This is completely non-intuitive but correct!

Paul I remember in the late 90s many unprofitable dotcoms said the same thing: ie, we're more valuable as we funnel millions out the door.

Great Point...Internally have a high level agreement for what the business is about is important about sharing that VCs does have its downside.

-Jitendra

Brian -- Yeah, like anything else, you can take this (il)logic too far and thereby descend into 1999-ishness. But, within reason, I still recommend going easy on the whole profits thing too soon.

"business plans are overrated, and profits perhaps even more so."

does it feel a little frothy in here?

i've been reading articles about how great sites like glam.com are because they have the advertiser in mind and are already profitable. this seems to be in direct conflict with your post.

On the business plan issue, here's how I see it.

You can have the most killer business model in the world, more genius than AdSense, but if you have no traction, it will never matter.

But, if you have traction, it's pretty easy to back into a business model. In fact, taking this path, you're more likely to back into a business model that endemic to your web service instead of a business model that offensive or antagonistic to your users.

It's less about frothiness and more about priorities.

Having an explicit business plan may be overkill but a company's founders / managers should have an unambiguous idea about their strategy and resource requirements (people, infrastructure, money, etc.).

I don't agree with your point on profits. Profits allow you to be self-funded and expand your range of options if you want to raise money to fund growth (perhaps no VCs at all).

The idea that profits are over-rated because they indicate a businesses' margins doesn't make sense. A business owner should be able to credibly explain what will happen to margins over time. VCs will run their models irrespective of a businesses' profitability.

In a frothy market, VC's valuations may look great for businesses like Twitter, but unless there is a basis for those valuations (i.e. real solid execution around some strategy), the valuations will collapse. If there was one lesson from the late 1990s we should all remember, it is that the money pit isn't bottomless.

Juxtaposed by PodTech's news on TechCrunch.

Paul Graham's take on 'solving a problem, then figuring out how to make money at it' is the right approach to be sure. Twitter is a lot of fun to use and it (and others) fit into a new niche in communications, but they need to find where the cash flows to be viable, or they'll be another PodTech in search of a profit model to pay off in exit.

Marc Andreessen's point recently that a business needs product/market fit is spot on in building with your point. Until usage traction occurs in solving a need, the b-plan has little value as the team has no idea how to define the scope of the efforts.

This post is ridiculous. Just because Twitter got funded doesn't mean that you shouldn't have a business plan. We're back to September 1999 with this type of thinking. Funding is not the certification that you have built a business. Just ask anyone involved with Kibu.com or Quokka if your memory doesn't serve you well. We'll see how wildly successful Twitter is...

But what's the model for making a penny on twitter? That's what I'm interested in. Lots of people are using it, but there's no ads... no customer revenues... where's the cash?

People are having a visceral reaction to the "no business model" argument - but I also see VCs have a visceral reaction to the "no traffic" problem when investing in early stage startups.

Look, early stage investing is taking a bet, there are always going to be huge unknowns. Twitter has mitigated a huge portion of risk (will people like this?) but they have certainly not eliminated all risk -- that's why it's an early stage investment, and that's why it's venture capital.

Kudos to Union Square and Charles River Ventures for making the bet.

'Those who cannot remember the past are condemned to repeat it.'

- George Santayana

1999?

'Those who cannot remember the past are condemned to repeat it.'

- George Santayana (1863–1952)

1999?

The difference between the 2007 no-business-model investments and the 1999 no-business-model investments is that the ones from 1999 (those that died) also had no users (no path to anywhere), but they were still burning huge amounts of cash.

The Twitter/PodTech combo is a great example of the fact that we're not in 1999. Twitter has explosive growth, raving fans, and spends precious little cash. That's fundable until they figure out where the money is. BTW, Ev has proven he knows how to find premium revenue. Another check in the plus column for Twitter.

OTOH, PodTech's a company that has no growth, essentially no users, a dribble of revenue, and $2million will only "last a couple months". PodTech would have gotten money in 1999. Investors are smarter this time.

My show has millions of downloads. Not sure where you got that it has "no users".

Our money will last a long time because we have millions in revenues too.

I asked the same question that Paul is addressing here:
http://www.centernetworks.com/twitter-gets-funding-union-square-ventures

Basically I struggle with whether it's better to have a plan and revenue coming in or showing up with no business model, no plan and no revenue and let the vc figure it out.

Apparently my question has been answered.

Isn't this just a sign that we've moved from the "fear" cycle into the "greed" cycle. There is no way these guys would have got funding 3 years ago.....

Isn't this just a sign that we've moved from the "fear" cycle into the "greed" cycle. There is no way these guys would have got funding 3 years ago.....

#9 CoryS - are you kidding? Paul Graham's approach is to not generate revenues either. Just pray that someone buys you out.

Paul - yes, your point makes sense from the perspective of raising money, but all of the VCs following this are going to get blown away. It seems that the lessons from Bust 1.0 haven't been learned. It's a shame that companies that actually have a model that is successful and being executed on are being valued at 10x EBITDA while companies with no clue can generate valuations with no foundation in today or tomorrow's terms.

As far as most people are concerned, Twitter isn't going anywhere:

http://livinginfirstlife.wordpress.com/2007/07/18/twitter-is-for-twits-tell-your-friends-whenever-you-pass-gas/

This is right on. The worse is when you have a solid answer on page 2 to the issue they said "no" over, but they don't bother reading that far.

This is weird even for the bizarre world of VC investing.

Michael Krigsman
http://projectfailures.com

I think this brings up a serious issue. Do VCs want to invest in successful businesses? Of course the answer is yes, but successful businesses need a business plan and/or future profits. Given the fact that future profits are a substantial indicator for future profits, you think they would be a benefit.

I see your logic. I think that VCs would have better luck looking for singles and doubles not only swinging for the fences. Maybe the YC type approach has some real merit.

Clearly you will need a business plan in order to be able to make a great pitch in order to raise the required funds.

What you need to do is to "package" your story depending on your audience.

I agree that less is more, in the end as an investor you buy into the idea, the innovation. Team, Finance, Partners are secondary, important but secondary.

In your presentation remember "When in doubt, cut it out..."

PerBear

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