Seems like a lot of people are missing the point of this one.<p>PG/YC invest at the earliest stages. The information they need is pretty much:<p>1. What are you doing?<p>2. Do people like it?<p>3. How big is the market?<p>4. What are you/team like?<p>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.<p>You don't have to ever view formal documents or financials to do that.<p>That is PG's broader point, and isn't really that controversial IMO.
Interesting to contrast this with PG's most recent essay "Putting Ideas into Words" where he argues that people who don't write don't have fully formed ideas. What else is a business plan besides a thoughtful writeup? I think it would give me a good idea into how a person thinks.<p>[1] <a href="http://paulgraham.com/words.html" rel="nofollow">http://paulgraham.com/words.html</a>
He invests in seed rounds where those often go down the drain.<p>The things that matter at this stage are:<p>Founders and general market size. So sure, ignoring the noise of those two makes sense.
Am I missing something? What's the point of the tweet other than to elicit a reaction? And then in the replies: 'I CAN'T BELIEVE I ELICITED A REACTION!.
I read them to see how people think. You can learn most of the same by talking to them. He didn’t say he doesn’t read the P/L, i.e. budget.<p>Plus he has other ppl to read the balance sheets.<p>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?<p>(It worked out for them)
YC funds software companies disrupting large markets. Software has high margins. Large markets are easy to intuit. Therefore business plans aren’t as necessary as opposed to other types of investors eg private equity.
Viaweb's First Business Plan: <a href="http://paulgraham.com/vwplan.html" rel="nofollow">http://paulgraham.com/vwplan.html</a>
My understanding is Y Combinator was always about people, on both sides, it’s also far more than just PG. if you haven’t read it, read this that Paul wrote about Jessica Livingston, it’s a brilliant insight into how they invest and how important the people around PG are at informing <i>their</i> investment decisions:<p><a href="http://paulgraham.com/jessica.html" rel="nofollow">http://paulgraham.com/jessica.html</a><p>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.<p>For someone known for his essays trying to convey meany from a 10 word tweet is never going to happen.
This is probably meant to be, partially, in comparison to Warren Buffet, who famously claims to invest based on reading of financial statements (and other documents) in search of “good businesses.” <a href="https://www.amazon.com/Warren-Buffett-Interpretation-Financial-Statements/" rel="nofollow">https://www.amazon.com/Warren-Buffett-Interpretation-Financi...</a><p>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.<p>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.<p>Suspect the same is true of many great success stories in business.
Very similar to Sam's confession on Econtalk [1]:<p>> 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.<p>[1] <a href="https://www.youtube.com/watch?v=JAYXUgNHHc4&t=1656s" rel="nofollow">https://www.youtube.com/watch?v=JAYXUgNHHc4&t=1656s</a>
Can’t read what he says as I was blocked years ago. I had expressed the mildest degree of cynicism one can possibly express in response to a straight up lie.
I wonder why it was surprising for some to read this tweet. Startups will change their priorities daily. Business plans are against the idea of running a startup.
I understand business plans, but balance sheets? It seems like you'd want to know the financial picture of a company. What else to you look at to, even at the most basic level, determine if the startup is going to be able to pay it's AWS bill and payroll that month?
This really is just arguing semantics on the internet, one of the least interesting activities, usually.<p>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.<p>If you don't want to call that reading a business plan, that's fine. But it's really besides the point.<p>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.<p>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.
I don’t understand why it is now, a couple of years when a bunch of billionaires have basically become 5-10x richer, while the rest of the people in the world are suffering because of understandable economic restrictions, are these rich billionaires going out of their way to show that they really never deserved that money.<p>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%.<p>Like, I’m struggling to understand why so many of these folks are going out their way to show that this is the case.<p>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.<p>Or are they just that clueless?<p>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).
I'm a seed stage VC. Reposting my thoughts on this from twitter:<p>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.<p>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.<p>Some examples of what financial plans reveal:<p>- 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?<p>- do you have buffer time set aside for a future fundraise?<p>- are you realistic about costs/salaries?<p>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.
Seems related to Systems vs. Goals. [1]<p>Biz plans and Balance Sheets are more associated with a goal-oriented mindset.<p>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.<p>[1] <a href="https://medium.com/@flaviorump/systems-vs-goals-a67fcd937370" rel="nofollow">https://medium.com/@flaviorump/systems-vs-goals-a67fcd937370</a>
It's not really uncommon. Some very successful investors & businesses can focus purely on the value exchange.<p>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.<p>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.<p>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.<p>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.
His response to some of the reactions he's getting:<p>Even after all these years, Twitter still surprises me. <i>This</i> 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.<p>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.<p>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.<p><a href="https://twitter.com/paulg/status/1492694430129672194" rel="nofollow">https://twitter.com/paulg/status/1492694430129672194</a>
Had to chuckle at this exchange down in the replies:<p>> @ebecerra999: how do you approach Ikea furniture.<p>> @paulg: Oregon Expressway, then 101.<p>Not sure why they were asking about Ikea furniture.
This tweet is saying that <i>YC interviewers</i> don't read balance sheets; he's not saying that all balance sheets are useless. (You need a balance sheet to file your taxes, for one thing!)<p>As for business plans, the saying goes that "plans are useless, but planning is indispensable."<p>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.<p>But just because PG won't read your plan doesn't mean your startup shouldn't have/make a plan!
A) I call BS on "never". It's one thing to not consider them, but another to say never ever. And what does that say if he's truly never even read one?<p>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).<p>c) Business plans and balance sheets are still very useful and applicable, and fair to say they aren't everything.
Aren’t pitch decks condensed version of business plans? Just asking?<p>Who has ever cared about balance sheets in the valley? The credit line is bottomless if you can show growth.
I have built a couple very successful SaaS businesses from scratch. 8 figure businesses. I have never in my life written a unit test or any kind of testing code in 20 years of professional software development.
It's like exams and Europass CVs. At some point taking exams can be a separate skill from learning the material. CVs in Europass format, force all candidates at filling a form and the CV fails at it's purpose of differentiating candidates.<p>I imagine if business plans, balance sheets and pitch decks become established formats, the risk of people focusing too much on them.
Did anyone else notice a response tweet from Simon Leviev (the Tinder Swindler which was on Netflix)?<p>> have you read my business plan ?<p><a href="https://twitter.com/3rd_layer/status/1492682875208146947?s=20&t=r2ShCcVXcR6EukY8tioA3A" rel="nofollow">https://twitter.com/3rd_layer/status/1492682875208146947?s=2...</a>
A 'balance sheet' is useless in determining the value of an early stage company.<p>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'.<p>The problem with this, is basically it's not really super early stage investing.<p>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.<p>It's a myth that 'rounds have been getting bigger' in a way ... really we've just been renaming rounds.<p>If you need to 'post good numbers' to get into a Seed, well, then it's not really 'Traditional Seed', it's something later.
How are business plans not just guesswork?
In practice how often does what actually happens to the business irl conform to the plan? And how closely? Like if you make 25% more profit in one year than planned than that's clearly way off and counts as not conforming.
This tweet kind of invoke the eternal(?) form vs. substance debate.<p>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.<p>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.<p>---<p>[1] - <a href="https://twitter.com/paulg/status/1492695627888672771" rel="nofollow">https://twitter.com/paulg/status/1492695627888672771</a>
Honestly the value of a business plan is just writing it, because it focuses your ideas and forces you to consider things you may not have considered before. Who cares if paulg reads it? It's a tool for founders, not investors (apparently).
> <i>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.</i><p>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.<p>As someone who hates writing business plans as well, it would be wonderful if YC released a <i>"here's why you should meet with me"</i> doc template that people can use widely as a replacement for business plans.
I don't know what is controversial about that statement if you put it into pg's context. Anyone complaining about it surely could do something more productive with their time.
So, PG got lucky once, and now he has the luck to burn on numerous risky ventures until one pays off and he gets more luck. This is basically a humble brag.
It makes complete sense. I come from a geographic area where the immediate response to my job description is "here's my startup idea". There have been very few I feel passionate about and want to get involved. The rest I ask for a contract few and my counter is always $0 and a partnershie of ownership.
Does this, however, mean that no one in PG’s employ or in contract with read a balance sheet?<p>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.<p>I suspect any due diligence almost certainly has someone reading a balance sheet.
Someone must be making sure there’s not a few million in debt casually tossed in, making a $250,000 or whatever investment into a $3,250,000 investment. Beyond that, balance sheets are really just part of the process of making sure the company’s not fragile.<p>Startups are always fragile.
Paulg's advice may be sound for companies at YC stage (ie not a company yet), but I would caution against it a general investment advice.<p>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.
This really does not mean that you do not need a buesniess plan. You definitely need it. But in case of startups that should be only for you: not for investors. For investors you make a different version called pitch deck.
I've been reading a few Lean Startup books recently, and this morning I went to the local government's website to see what advice they could give to register and start a business...<p>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.<p>... 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".
It's like this guy is out to prove to everyone that he's an idiot. Which is honestly pretty convenient since it means a lot more coming from him.
I’m surprised the YC application hasn’t been more of a focus in this discussion.<p>The following questions are pulled from the application (perhaps an older version):<p>What is your company going to make?<p>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?<p>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)?<p>Who are your competitors, and who might become competitors? Who do you fear most?<p>What do you understand about your business that other companies in it just don't get?<p>How do or will you make money? How much could you make?<p>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)?<p>—-<p>These questions cover product description, value prop, market analysis, financial projections and more, all of which are the core of a “business plan”.<p>Sure, the application may be structured in a different way, but the sentiment that PG has never read a business plan seems very disingenuous.
He obviously has got people working for him, that filters prospects before they get to him. I am sure they read both business plans and balance sheets.
that might work at the seed level but not when investing in the stock market<p>obviously, at the early stage growth will matter more than the balance sheet
He later goes on to claim he's "never read a pitch deck". <a href="https://twitter.com/paulg/status/1492696791434731529?s=20&t=ODbVDT_HQOWLtSqBsiWk1w" rel="nofollow">https://twitter.com/paulg/status/1492696791434731529?s=20&t=...</a><p>What an eye roll.
He says he interrupts the founders during live presentations instead of reading balance sheets.<p>Founder: So we’re doing this rad new architecture-<p>Paulg: In Lisp. It’s in Lisp, right?<p>Founder: Huh, fuck no, it’s 2022, dude-<p>Paulg: (frowning) Out. Thumbs down.
I read through the thread and his tweets.<p>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.<p>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.
So he's never read from anyone that Google monetizes search by displaying advertisements? He's never read anywhere how a company markets its products.<p>How?
PG is a very, very bright guy and has left an outsized mark on the first two decades of 21st century consumer tech: his legacy is secure. I'll even grant that pre-A business plan decks are relatively low signal based on what I've seen.<p>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 <i>so friggin Bitcoin</i>.