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.
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.
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.