger players, like Microsoft or Salesforce. Some of them might remember what happened last time Microsoft bought a todo-list maker: It was eventually shutdown, the service stopped working, and everyone was asked to use some other Microsoft todo product instead. Eeeks.

At least Asana has plenty of company in its misery. Monday.com lost $126m in 2021, $149m in 2020, $90m in 2019. The trailing twelve months is showing losses of $170m. Closing in on half a billion dollar in losses over the past four years. The stock is down -78% as a result.

monday stock chart.png

So Monday.com is in much the same boat as Asana with similar hard questions for investors, employees, and customers.

The same goes for Smartsheet. It lost $170m in 2021, $120m in 2020, $103m in 2019. The trailing twelve months also show over $222m in fresh losses. The stock is down 62% over the last year.

smartsheet stock chart.png

Now you might say the market is hurting as a whole, and that's certainly true. But the pain is not equally distributed. Yes, Dropbox is down 21% over the past year, even Apple is down 6%, but Box is up 5% over the period. It's a mixed bag to be sure, but it's been absolute murder for the likes of Asana, Monday.com, and Smartsheet.

You might also say that while stocks go up and down, the business behind needn't suffer from the swings. And that's true as long as the company doesn't need to rely on the stock price to raise more money, pay employees, or pursue acquisitions. If you're just trotting along making money, paying employees with cash, and completing acquisitions without using the stock, you can ignore the market swings for long stretches of time. That's just not the reality for any of these companies.

The bloodshed isn't constrained to the public markets either. You can be sure that any private company that raised money using public comps from late 2021 are going to be in a world of hurt, if they're also wildly unprofitable, and eventually in need of raising more money.

Look at ClickUp, for example. They raised a $400m Series C on Oct 27, 2021 at a $4 billion valuation. October was near that top-of-market moment. The investors who got in at that time need not just a moonshot to be made whole but for the company reach the outer rings of Orion. Incredible if they can pull it off, highly unlikely.

And in the mean time, all the same public-market pressures are coming to bear on them as a private company saddled with an absurd valuation and a burn-rate to match. Employees who were issued stock at the last valuation probably shouldn't plan to pay for retirement with the proceeds.

Or look at Airtable. They raised an insane $735m Series F on Dec 13, 2021 at a $12 billion valuation!! Bringing the entire funding journey to $1.4 billion. What might that all look like if they face a Asana-like -87% for investors, employees, and options to raise more money later?

Same deal with Notion. They raised a $343M Series C on Oct 8, 2021 at $10 billion in valuation.

These are all crazy numbers from a crazy time, and now the economic hangover is due.

Jason and I have lived through many of these boom'n'bust cycles. 37signals was founded during the original dot-com boom, survived through the bust, since through the financial crisis, and every downturn since and in-between. In this time, we've seen competitors come and go. Fantastical valuations inflate and deflate. People thinking they were billionaires one moment, only to be left with little to keep the next.

This recession isn't going to last forever, but it's also barely even begun! We haven't even begun to feel the hurt in the industry at large from the excessive exuberance that propelled the madness of the last few years. The fallout is not contained. The situation is not transitory.

But amongst all this misery, there's also opportunity. Opportunity to start and grow businesses based on sustainable thinking of profitability. Or at least an aspiration to getting there in less time than it took to build the pyramids. You don't need to sign up for whole or half billion dollar losses over four years to have a shoot at building something awesome, something you can be proud of.

Now is the time to RECONSIDER. Not just for the entrepreneurs who aspire to build, but also to employees thinking about where to join, and for the customers who don't want to be collateral damage in another dot-bomb implosion.

About David Heinemeier Hansson

Made Basecamp and HEY for the underdogs as co-owner and CTO of 37signals. Created Ruby on Rails. Wrote REWORK, It Doesn't Have to Be Crazy at Work, and REMOTE. Won at Le Mans as a racing driver. Fought the big tech monopolies as an antitrust advocate. Invested in Danish startups.