Jason Fried of 37Signals has taken the stage at Y-Combinator’s Startup School this morning at UC Berkeley. I’m taking my notes below on his talk.

Fried has started off by talking about bootstrapping startups. Startups that bootstrap are more “money hungry” then companies that are funded. If you are a funded company, you generally have money to spend that investors encourage you to spend as well. If you’re a bootstrapped company, you’re hungry to make money.

Fried also talked about the art of making money. He mentioned that making money is like playing the piano. If you started playing piano at 5, you have a lot of time to practice playing piano to get better. If you want to be a good piano player, you start young, and you practice. Same goes with making money. It’s a skill and a talent. The more practice you have making money, the more successful you’ll be.

Fried also used an interested analogy to crack cocaine, comparing crack to funding. Crack is like funding, because it’s addictive. Investors want you to come back for money — they want you to be addicted to the money.

One of the major points Fried mentioned is picking the right price. You have to find the right price to sell your products to consumers. Customers will pay if it’s worth it. Don’t make products that aren’t useful for others — you have to have people using your product, and if they use it, charge for it.

Thing will go wrong as well. Be real and honest about your mistakes. Also, you don’t have to be in Silicon Valley to be successful. Fried mentioned that 37Signals is based in Chicago, but they have employees all over the world. Location doesn’t matter to build great products. You’ll know if you have a great product if people use it.

Q: How do you know if your product is useful for a lot of people?
A:Build something you would use yourself. When you put stuff out for free everyone goes “ah, that’s cool.” Put a price on it, then you figure out if it’s really useful.

Q: Regarding virtual offices.
A: Need to find a good team. People who can work from their home a lot. We’re in touch all day using our tools, but you can put that away if you need to. You can’t put a ‘real’ office away like that. But some face time is essential sometimes. Should be the exception not the rule.

Q: Pricing?
A: First question is ‘would I pay for it?’ It’s a science. You have to worry about margins. Walmart doesn’t use 9s for their prices. They do 8. But for me, is it worth paying for. We have multiple tiers. Every price point is double, but you get more than twice as much in each tier.

Q: I’m a scientist, skeptical about luck.
A: I think luck plays a part somewhere. BUt I think for the most part make your own success. You can’t wait for something lucky to happen. Maybe timing/meeting right person is luck. I think it’s the kind thing to say, PC to say. But I think if you ask people honestly they won’t say that.

Q: How long did it take you from having idea to launching paid project?
A: We launched basecamp as a side project. We were a web design company at the time. We made it in a few months, then we put a price on it. Built it for ourselves, we needed it for ourselves. Hit $5k a month in about six weeks, has since increased. We don’t share exact rev numbers. Job wars made 1.5 mi. book material about a million. Advance from new book is handsome. We make millions in rev and profits. We did take one investment in 2006. We bootstrapped. We didn’t need the money (from Jeff Bezos). We did it for liquidity and someone like Jeff available, he’s built a business from scratch.

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37signals

By way of sarcasm, Fried raises a number of points. But the key ones he hits on are valuations, revenues (or lack thereof), business models, and hype. And he chose an easy target in Twitter, which has no shortage of naysayers who simply cannot believe the amount of funding and valuation the service keeps getting. But Fried undoubtedly knows how the game is played, and by picking on the current “it” company, a few people noted that his post looked more like a case of sour grapes. But his points are still definitely worth talking about.

Valuations

Fried jokes that 37signals is valued $100 billion based on a group of people who are paying $1 for 0.000000001% of the company. His point is that valuations based on investments are ridiculous. But that’s not entirely true.

Certainly some are — Microsoft’s investment in Facebook that pumped its valuation to $15 billion is a great example. But the key point there is that Microsoft wasn’t making an investment in Facebook hoping to get rich when the company eventually has an exit. Rather, it was making a small (1.6%) strategic investment mainly to keep Google away. At the time, everyone went mad over the $15 billion number, but it was never realistic to begin with. Since then, Facebook (which has grown a lot in size) has raised real money at valuations that are much less. So did Microsoft get screwed? No, because it was never about the money.

But in Fried’s example, lets assume that the $1 investors are putting money in hoping to eventually get it back. If they really are paying $1 for 0.000000001% of the company, putting the valuation at $100 billion, those investors are going to want an exit of more than $100 billion (leaving out the various types of deals and options they could have surrounding an exit). So that $100 billion number does have meaning.

And likewise, without knowing the details of its latest round, the $1 billion number probably does have meaning for Twitter. If an when it closes this latest $100 million round, those investors are going to be looking for an exit of more than $1 billion. You can bet that T. Rowe Price wants to make money on this deal, as do the firms involved. And they clearly think Twitter is worth more than $1 billion dollars. And they’re hardly alone.

Revenues & Business Models

Fried jokes, “In order to increase the value of the company, 37signals has decided to stop generating revenues.” And continues, “Once you have profits, it’s impossible to just make stuff up.” That is absolutely true, and Mike wrote a great post recently about that very dilemma Twitter could well face shortly.

But this is Fried pulling out the tired “Twitter makes no money” card. Let’s be clear: If Twitter wanted to right now, it could make money. (Well at least revenue, if not profits.) They would simply have to turn on advertising (which they can now do thanks to a recent change in their TOS) and some amount of money, and probably not an insignificant amount, would start rolling in.

At the same time, if it did that, investors would have a better idea of their business potential and that could make some wary of sky-high valuations if the numbers weren’t stellar — which both Fried and Mike rightly note.

But as Twitter has stated numerous times, its real intention for making money (at least right now) is not to go the way of ads, but instead to do professional accounts and tools. It would seem that Twitter is getting closer to rolling that out, and they’ve said the plan is to start making money before the end of this year. We’re closing in on that, so it seems safe to assume that new investors have a pretty good idea of Twitter’s strategy here. And if that’s the case, they clearly like what they see enough to pour in $100 million (again, assuming that round closes).

With this rumored new round, Twitter would have some $130 million in the bank. Like Facebook before it, that would give the company plenty of time before they had to start making any meaningful amount of money. Actually, Facebook just this past quarter went cash flow positive for the first time — after taking over $700 million in funding throughout the years. Twitter seems downright svelte by comparison.

The point is, they will have plenty of cash, and as such, plenty of time to worry about getting the right business model in place. And these investors would not be investing if they didn’t think that would happen, obviously.

Hype

“Bhatnagar admits the math [for valuations] is mostly a guess but points out that ‘the press eats it up.‘,” Fried writes. That’s undoubtedly true, we the press do eat this stuff up. Big numbers are sexy, and lead to interesting, or at least lively, discussions. But again, this is Fried suggesting that valuations based on investments are crazy. In some cases, they are, but not always. And provided that both the writer and reader understands how they work (which, admittedly, is quite often not the case), they can be a useful point of reference.

“37signals will lead the new global movement filled with imaginary assumptions on growth and monetization potential,” he continued. “We’re excited to roll out a list of unconfirmed revenue possibilities that involve crowdsourcing, a robust set of widget creation tools, 3G, augmented reality, social stuff, and an app store. Also, everything we make will include a compass,” Fried concludes.

Though he later backtracked from it, it seems pretty clear that Fried is suggesting that Twitter is pretty much all hype. We touched on this a bit yesterday, but ultimately, this still remains to be seen. But what’s humorous is that on the sidebar of his very post, Fried himself has a Twitter widget, and it’s actually above his list of 37signal products. This isn’t quite as bad as the people who loudly proclaim that Twitter is all hype — on Twitter.

But regardless of where you fall on the hype debate, all that really matters is that the investors obviously don’t think it’s hype. And they’re apparently still pouring money into it with the belief that it will be the next big thing. How big? Big enough to have an exit north of a billion dollars. How do I know? The valuation told me.

[photo and video: New Line Cinemas]

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College students now have their own Yammer. Last week, Wiggio came out of beta with a new look and a slew of group messaging and group management features. For each private group that you create, Wiggio provides a Twitter-like message stream from all the group members. But it also includes a slew of other features such as a shared calendar, mass text and voice messaging, file-sharing (including online docs and spreadheets), polling, and more.

Many of these features can be found in other products such as Yammer, Basecamp, WizeHive, and Producteev. But Wiggio is a solid addition to the group messaging family, and it is already gaining some traction by targeting college students and their particular group dynamics (academic, extracurricular, social, committees, sports teams, music/dance, religious, charity, etc.). Wiggio, which has been in closed beta for a year, already has 45,000 users, about 80 percent of which are college students and faculty members.

The site was created in January, 2008 by Dana Lampert, who was then a senior at Cornell. His two co-founders are Rob and Derek Doyle, sons of Bob Doyle, the creator of MacPublisher (the first desktop publishing program) and the 1970s electronic game Merlin. The elder Doyle is an adviser and investor in Wiggio, and houses the four-person startup in his lab a block away from Harvard. Wiggio raised $450,000 in an angel round last August.

The site offers following features:

• Shared calendar (with SMS reminders)
• Folder (includes group editing of docs and spreadsheets, photo sharing, video)
• Mass text and voice messaging
• Free conference calling and web meetings
• Polling
• List-serv

Groups can be created by simply adding people’s email. They don’t even have to sign up. Wiggio hooks into existing text messaging and email services. You can email an entire group, take group polls, import calendars, share documents, links, photos, videos, and other files. Wiggio uses Zoho and Scribd for shared document viewing and editing, and has partnered with Rondee for the teleconferencing. All the other features were developed in-house.

Lampert has several ideas for making money, including display ads targeted by group type and university, SMS ads, and subscriptions for additional customization and security features.

Here are a couple intro videos and screenshots:

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We cover some amazing startups here at TechCrunch, and for every service we cover there’s probably a dozen we miss as well, given the hyper-inflated nature of the second great web boom. You can appreciate a service without ever actually going on to use it, but the better ones can change the way you interact with the web or run your working day. I thought as this is my last major post here that I’d share some of the services that I actually use. I started using most of them based on posts at TechCrunch, so if you like these turned out to be my practical standouts in the sea of noise.

Evernote

Evernote has completely changed the way I deal with paper (yes, old fashioned paper). Its been described as everything from a scrap collection through to a bookmarking service, but at its core its a database service with industrial strength OCR capabilities. To use, you can clip data or a link, type a note, add a photo (with support for webcams) or scan info in. Everything added can be tagged and indexed, and is searchable via the text within each document, for example a wine label with no other information becomes searchable by every word on the label itself. I scan every paper bill or letter I receive, allowing me to shred/ dispose of them cutting down on the need to file things manually. More importantly it cuts out the need to have to go through my filing cabinet searching for the bill later. The service has a desktop client and web interface, so you have the security of knowing that your scanned documents always have a local copy, but if you’re at another computer or on the go, you can easily access the same data.

See Erick’s review here.

Things
This isn’t a web application yet, but hopefully one day it will follow Evernote’s lead and offer a web backup/ sync services as well. Things is a clean, simple Getting Things Done client for the Mac that’s helped me overcome my constant cases of email bankruptcy. It takes a little discipline (I process my email at once every morning and add everything requiring follow up to Things), but its been a godsend in terms of information management. Users can add links to emails, webpages, or simply make notes, and you can tag, categorize and set due dates on all entries. They’re currently testing iCal support, so I’m hoping that if this works well I’ll be able to sync the data, via iCal, across various computers.

Skitch
Michael put me on to Skitch initially and I’ve never looked back. Skitch is a Mac image editing tool that also links into web based image hosting. It’s not a Photoshop replacement, but it handles 95% of my own image editing needs. Simple, quick, brilliant.

See Michael’s review here

Plaxo

Plaxo is trying to be many things to many people, from activity streams through to social networking, but its core syncing product has unlocked my data across multiple computers and even my iPhone. Plaxo syncs data from your calendar, address book and elsewhere between computers. It can also pull data from LinkedIn and some Google services. This allows my laptop, desktop and iPhone to be always in sync, and in case of emergency I can get to my address book via the web as well.

TechCrunch coverage here

LinkedIn

I never really appreciated LinkedIn until Plaxo gave me access to the data elsewhere. LinkedIn remains the premium business social networking destination and I find myself regularly using details I’ve pulled from it. I use Facebook as well, but I find LinkedIn provides more value.

TechCrunch coverage here.

Twitter

Twitter is like being married, you love it dearly but some times you want to strangle it. Twitter has transformed my networking in the last 12 months. It served as a conduit to building new relationships in a way that Facebook, FriendFeed and others never will. I can walk into a tech meeting/ conference/ meetup anywhere in Australia now and although I may have never met anyone in the room in person, I’ll know at least one person (usually more) from Twitter; you cant buy that level of contact and its given me friendships and acquittances that could never have come around by any other means. Twitter still has problems ahead: like a complete lack of a business model, but expect Twitter to continue to grow, with somebody (maybe Yahoo, although Biz prefers a Google exit) acquiring the service before December.

TechCrunch coverage here.

Grooveshark

Until recently this would have been Seeqpod, but since reviewing the Grooveshark player I’ve found myself listening to music there regularly. MyPlayList is another service I’ve been using, although not as much. The bonus with Grooveshark is quality: as all songs are uploaded by users (legally) and the quality is usually first rate, where as Seeqpod can be hit and miss sometimes. I want to love Pandora, and I used it for years, but given it’s now georetarded I’m blocked out. Last.fm isn’t bad, but it’s not a team player in terms of the industry and it’s also owned by CBS; I’d rather support the little guy.

There’s probably others as well I’ve forgotten about. One last shout out to 37Signals: I’ve used their services in the past when running a startup and they’re great (I’m not using them today) but their management ethos is a breath of fresh air in a world where people who want balance should (apparently) be working at Starbucks. If I were local and looking for a job, I’d be begging for a look in.

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Central Desktop

Central Desktop offers a web-based SaaS collaboration platform that allows business teams of all sizes to work virtually and seamlessly online. Central Desktop is pitched as providing “the richest set-of-tools available for business users with ease-of-use at a price-point, leveling the playing field for small and mid-size companies wishing to do business with enterprise partners and customers.”

The company has over 125,000 users and business teams currently using its tools. Central Desktop said it would use the funding to accelerate R&D, marketing and sales efforts into the SMB market.

Competitors include 37signals, JotSpot, Microsoft, WebEx, Daikana and Huddle.

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Google showcased HuddleChat, a real-time chat application, as one of many test applications (directory here) to show off their new Google App Engine platform last night.

Some bloggers noted that the application was a rip off of Campfire, a 37Signals product. And 37Signals CEO Jason Fried used HuddleChat as a PR opportunity, telling ReadWriteWeb “We’re flattered Google thinks Campfire is a great product, we’re just disappointed that they stooped so low to basically copy it feature for feature, layout for layout…We thought that would be beneath Google, but maybe its time to reevaluate what they stand for.”

Frankly, the reaction is fairly ridiculous. But this is apparently a fight that Google doesn’t want to be involved in. They pulled the application and replaced it with the above notice.

I wonder if Darren Delaye, Braden Kowitz, and Kyle Consalus, the Google developers who created HuddleChat, had much of a say in the decision. And why, since HuddleChat is not an official Google product, was it Google that made the decision to pull it down and not the developers who created it? Google was very careful to say that they were not affiliated with HuddleChat while it was up – that, apparently, wasn’t the case.

As far as I’m concerned, this is the first case of censorship on the new Google App Engine platform, and a bad precedent.

Our test application for Google App Engine is here.

Update: If you are as outraged as I am over this , join this Facebook group demanding that Google bring back HuddleChat.

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37Signals is having a bad morning, according to their current home page image above. They’re pointing fingers at their service provider, which was (and we believe still is) Rackspace. Last November they suffered a three hour outage along with other Rackspace customers.

Update: It’s back up, total outage was about 2 hours. Per the comments, 37Signals doesn’t seem super duper happy with Rackspace these days.

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Feedlounge, a subscription-based online RSS reader, is the most recent casualty. They launched in 2005 and offered a web based feed RSS feed reader for a monthly subscription fee. There were a number of free competitors at the time, including Bloglines and NewsGator, which had dominant market share. FeedLounge planned to carve a niche for itself by offering speedier and slightly better service.

The reader was good but not great, and came out in the middle of the pack when we reviewed the competition in mid 2006. But the company defended its business model until the end – hear our podcast interview at TalkCrunch with founder Alex King where he defended his business model.

They shut down over two months ago, canceled everyone’s subscriptions, and no one seemed to notice until now. FeedLounge is now in the deadpool, although they may re-emerge as a free service at some point.

If you are in a position to charge for your software and you aren’t that concerned with dominating your category, by all means go for it. But to blindly follow the idea that software must not be free because, damnit, people put a lot of time and effort into it, means you probably shouldn’t be making the business decisions for your company. And if you are entering what is already a commoditized business (online feed readers in this case) that has a price point of zero, you are absolutely crazy to try to charge for that product.

Offering your product for free isn’t always the right choice, either. Often, the right choice is to never have entered the market to begin with. But just because 37Signals tell you you are dumb to go the free route doesn’t mean you have to be a lemming and walk over the cliff.

Thanks Smaran for the tip.

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37Signals is taking a more streamlined approach from the big guys, opting for a laser focus on only online contact management, serving as a good companion to Outlook. Contacts can be added manually or imported from Basecamp and vCards. Each of the contacts you add to Highrise gets a bio complete with photo and can be assigned task to-do lists and labeled with notes (including images and files). Each of these contacts can be locked down through user permissions, and dropped into project groups that keep your contacts, notes and files all together. If logging on is too much, you can also CC email notes to Highrise, which it will attach to the right contact.

Their basic business accounts start at $24/month for 6 users and 5,000 contacts, and work their way up to $149/month for unlimited users and 50,000 contacts.

Zoho has a similar CRM application that’s free with all features for 3 users and $12/month for each additional user. However, Zoho CRM is better suited for the sales pipeline, tracking leads from potentials to completed sales and forecasts. Zoho CRM also integrates with your web forms so leads can go right from your site to the form your database, and back out again as a .csv export.

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The Backpack calendar looks a lot like Google Calendar (our review) and includes iCal synching and natural language input but SMS alerts as well.

Just days ago 37Signals officially embraced outside developers CellTell and their service that sends phone messages to your Backpack account.

When we wrote a few weeks ago about ActiveCollab, a free and open source competitor to 37Signals’ flagship enterprise offering Basecamp, debate was fierce over hosted software as a service vs. software downloads to be placed on your own server. Many people contended that the nominal cost of paying a hosted service for maintenance was more than worth it. [Note: Even ActiveCollab announced yesterday a one-click hosting option with DreamHost.]

Now the addition of one new major feature and one cool supported feature to a 37Signals product is a tangible example of the other primary advantage of software as a service – your system got upgraded and you didn’t even know it was happening. Even the next version of Internet Explorer will be delivered by automatic update, it was announced today.

Whether or not you’re a cynic about user generated content, tagging or ajax – it’s becoming increasingly clear that the web service centric part of the Web 2.0 equation is a keeper.