Monday, November 3, 2008

Second Verse: Same as the First?

Over on TechCrunch they've got a hand-wringing report on the apparent economics of Facebook:
Facebook May Be Growing Too Fast. And Hitting The Capital Markets Again.
Bottom line: Facebook has revenues of between $250 and $300 million per year, but it's burning through at least that much -- and possibly a lot more -- on operational and personnel expenses. So, amid all the accolades and congratulations, Facebook is still unable to justify its $15 billion valuation with actual profits.

Is the next step layoffs? Certainly they'd be in good company. Last I saw, tech sector layoffs in the wake of the credit crisis were at 19,000 and counting. For those of us who were around for the first Internet bubble, this has a familiar feel. First you have the heady days when a good idea is all you need to bring in a bunch of venture capital. Then you have explosive growth, punctuated by the occasional wild party with regrettable photographic and video footage circulated afterwards. Then you arrive at the hangover stage, when you're still burning money and your investors are losing patience. Then come the layoffs, followed (in most cases) by a complete shutdown.

It's a melancholy feeling, looking at that scenario playing out a second time. I didn't enjoy it the first time, and I doubt I'll enjoy it more now. It's easy to indulge in schadenfreude at the expense of the arrogant entrepreneurs at the head of these companies, but there are a lot of ordinary people -- people with kids, people just trying to make rent -- who end up getting hurt. I feel for them.

And again, the same lessons are to be learned this time as last. Namely this: "cool" is not a business plan. Facebook didn't start as a business, it started out as a cool idea some random guy built out in his dorm room. No matter how many members the service attracted, if they couldn't be monetized the idea would never make the shift from "cool" to "profitable." And if profitability isn't at the core of an idea from its very beginnings, is it all that surprising when profits prove elusive down the road?

Not everything needs to be profitable, of course. Some things should be built simply because they're cool, but in that case you're working on a hobby, not a business. And if you have a cool idea that so excites other people that they want to invest in it, there's no reason you should turn down the money. It's their money, and they can choose what to do with it. But take a look out there at the tech sector: for every ten popular sites and services that have not yet figured out a business plan, at least eight or nine never will. "Cool" is easy. I have cool ideas all the time. "Profitable," though, is hard, and ultimately that's what makes the difference between winners and losers.

If you want to build something cool, go for it. I encourage you in that dream. But if you want to build a business, keep working on your idea until coolness and profit go hand-in-hand. Otherwise, you're planning for failure.