The New Rules of Business from 37signals

It's the kind of outcome most entrepreneurs only dream of. Last September, the financial-planning startup was acquired by Intuit for $170 million—earning its founder a reported $20 million. As the kudos poured in, another Web entrepreneur, Jason Fried, assailed Mint in a blog post for selling out to a corporation it could have taken down. "Is that the best [we] can do?" Fried wrote. "Become part of the old generation? How about kicking the s--t out of the old guys?"

The company Fried founded, 37signals, makes Web-based business-efficiency tools—hardly stuff to set the heart racing. But 37signals is about more than software: Fried and cofounder David Heinemeier Hansson use the company as a pulpit for entrepreneurial evangelism. And their message—a sort of minimalist's approach to capitalism—has developed a cult following. The company's blog, Signal vs. Noise, reaches 100,000 readers a day, by offering takes on such topics as the design of laundry-detergent jugs (Method's new one-handed pump bottle kicks ass) or a satirical attack ad for Karl Rove's book ("Does he really expect taxpayers to carry a book that heavy?"). The company's founders gleefully admit to bias, since their own second book, Rework, was at No. 10 on the Amazon bestseller list in mid-March, only a few slots below Rove's.

Rework is a Webby manifesto for post-recession success. Forget about strategic planning, they advise. And ignore your competition—unless you feel like picking a public fight. Don't waste time on meetings. Stay as small as you possibly can. The 37signals guys scoff at workaholics (masochists who compensate for intellectual laziness with brute force) and traditional ideas about promotion (emulate drug dealers: make your product so addictive that giving a free taste makes customers come back bearing cash). They believe businesses should "under-do" their competitors—do a few things well, rather than many things adequately. Their company is the ultimate hands-off employer: 37signals doesn't care where its 16 employees live or when they do their work.

Perhaps that's because in 2001, when the company was in its first incarnation as a Web-design shop, Heinemeier Hansson was living in Copenhagen. One day he read on Fried's blog (Fried lives in Chicago, where the company is based) that he needed tips on a programming language, and offered to help for free; Fried hired him instead, and for four years, they worked seven time zones apart. By 2004, the duo had developed the company's flagship product, Basecamp. The same year, Heinemeier Hansson released a spin-off, a free Web-applications tool called Ruby on Rails. Little known outside the community of code writers, Rails has become the development backbone of such megasites as Twitter and Hulu. Basecamp is used by startups and Fortune 500 companies alike; Barack Obama's presidential campaign used the project-management tool to plan the development of its sprawling Web site. "The thing that's great about 37signals is they're incredibly disciplined as a design shop," says Michael Slaby, the Obama campaign's CTO, now at a venture fund. "They don't allow themselves to get distracted by the shiny new feature, and because of that you get simple products with a low learning curve."

Their philosophy is appealing, in part, because starting a company is a lonely, risky business. "Doing a startup is an act of irrationality—statistically, you're going to fail," says Anil Dash, a blogger and an architect of the Movable Type publishing system. "You have to make a leap; you have to be a person who believes in something bigger than yourself. So you want to be surrounded by that atmosphere that 37signals creates." It sounds touchy-feely, but the company is dead serious about the bottom line. "They are an anomaly in the Internet world," says Mark Cuban, the chairman of HDNet. "They think in terms of profits and productivity ... Anyone who wants to make money at their business can benefit from their message."

Yet Fried and Heinemeier Hansson's advice sometimes comes off as pious. They can sound like the business equivalent of kids in Clash T shirts, sneering at phony acts who have sold out. They are reflexively anti-big—"Small is a great destination in itself"—although they make exceptions for Apple and Google. Some critics in the blogosphere argue that the duo haven't accomplished anything large enough to justify their holier-than-thou tone—or the attacks on rivals they see as impure. Aaron Patzer, the CEO, scoffs at the criticism leveled at him for selling out to Intuit. "I don't think that I owe it to the world to take down the old guard," he says. "My purpose in life is to build and invent, and create things that are useful."

Fried and Heinemeier Hansson do not disclose their company's finances, but say it generates several million dollars in annual profits. They estimate they have spurned the advances of 45 venture funds over the years, since they view outside capital as a polluting influence. They believe that taking VC money—and with it the pressure to pay back the investment via IPO or acquisition—would change the way they run their company, in the same way that people treat rental cars differently than cars they own.

Only one outside investor has won them over: Jeff Bezos. The founder first heard about 37signals' software from startups he'd invested in. After hearing Fried speak at a conference, Bezos flew the pair to Seattle, where he convinced them that, with billions to his name, he would never pressure them to go public or sell out. Bezos received no board seat for his minority share, mostly because 37signals has no board.

Naturally, there is no formal plan at 37signals, but life goes profitably on. In 2010 the company is focusing on refining existing products rather than launching new ones (although it is intrigued by the possibilities of Apple's iPad). In February, its employees could be found lounging and working at a hotel in San Diego. Because they work all over the country, and because Fried and Heinemeier Hansson would refuse to call meetings even if they didn't, twice a year the company pays for a weeklong retreat for its workers and their families. This July, 37signals will move into a new office in Chicago, which will include a 37-seat theater—a university, Fried says, for the 37signals way of doing business. It all comes down to one of its many management rules: emulate chefs. Great ones, like Julia Child and Mario Batali, share everything they know, from recipes to technique. Rework, write Fried and Heinemeier Hansson, is their cookbook.