I have never read a business plan or balance sheet
twitter.com
twitter.com
PG/YC invest at the earliest stages. The information they need is pretty much:
1. What are you doing?
2. Do people like it?
3. How big is the market?
4. What are you/team like?
Could you cover all of those in a formal business plan? Sure, but you can also do so in a short-form application that's 1/20 the length or in a 10-minute back-and-forth conversation.
You don't have to ever view formal documents or financials to do that.
That is PG's broader point, and isn't really that controversial IMO.
YC Continuity, otoh, surely evaluates go-to-market / business plan?
It’s mostly gone away, but there used to be endless arguments about whether a startup should have a formalized written business plan https://en.m.wikipedia.org/wiki/Business_plan. Business schools taught all the MBAs to write them, and everyone used to argue about whether a startup ought to have them.
Today I’m not aware of any VC or investor that requires/wants a Business Plan, almost everyone has settled on a standard pitch deck if anything (though one-page ‘memos’ are becoming a thing, and some investors even eschew those). A few business schools somehow still tell you to create a business plan if you want to raise VC. I invest in ~100 startups/yr and will see a handful of Business Plans sent to me, but not many. I don’t read any.
YC Continuity today would likely look at a deck and definitely ask questions, but still wouldn’t require a Business Plan.
PG probably wouldn’t ever even look at a deck.
They definitely required balance sheet, income statement, financial forecasts etc.
Much more than a deck and a one page memo. It all has to do with what stage you are raising at.
Instead, I believe YC is trying to focus on finding good teams under the assumption that a strong team that can execute well has a higher chance of success than a worse team with a better starting plan. If anything, the business plan's value is to indicate that the founding team can think logically and realistically map products to market. Once the investment reaches 100M (YC Continuity's stated higher end), they probably focus more on the marked and business plans. Just my 2c.
YC Continuity and similar follow-on investors are 100% reading pitch decks which have projections, financials, etc.
In that sense, what he says is normal.
See both Roger Federer and college debate teams.
Yes, but the students have had preparation time: the teaching and revision prior to the oral examination. They should be able to answer questions, even if the answers aren't as 'clean' as they might be if the questions had been shown to them beforehand.
Except when they don't.
I used to work with a guy who was so hung up on business plans he always wrote me off when I scoffed at his obviously made-up numbers. "Kevin, you're just not going to be making a million dollars by the end of your first fiscal year." and he would arrogantly reply "Of course not, but you need the goal!" This is when one needs to understand the difference between "goal" and "dream" because his so-called business plans didn't support those numbers.
Paul has mentioned before that sometimes an idea is early and so there is no real competition to speak of, and very few metrics by which to measure the value. Just a hunch that this will take off to unknown lofty heights and therefore might be worth investing in.
Then becoming a billionaire.
Words have meaning, and pg has done a poor job articulating himself in this instance, if his goal is to be understood. Since pg is a social media personality and his business ventures stand to benefit from his social media audience, reasonable people may speculate that his goal is NOT to be understood, but rather to drive engagement, and to that end he has been successful here. But it’s not actual thought leadership, it’s purely marketing.
The hate/cancel/pitchfork sentiment expressed by some replies, could be seen then as an intended consequence of pg’s remarks - the outrage-driven engagement cycle is a well known dynamic in social media. And the defenders like you are the other side of the same coin. It’s amazing and somewhat sad, but not surprising, seeing smart people get worked up over this.
Every time PG tweets, he can't give the entire context for everyone's benefits.
You either get PG, Naval, Sam Harris, Jordan Peterson, Tim Ferris, Musk, Bezos ... and understand where they are coming from and extract pearls of wisdom to enrich your life or you can bitch/whine/moan about semantics, sensitivity, political correctness.
Oh and I absolutely don't think PG needs to manufacture outrage. He has been a first principle thinker since 1990s and that means he will say things that go against the cargo pants culture.
He is saying that it isn't useful for him when deciding who to invest in.
I once had a meeting with an investor years ago. I had a dream of starting an internet cafe back when broadband was hard to come by. So I spent a couple weeks writing a business plan to show him. In the process I came to realize the idea was a dog. At least, it didn’t align with my interests once I ran the numbers, and realized that charging by the hour to use a medium to high end gaming machine could never scale. You can’t easily over subscribe which meant you had a real limit on the ROI you could get from the machines. Which meant that all the profit was in selling consumables. That’s when I realized I had very little interest in running a profitable eatery, I just wanted to work with the computers.
The point of the essay (as I understand it) is that writing about something (as for example in a business plan) helps the writer understand the topic. The tweet says that pg is not interested in descriptions written by someone else. That writing a business plan can be edifying for the startup founder and at the same time of no interest to an investor, is consistent with both the essay and tweet.
The things that matter at this stage are:
Founders and general market size. So sure, ignoring the noise of those two makes sense.
It should be implied that his advice is only relevant the type of investing which pg does.
pg tweeted later on that his solution is something he does in YC interviews. So his comments are obviously scoped to companies which would apply to YC.
I don’t see the value in a formal business plan at all and so I would almost agree with your made up quote there.
I mean obviously you need to have a plan for your business. But writing it down in some formal way seems like a waste of time.
Perhaps there is value in writing one in order to coalesce your own thoughts if you are that way inclined, but it’s certainly not going to convince anybody of anything that wouldn’t be convinced by the conversation you would have instead.
The plan itself was short enough that I could share it with a fee people for advice but I never showed it to any of my investors, other than perhaps as a way to give a pre-canned snippet of information on a specific thing.
The process itself took about a day and a half, mostly spent getting specific answers. The knowledge gained helped a lot while pitching.
I suspect if you asked him he would tell you that particularly as the startup grows the startup should be across the financials, just that it doesn't help an outsider with no context as to why you're in the red.
Saying "I don't read those documents anymore" would have made sense too.
It's pretty clear from the context that he means that he has never read the balance sheet of a company applying for VC funding as the information there is irrelevant at that time.
It's highly unlikely, as the founder of several businesses, and long term investor in others, that he could have never read any balance sheet ever.
>> Have you ever written one though?
> PG: I'm not sure. I wrote something for Viaweb that I called a business plan, but never having seen one, I didn't and still don't know if it contains what business plans are supposed to contain.
It doesn't matter though. The title is clickbait at best.
> It's highly unlikely, as the founder of several businesses, and long term investor in others, that he could have never read any balance sheet ever.
Glad we agree.
But yes I agree, he's talking early-stage startups. At that stage balance sheets seem like they would be obvious.
If I had one and you looked at it. It would tell you that I'm draining my personal savings and should probably go and take a job at a FAANG and stop trying to build a startup.
And both of them can be as ambiguous as anything. If anything, its impossible to predict who or what can become successful. Look at the historic interview of zuckerberg and his competitor: https://www.youtube.com/watch?v=cUNX3azkZyk Competitor seems more outspoken, got more airtime, had already monetized yada yada but here we are.
Is this tweet wise and profound? Obviously not. Is there a kernel of useful information buried in there? Barely. As you said, is the purpose really just to elicit a reaction? Obviously, yes.
These kinds of remarks remind me of people who used to brag about getting good grades despite not doing the reading or homework, as if that's a virtue.
They're not harmless, because plenty of people will take away from this the idea that you don't need to do research on things, in general. Because Paul Graham is very rich and wise and he said so.
It's dumb fortune cookie wisdom, like so many of his wise and profound edgy, contrarian viewpoints.
Instead, the choice of a lean business plan (business model canvas) is also offered or at least talked through. Someone has an idea but isn't sure what to do next. Well a business plan can just be the very essentials (who do you plan to serve and how... what are you planning on actually doing and can you afford to do that)
Plus he has other ppl to read the balance sheets.
I did a $20MM A round with $BIG_FIRM after associate asked for business plan and parter said “they sent it to us already” meaning just the Excel model. Which was a relief since I never write a BP suitable for public consumption, only internal use. But the excel model included all our assumptions for headcount, cap ex, op ex, regulatory and revenue so really what use was a narrative?
(It worked out for them)
"Spending some money on advertising might also be a good idea"
Secure server software ($5000). This does not seem to be an absolute necessity; there are a lot of sites on the web where you can send your credit card number unencrypted, and to date there have been no reports of the numbers being stolen. But catalog companies may believe that a secure link is necessary, and spending this $5000 would give Webgen a much more professional look.
http://paulgraham.com/jessica.html
The point is he doesn’t make investment decisions based on a traditional business plan or balance sheets. That’s all he is really saying in his tweet, for a popper insight read that post.
For someone known for his essays trying to convey meany from a 10 word tweet is never going to happen.
Suspect that both Buffet and Paul’s real methods rely heavily on instinct, context, relationship networks, combination potentials, personality and pattern matching which can’t be fully documented or quantified or imparted.
I remember having a conversation with my brother once about a protein powder being recommended by some bodybuilder or another. His response: “Yes, he says that he looks that way because of this powder, but what does he actually do?” Answer: Steroids.
Suspect the same is true of many great success stories in business.
For example, say that you have a resume packed with awards. The secret to getting nominations for awards and scholarships is usually to write it yourself and send it to a friend/teacher/colleague for signature, not waiting around hoping that someone deems you worthy.
As most wait for someone to deem them worthy, many awards are less competitive than they appear to be.
But you could never admit to this, as it would devalue you in the eyes of others.
It's rather different from investing in a startup. Plus all of YC's startups presumably receive some boost from exposure on HN and reddit.
> I probably shouldn't admit this--I'm on the Board of a public company: I can't read a balance sheet or income statement or anything like that.
Looking at things like Uber, though, they’re coming up with ways of making these basic reports harder to read critically. It reminds me of the pre-SEC financials covered in “Security Analysis” by Benjamin Graham. Companies claimed all sorts of things, especially treating one-time events as operating revenue, and toed the line of fraud.
What he is saying is that he doesn’t read them (i.e. chooses not to), and the implication is that he does not need to.
When I land on this tweet the site takes long enough to annoy me before it loads the content (ie. everything below the "Log In / Sign Up" banner is delayed).
When I scroll down past the first few tweets the whole page disappears and is replaced with a nag screen implying I can't see more without signing up and/or downloading the app.
Pressing back once bumps me right out of the whole site (back to HN).
The behavior is non-deterministic. It worked this way the first few tries (with varying quantities of tweets loaded before the nag screen took over). Then I tried in Incognito mode and it worked, and after that going back to the site without Incognito seemed to fare better (did Twitter finally figure out I don't want to download their app?)
Seriously disheartened the majority puts up with this kind of horrible UX. As a content publisher, I don't want readers encountering friction preventing them from digesting my thoughts. As a consumer I want to see the content without hassles. The only party benefitted by their dark pattern is the platform.
Not putting users first = opportunity for someone else to do it better and eventually displace your business.
I used to respect Twitter engineers and was under the impression they cared about things like load times and user experience. Has the culture changed? Am I just getting old and grumpy?
I find the URL that they call just before they block access to be interesting:
https://twitter.com/i/api/1.1/onboarding/fatigue.json
Onboarding Fatigue
It stood out from my pov because there’s very very few times I’ve noticed I’m blocked and I don’t generally mean to cause any offence. The most I would’ve been intending to cause was a little introspection.
Is that a normal thing, to be blocked more than once on Twitter?
There are sometimes quite wide blocklists - I know I was at some point on a blocklist composed of anyone who had ever followed a particular person.
I was already aware, from things he’d said about me, that he was not a person I would ever do business with.
I hope its not too much covered cynicism for him.. This is exactly the kind of stuff that degrades social media and particularly twitter. Just tweet something “smart”, “insigthful” and “prophetic”. Ohh, much wow (doge meme). Like someone here on this HN thread wrote, now the peasants are debating what the prophet said!
Ehh… will go have breakfast.
https://twitter.com/iamsanteri/status/1492779569102966788?s=...
I mean his article on "The Equity Equation"[1] seems to be written by someone who has read a balance sheet.
I don't think a "business plan" is literally just any words, written down, that are related to "business".
It is likely a specific and defined thing.
>What is your company going to make?
This question is asking what your business is planning on making.
Edit: This comment includes more relevant questions https://news.ycombinator.com/item?id=30319753
afaik there is no legislation defining a business plan. It might say business plan at the top, it might be a whitepaper, it might be a tweet.
Make money, lots of money
There we go, a business plan, its not a good business plan, nor a traditional one nor even a very comeplete one, but a plan nevertheless.
If my software company's treasury gains were realized it would make up almost a third of our revenue.
Though I suppose a case could be made that this would make us a holding company with a cash-flowing SaaS, and not actually a "software company"
I'd argue that for ALL companies, in any industry, working capital--measured on the balance sheet--is a critical data point. That is, you may be booking revenue but not collecting cash from your customers (in an extreme case, the "revenue" may be fictitious, if the software doesn't work and the customer refuses to pay). And while you might have $x of cash on the balance sheet, you could also have a huge and looming payables balance because you're waiting to pay your bills until you're N days past due.
Also, revenue is just what you can actually book per the accounting standards, which has lots of specific tests for software companies. For most SaaS companies, a key number is also deferred revenue, a balance sheet item that records the difference between the cash you've collected (say, up-front for 12 months) and the remaining performance obligation to deliver software over the period. Or, if you have a big service component as part of your offering, a number to watch is the amount of revenue you've booked but not yet billed.
As an investor, I'd also be curious about the future obligations of the company that will consume cash, such as big leases, debt, and other liabilities (eg, legal judgements against the company).
Investors are free to ignore whatever information they'd like, I suppose. And a tiny two-person company probably has a very simple set of financial statements, if any. But those two founders have the ambition to build a big and successful company, I'd argue that understanding how to read financial statements with some mild degree of fluency just isn't that hard and is a very useful skill.
For an early stage company, nobody cares about your assets or your shit estimates of the value of your intellectual property or goodwill. But payables and receivables can definitely be a dealbreaker, and I've never known a single VC that would sign a check without an understanding of where the company, no matter how new, stands with them.
Furthermore, their interviews cut to the underlying cause (scrappiness & maker mentality), which inherently eliminated certain effects (AAA office spaces) without ever seeing a balance sheet.
There was some basic due diligence questions that us founders had to answer but very light still.
I’d assume most seed deals on SAFEs or even priced rounds are similar.
PG might not personally read balance sheets but if nobody checks them at all, it would be pretty weird.
To your point: when YC interviews companies, they are mostly very early stage and pre-revenue. What YC cares about is how much money they could make if everything goes right, and whether the team is capable of making everything go (close enough to) right over the long term. The current financial picture has minimal bearing on that. Obviously, to the extent that it does have a bearing, YC is smart/experienced enough to consider that. But again, you can glean this from a conversation better than an accounting document.
I've personally seen A-rounds fall through because of balance sheets...turns out that when you promise hundreds of thousands of dollars in future services in exchange for a little bit of present cash flow, it can drastically affect your balance sheet and prospects for future investment.
Yes, companies need to mindful of their finances and cashflows. Everyone knows that, PG included, as I conveyed in another comment.
The real point that PG is making here is that an early stage company with perfect books but no exciting product or market opportunity is dead, whereas one with incomplete bookkeeping but an incredible product and market opportunity is much more likely to be a good investment.
I've long respected PG for his role in transforming the VC industry from it's MBA-led Sand Hill Road old boys club into an engineer-led scrappy startup world. And I have enjoyed his writing even when I disagree with much of it. However, his new Twitter persona is absolutely bonkers. Not every insight needs to be contrarian to the point of negligence.
He said nothing of the sort.
The point of this tweet is just that balance sheets don't determine outcomes for early stage startups; good products and excited users do. Balance sheets matter later. Many of the teams PG invested in were not even incorporated when he invested in them.
Tax authorities, YC's due diligence team and others will want to look at it. Anyone competent enough to start a company will know this.
Interpreting this as "pg says balance sheets don't matter at all to anyone" is.... weird. Repeatedly pushing this point is weirder. Maybe take a break from the internet for an hour or two
Isn't that what a business plan is? In some sense, it's a description of what your cash flow looks like in a couple of years.
What he does read (or did, when he was still working), is the YC application form response, which is designed to glean the important information in a very succinct format.
If he likes what he reads, then he'd have a 5-10 minute conversation with the founders, and decide whether or not to invest based on that.
So, yes he wants to know what the founders' general plans are. That's very different from reading or recommending lengthy business plan documents.
Then one time he replied, frustratedly, imploring us to just tell him how much money we were making, how much money we were spending, and how much we had in the bank.
He later put that concept into this essay http://www.paulgraham.com/aord.html
How much you were spending: seen on income statements as expenses and on balance sheets in accounts payable.
How much cash in the bank: seen on cash flow statements as starting/ending cash position and seen on balance sheets as cash assets.
Paul graham didn't care about your poetry, he just wanted to see your income statement and balance sheet. He apparently just didn't want to call it that because then he couldn't get edgy contrarian soundbites in on Twitter.
He specifically didn’t want to see balance sheets or income statements as he knows they can be full of bullshit (FWIW my only university qualification is in accountancy, so I know what he means).
All he cared about the bank balance and whether it was going up or down, because that’s what indicates whether the company would survive or not.
He still cared most about users and how excited they were and how fast their number was growing.
Nobody's missing the "important point" because everybody who's been on Hacker News for five minutes has heard Paul Graham make that point. Indeed, people have made jokes about startup business plans for decades. Literally everyone knows that those things don't matter for super early stage startups.
The tweet, however, and very much like many of Paul Graham's latest essays and tweets, seems to purposely elude any context, make a very generic a debatable statement, and assert it with complete aplomb. For someone who just wrote an essay about putting ideas into words, if he can't see that this tweet will be interpreted as "balance sheets are useless", he needs to put in a bit more work.
That's what people react to, because the only conclusion is that since he doesn't want to tweet bromides, he must be trying to say something "controversial."
It's really bordering on trolling, which for a man with his age and reputation is kind of cringy, embarrassing, and frankly disappointing to people who enjoyed his past stuff.
If literally everyone knows that then I don't need to be commenting, as my replies in this subthread are to someone insisting that balance sheets matter even before a company has a working product. Clearly they don't.
It seems the people "reacting" are imagining some deeper intention or elaborate plot or some complicated character weakness behind it all.
I just see him repeating what he's said for years: for early stage companies, you should just focus on making something people want.
As someone who has frequently made the mistake of overcomplicating things, I don't see anything wrong with repeatedly telling early stage founders, in all kinds of different ways, to just focus on building a product that people want.
You're acting like PG is sitting on something profound here, but there's nothing profound in the slightest. Nobody has ever gotten rich writing financial statements, they get rich by creating value that didn't exist before. The financial statements don't get you customers, don't build revenues, don't develop products, don't manage your cash flows, and don't manage expenses. But they're still crucial because they communicate, in a fairly standardized way, all of the most important measurements of a businesses success...including the three things that you just said PG cared most about.
Telling people that financial statements don't matter is like telling a PhD-candidate astrophysicist that it doesn't matter that they can only communicate in Azerbaijani as long as their physics research is rock solid. It's already completely brain-dead obvious that the physics research quality is the most important thing...but it's a breach of duty to tell them that they don't need to know how to communicate it to their peers.
I'm really not. You and others are acting is if he said something far more grandiose and potentially influential than he did.
He's just saying he focuses on teams and products when investing in super early stage companies. Finances matter only to the extent that the company can survive long enough to become sustainable. It's only then that GAAP accounting matters.
It's really not that big a deal. Seriously, which competent startup founder is going to make a decision to "never" take care of balance sheets for their entire company-operating career based solely on this tweet?
Agreed.
However, I do have a question for you: what do you think can be more full of bullshit, an oral financial statement by the founder during a conversation, or his audited financial statements?
Yes, the notion that balance sheets and income statements don't tell the whole story and can be misleading is a fact. It's also a fact that they're useful tools, part of elementary due diligence, in combination with conversations with founders.
He asked financial questions that are in audited financial statements. Asking a founder and assuming it's all true is fine, but when making the investment he's surely having someone do due diligence on the finances to confirm. Yet he's denied that anyone else reads these documents for him, too.
The types of companies PG has normally invested in were barely even companies yet. They were small teams with an idea. Maybe a prototype. Maybe a few users. Often they were not incorporated as companies when he agreed to invest, or if they were, they weren't old enough to have audited financial statements. He didn't do "due diligence" as there was nothing to do diligence on; pretty much everything to know about the company was sitting in front of him.
Did he have to have a good bullshit detector? Yes, absolutely. But that was a skill he and the YC partners learned from doing thousands of interviews over many years. But also, it didn't matter if a few dud companies slipped through; they were investing such small amounts it didn't matter. That's the whole point of YC.
In another comment you wrote "at the scale of PG's investments...". That's what says to me you're misunderstanding things. PG's investments have always been very small. He just did many of them.
If you want to ignore the fact he's been a director and has to sign off on balance sheets, also be my guest.
But again, his investment in Rescale isn't because he read their balance sheet and business plan; it's because he's been following their progress closely since YC invested in them in 2012. So he has at least 9 years of progress he's been following, via regular email updates and conversations with the founders. (You mention the $55M round as if it's evidence of the scale of investments he makes, but his share of that round was likely quite small. He really doesn't have a team to do due diligence on his personal investments. He just invests in people he personally believes in.)
As for being a director; he's explicitly avoided taking directorships in companies he's invested in, as he doesn't want to deal with the things that directors have to do, like read balance sheets. The only exception he made to that rule is Watsi, a non-profit - https://techcrunch.com/2013/04/19/paul-graham-watsi/
Please don't be patronising; I've been polite and respectful towards you and the others in this discussion, despite barbs being sent my way. I'm just trying to clarify misapprehensions as I have knowledge about the topic.
I can almost guarantee that Paul Graham has read material produced by companies, which contain information on a business' plans and current status, including financial.
If you don't want to call that reading a business plan, that's fine. But it's really besides the point.
Further, he's denied that other people have read business plans or balance sheets for him. That's also very likely false. Reviewing a balance sheet is an elementary part of due diligence, I'm sure that many startups have been funded based on a conversation over coffee, but at the scale of PG's investments I don't believe he's never been involved in a transaction where his side has had someone due the most elementary due diligence to confirm founders' statements, e.g. by reviewing a balance sheet / income statement, which he has denied.
I mean hell, he's been director of various companies, typically you're required to co-sign at least annual financial statements as a regulatory obligation, sometimes audited, which always include balance sheets. Come on. Just restate your point: I don't focus investment decisions on traditional balance sheets at all, but rather on conversations with founders.
"Come on. Just restate your point: I don't focus investment decisions on traditional balance sheets at all, but rather on conversations with founders."
It's pretty interesting once you get into it, isn't it? Welcome to the club!
They had no special insight. They had no special genius. In fact, we built an economic system that ensured wealth ended up with 1-2% of the population, and they happened to be the ones who lucked their way into the 1-2%.
Like, I’m struggling to understand why so many of these folks are going out their way to show that this is the case.
Is it a power play. Like laughing at everyone else? Hahaha. I’m a bigger idiot than you but still I’m richer. Fuck you.
Or are they just that clueless?
Both of which only serve to show that our rich overlords are not deserving of their wealth for the most part (and the ones that are, are unfortunately the exception).
YC invests at $2m valuations, so Paul's take is very logical. This won't apply to startups raising seed rounds at 10x higher valuations.
At a 10x valuation, you (literally) need to show your startup is 10x more likely to win. Progress and pitching are part of that, but so are financial plans.
Some examples of what financial plans reveal:
- are the business model assumptions thoughtful or simplistic (e.g. ramp up team over time vs hire all on day one)? What ARE the key assumptions and levers?
- do you have buffer time set aside for a future fundraise?
- are you realistic about costs/salaries?
Addendum: basically if you're raising a seed round, you should expect that many investors will ask about financial models and projections. This is less about your predicted revenue in month 36, or whatever, and more about understanding how you think about the business for the next year or two.
Nitpick but this is (literally) not true. Expected value is a function of FUTURE VALUE and PROBABILITY. Unless all the wins are the same future value you can't reduce the reasoning just to probability as you suggest.
Practically the valuation is also determined (maybe dominantly) by supply and demand as you are not the only investor in the market.
I agree that modeling these factors, checking your assumptions, finding what factors your plan is most sensitive/responsive to, estimating realistic buffers, etc. is extremely useful, and even essential. And doing so at an early stage is very good.
However, as Eisenhower said: “In preparing for battle I have always found that plans are useless, but planning is indispensable.” Having been expected to write and present such plans /pitch decks as a key element of, or prerequisite to, the first fundraising meeting, I found it absurd.
It was obvious to me as I built the models and wrote the deck that it was pure fiction. It was merely a projection of the intersection of our vision, plan, and execution, and the economy, in the next X years.
We were basically being asked to produce a linear projection when the entire point is to generate non-linear results and returns. And whatever we produce is hugely sensitive to assumptions in the models.
How can selecting a single point out of that fiction even begin to be actually useful as a predictor, at least for anything but linear growth businesses?
PaulG highlighted this in his post just a few comments down [0].
So, I'd think it would instead be a great exercise to do with a candidate after the first few meetings, have them generate best-medium-worst case scenarios, and highlight the most sensitive factors - then discuss that, but not as an initial selection criteria.
What am I missing here?
> I'd think it would instead be a great exercise to do with a candidate after the first few meetings
We're on the same page here, too. If we ask for a financial plan it's usually after a meeting or two, not as a filter for whether to take a first meeting.
Biz plans and Balance Sheets are more associated with a goal-oriented mindset.
PG's decision making obviously aligns more with a systems thinking. Founders are a major piece of a winning system to him, thus why he puts so much value in a 5-minute talk with them.
[1] https://medium.com/@flaviorump/systems-vs-goals-a67fcd937370
Business plans are vague, balance sheets are very concrete.
In my interpretation, "Balance Sheet" is being loosely used in this context for Financial Statements in general.
At the end of the day, KPIs, OKRs, MAUs, etc are all just numbers. What really matters is whether the value being exchanged is business worthy.
Like take an example about the Steam Deck recently by Valve. Gaben doesn't really care about these metrics right now because he's trying to validate a hypothesis that PC gaming can work as a handheld device (which has been tried for many years). Can it fail miserably? Maybe.
Or look at Mark Cuban's recent online affordable pharmacy. Mark obviously is showing he doesn't care about draining individual's bank accounts for life saving generic drugs, but validating if the big pharma industry is a bit corrupt and wants to slash the prices down. Can it fail miserably? Maybe.
Do you need business plans, balance sheets, or pitch decks to do this? Arguably not. You just need to know how driven the individuals/team is and whether there's a sense of product-market fit.
Even after all these years, Twitter still surprises me. This is the tweet that makes people accuse me of lying and announce that they're unfollowing me? People are that attached to business plans and balance sheets? How completely mystifying.
The reason I don't care about business plans is that I can learn more from 5 minutes of interrogating the founders than from 10 pages of fluff they've written.
The reason I don't care about balance sheets is the same reason I don't care who's leading 100 yards into a marathon.
> @ebecerra999: how do you approach Ikea furniture.
> @paulg: Oregon Expressway, then 101.
Not sure why they were asking about Ikea furniture.
As for business plans, the saying goes that "plans are useless, but planning is indispensable."
Business plans are a particularly poor tool for having funding conversations; they're both less persuasive than a pitch deck and less helpful in helping funders decide whether to invest than simply interviewing the founders.
But just because PG won't read your plan doesn't mean your startup shouldn't have/make a plan!
This is true not just for startups and its great advice for life in general. However, I believe YC would actively discourage founders from writing a traditional business plan. They would rather have their startups talk to users and building products.
To put it another way, I think YC would say that you cannot possibly write a realistic business plan without a solid customer base and a good product. Anything else and you're just making things up. By the time you have customers and a good product, you don't need a business plan to raise funding.
* This is what I've gathered from their startup school materials without having raised a dime from YC or talked to any of the partners, so take this with a big dash of salt.
Plans in war (and in business) tend not to survive first contact with the enemy, but planning is still useful.
B) This isn't something to be proud of, and certainly not something others should emulate. Ignorance isn't what makes you successful. (likewise, neither is millions of data points).
c) Business plans and balance sheets are still very useful and applicable, and fair to say they aren't everything.
Who has ever cared about balance sheets in the valley? The credit line is bottomless if you can show growth.
I'd be curious to learn more about your experience, would you be open to a chat on sqwok.im? I'm somewhere in the middle with moderate unit tests and e2e for critical paths.
The idea that you need to throw unit testing out to be successful is kind of silly.
When you’re growing a very complex system (huge micro services pattern and dealing with sensitive data) you’ll be happy you have tests to save your ass.
…speaking from experience.
I mean, who would even think it is?
There are also alternative approaches to achieving quality, and there was that report/"study" circulating around that claimed Team Software Process actually beats most agile/extreme programming methodologies in at least one metric (or two: defect rate and time to completion, IIRC). Of course, none of the actual "agile" development teams do clear-cut TDD or Extreme Programming either, so you are never comparing apples-to-apples.
As a corollary, I'd also say that neither does the UI or UX matter that much to success, and there are simply a bunch of intangibles that can make or break a product.
But one "tangible" thing is that you've got to be serving some customers' needs, and need to continue to do that. And rare are businesses which have a need of "my button needs to be rounded and 10px away from the next button" or "my code needs to be unit tested": those are actually "my customer can get their work done through my product" and "it should rarely break".
None of this means that you should not invest in pretty/functional UI/UX or well-tested code. Just don't expect that to mean much in the grand scheme of things. They will affect your ability to hire top-level people once you are an established business, though.
(I personally am too attached to "high-quality" [as in well tested] code and would struggle to kick off a start-up for that reason only, even though ideas keep popping up :)
Product/market fit has more to do with functionality and the minimum quality design aesthetic required by the customer.
In our case, we disrupted a rather boring, traditional field. Our UI/UX was never great neither did we hire “frontend” people until post-acquisition but performance and data security were huge to our clients thus testing.
I imagine if business plans, balance sheets and pitch decks become established formats, the risk of people focusing too much on them.
> have you read my business plan ?
https://twitter.com/3rd_layer/status/1492682875208146947?s=2...
Let's be a bit cynical: the 'balance sheet' for a company at 0.2 on the scale of 0->1->N is basically the 'download and stickiness numbers'. YC strongly encourages users to 'share the numbers'.
The problem with this, is basically it's not really super early stage investing.
The implication is, you need to have a company showing material traction with a product, before taking on significant funds. Which is fine, but let's just be real about what that means.
It's a myth that 'rounds have been getting bigger' in a way ... really we've just been renaming rounds.
If you need to 'post good numbers' to get into a Seed, well, then it's not really 'Traditional Seed', it's something later.
Regarding the business plan part, it seems PG does indeed read[1] "business plans": not from some written document which has static form but from a source having a more dynamic form i.e. people who are primarily responsible for writing of those static documents if/when needed.
And, about the balance sheet part, I don't really know how useful it is for the kind of businesses (early stage startup) in which PG and YC are interested and primarily invests in.
---
1. s/eternal/age-old/ # replace "eternal" with "age-old"
2. s/form vs. substance/signified vs. signifier/ # I think signified-signifier[1] distinction is more specific and apt compared to form-substance distinction when it comes communication.
Additionally if you're interested and want to "read" more on "business plans", I would recommend checking MIT's "Nuts and Bolts of Business Plans" course[2], at least the first lecture[3, 4] if you aren't motivated enough to go through the whole course.
---
[1] - Signified and Signifier: https://en.wikipedia.org/wiki/Signified_and_signifier
[2] - MIT OCW - Nuts and Bolts of Business Plans: https://ocw.mit.edu/courses/sloan-school-of-management/15-s2...
[3] - Business Plan Basics - Lecture Video: https://ocw.mit.edu/courses/sloan-school-of-management/15-s2...
[4] - Business Plan Basics - Slide: https://ocw.mit.edu/courses/sloan-school-of-management/15-s2...
Presumably Paul isn't meeting with every single founder who is applying to YC. So he must be using a different filtering mechanism to winnow down the funnel. This is usually the role that business plans have often played.
As someone who hates writing business plans as well, it would be wonderful if YC released a "here's why you should meet with me" doc template that people can use widely as a replacement for business plans.
The reaction is not directed towards business plans or whether PG has even read one or not (hint: no one cares). It is about his consistently proven proclivity to say edgy, inaccurate things, often which add 0 value. Then get upset that people are pointing this out on twitter. It's pretty annoying that he acts this way on twitter considering his previous essays have been ogod.
Because it makes complete sense that a balance sheet doesn’t tell you anything about how a business will do. But assuming it’s not falsified it helps identify red flags.
I suspect any due diligence almost certainly has someone reading a balance sheet.
Startups are always fragile.
To take his analogy further, if someone has run 10 marathons one might have a fair idea of the probable time for the next one.
From all the Victoria Government's main business website and to all of their small business grant websites, all I could find was advice on how to write a business plan. This was in complete contrast to all the Lean books that not once talked about business plans but instead focused on customer development.
... maybe it's no wonder 9/10 of new businesses fail if they start with planning documents that take weeks vs "getting out of the building".
The following questions are pulled from the application (perhaps an older version):
What is your company going to make?
Why did you pick this idea to work on? Do you have domain expertise in this area? How do you know people need what you're making?
What's new about what you're making? What substitutes do people resort to because it doesn't exist yet (or they don't know about it)?
Who are your competitors, and who might become competitors? Who do you fear most?
What do you understand about your business that other companies in it just don't get?
How do or will you make money? How much could you make?
How far along are you? Do you have a beta yet? If not, when will you? Are you launched? If so, how many users do you have? Do you have revenue? If so, how much? If you're launched, what is your monthly growth rate (in users or revenue or both)?
—-
These questions cover product description, value prop, market analysis, financial projections and more, all of which are the core of a “business plan”.
Sure, the application may be structured in a different way, but the sentiment that PG has never read a business plan seems very disingenuous.
I suspect pg is referring to the plans founders make to impress investors, rather than to figure out which problems to solve.
The business plan for a startup pitching to a VC will look different than the plan an SMB submits to a bank
I do think the plan you linked to is more thorough than what the majority of SMBs will be writing. YC is another league of finance. Most SMBs I know are not very sophisticated
It also included a background check on the management IIRC
Can you link to an example SMB business plan? I once tried to help a neighborhood grocer with financing and I can assure you they weren't writing a sophisticated business plan.
No it's not. The point is that what most start-ups submit as a "business plan" is just a load of b.s.
The questions that are asked in the YC interview draw out the information that _should_ be in a business plan.
In most cases though YC applications are meant as a way to evaluate the team, not the business and that's where the difference lies between the data they collect and what your typical business plan shows, even if there are superficial similarities the goal is an entirely different one.
I think PG & Co would invest readily into a fantastic team with a crappy business plan knowing full well that they are effectively already investing in the first - or second - pivot.
For them it doesn't matter: people driven to succeed will try to do so one way or the other and have a leg up on people that are not like that.
There is a key difference though - none of the YC questions are about the planning bit of a business plan. None of them are about what you're going to do in the near term future. It's all about what you've done so far and where you believe you could be when you exit.
The issue with business plans isn't that they include a report on what you've done to date. It's the idea that you can reasonably predict what you plan to do over the next year or two. Lots of more traditional businesses can do that, and a business plan is appropriate for them, but a YC startup needs to be significantly more agile than that. Any plan will certainly be wrong, so there no point wasting time making one.
There's a famous Eisenhower quote that goes something like, "Plans are useless, but planning is indispensable."
The point being that any single plan is likely not to pan out because of unknowns and surprises, but by going through the process of planning, you have "cached" knowledge about your domain like what the opportunities and threats are and you can use that knowledge to adapt when the specific plan falls through.
They might not require a bullshitty chart of next year's P&L, but if you already have a clear idea what the metrics that are supposed to lead to it are (growth rate, CAC vs CLV, untapped market size) you'll be at an advantage and if you can't tell a plausible growth story about your most likely route to growth you won't (not even if your deck has the chart!)
Okay, let us look again at some of the questions posted by OP:
1. How do you know people need what you're making?
2. Who might become competitors?
3. How do or will you make money? How much could you make?
These all look future tense to me.
If you put something forwards-looking like "Google are really big so they might become a competitor!" it wouldn't look great. It's technically true, but it's not interesting. It doesn't demonstrate that you know your market. If you put "Lithuanian Startup X has launched a product in this market 60 days ago, which reached position 3 on Product Hunt, and had a successful Show HN post" then you start to look like you actually follow what's happening. You know your market, and can show you research it. No vague guesses about the future, just demonstrable knowledge about the present.
"By Q4 2025 expected turnover is..."
No one should take that kind of prediction seriously. (Although VCs sometimes do, which is unfortunate.)
Plans exist to show you know what a market is and that you can research the details enough to know who else is in the space, what they've done, how they did it, and what they missed.
If no one else is in the space - still possible, but rare - you should at least be able to point to some comparable efforts, some of which should be your own.
The point is to show that you're capable of thinking strategically and not just nailing some code to the wall and hoping someone will pay to get some use out of it.
Ensuring that you did think well about the threats, menaces, and what could impact your future growth. And so you have already evaluated mitigations for them.
YC was never about an exit. It's about building something people want. Only after that can you decide what to do with it. Continue running a business was a serious consideration before it got overrun by VCs.
The only thing I can think of is targeting different users by various segments (which isn't new). E.g. HN is mostly for people that like tech and the startup scene.
If someone is just expressing their opinion, I don't like to read a bunch of hedging. I get that you are uncertain and this is just your opinion, stop telling me that over and over and over.
I wish there was a new shorthand/syntax/convention/notation for expressing uncertainty. All statements are delivered succinctly, with some notation for saying I am only 70% certain, perhaps by putting 0.7 as small superscript text.
It's great to get some (many in PGs case) likes on twitter and that's about it. A business plan is great to have because it forces you to think through all the important pieces of the business. Many great companies had one, e.g. Apple (as mentioned by someone else in this thread). Amazon has detailed Word documents for anything they dive into.
Of course, planning should not becoming your core activity... There's a limit after which business planning is just an academic exercise.
These kind of organisations need to move fast and try a lot of stuff in a short amount of time to see what works. A business plan then seems expedient because the future direction is not set in stone anyway.
That's the logic behind the argument.
Now, we can talk all day about whether that is a healthy path, to constantly drive to build Y/VC-level growth no matter what. But whether or not you buy into the "startup" lifestyle, YC absolutely does run under that model, so they seek people who match, and those people aren't identified by snazzy spreadsheets.
But what I'm sure about is that if he wanted this to be an idea that's well communicated and important, it wouldn't be ambiguous like this.
I don't know pg but the HN brand is certainly to rise above stating disinformation to start arguments and drive engagement.
I guess maybe that's what Twitter is for, but then maybe the mods should stop that sort of thing leaking to HN ...
Any chance you're mistaken?
Why this idea?
Why you?
Why now?
What have you done?
Honestly Twitter is a terrible idea in most cases that just leads to people shouting at each other - because 140 characters isn't enough to communicate anything in a balanced way.
I find politics is best learnt from history books. There isn't that much about today's politics you can't learn from 19th-21st Century history books.
It's been 280 for a while, but your point still stands.
obviously, at the early stage growth will matter more than the balance sheet
What an eye roll.
But that's the thing, the IQ says absolutely nothing about ones ethical responsibility or the amount of empathy one has.
It is purely measuring "logical thinking ability". Things like "continue this sequence", "recognize a pattern", etc.
I also often see this dangerous assumption that ones political opponents or everyone with a different opinion than the one which seems most rational to ones own must be "stupid". In reality, the problem is that we focus on something as (arguably) unimportant as the IQ, which measures only something very narrow.
Another misconception about IQ is that those who are more poor or have less favourable job positions must have a lower IQ. To give just one counter example to that, very often, people who have some sort of handicap (ASD, ADHD, etc.) are also "gifted", have a high IQ, are good when it comes to logical thinking. But their handicaps still make their lives more difficult in general, so they face more adversity than someone who is "normal".
Sorry that i wrote a wall of text, was just thinking out loud.
In my personal opinion, the IQ is already a little dangerous, because it assigns a "value" to a human life, but that is an entirely different discussion.
To be fair though, 99% of wisdom books from successful people are like this.
And btw, before YC, the whos-who of SV were a closed-knit, exclusive group. You underestimate the very radical nature of YC when they started in 2004.
Imagine showcasing a complete Dapp with a tutorial, basically ready for launch excluding some UX changes, and then getting questions about, "What's your roadmap?" or, "Where's your whitepaper?"
I appreciate his perspective here. Words must mean action. Talk is cheap.
Founder: So we’re doing this rad new architecture-
Paulg: In Lisp. It’s in Lisp, right?
Founder: Huh, fuck no, it’s 2022, dude-
Paulg: (frowning) Out. Thumbs down.
He did care a lot about the fact that we had users who were excited and unique insights into what was overlooked in the market.
Let's say she starts a few more businesses and they are successful. Is Kim someone we should take business advice from? She is one of the richest self-made women ever.
Kim would likely never have to make any ice creme either.
Here's a pg speech. Make your own conclusions:
Many people took a lot of advice from him, but nobody took the advice on Lisp. That was exactly what I realized in 2007, when I started reading his essays, that the opportunity here was to take excellent advice that nobody else was going to take.
Now, some people do learn Lisp on his recommendation, the thing is too only a very few--perhaps only one--will actually also be able to turn that into the other thing he speaks of at length, becoming a great founder. I would say the two things pull away from each other. And technologic fashions have pulled in a direction diametrically opposite to his vision until only three years ago, to the point he announced in an interview Viaweb's technology "was a lot more sophisticated than it needed to be."
He's saying that he doesn't read the business plan, balance sheet or the pitch deck. He just asks them questions, answering which would answer everything in those documents.
So, basically, in addition to writing all these things, you have to read it out to him because Mr. rich guy investor doesn't want to read it himself.
In conversation you can pick up the BS a bit more readily than in a document.
He does what anyone sane would do: ask the question and get real reactions. Most people are much better in lying (aka optimizing) on documents than in real life.
like bragging about failing at math and then succeeding hugely at something math-related
How?
But to just toss out the idea that balance sheets and discounted cash flows should have any bearing whatsoever on the value of an equity is so friggin Bitcoin.