Dick Costolo of FeedBurner fame and Ask the Wizard fame (that is his blog if you did not know, I suggest putting it in your reader, although he does not post often) is owning up to his New Year’s resolution by blogging more often. So today, he got in his first quarter quota (I am hoping that was tongue in cheek on his part and we can expect more, but if not, this post was chock full of goodies). He laid down some knowledge today on the purpose and need (or not) of business models in this day and age. The post was very verbose, which is typical of previous posts ( perhaps the verboseness is a byproduct of the fact that he does not post that often, or perhaps it is simply because he has so much good stuff to say, who knows).

You can read the whole post if you like, it is worth the read, but he sums up the post nicely in his last sentence:

“When do you need to figure out your business model? Before you run out of cash. “

So the first obvious question you ask yourself is, well how do I raise the cash in the first place to where I find myself in this position? Great question! My experience has been that the investors I have pitched to want to understand how the money they are about to invest in you is going to give them X in return. So without a business model, how do you answer that question or defend your stance? If you are bootstrapping the whole shebang, then this does not apply, you answer to yourself so you better figure it out before you run out of your own cash or you are screwed. For the rest of us that are trying to raise money, what in the world do we do? Dick gives an example about Google and how when they were funded they did not have a clear business model, but investor John Doerr is rumored to have said that with that kind of traffic, we will figure it out. Another example is Twitter, they raised somewhere in the neighorhood of 5 million without a clear business model, and the same attitude that was taken towards Google was taken towards them, we will figure it out. That is fine if you are Google or Twitter, but for every Google or Twitter, there are hundreds if not thousands of startups out there that need that initial funding to get the traffic going.

I believe that a formal business model is not necessary for raise funding, but you need to have a clear path to generating revenue in mind when you are out pitching to investors or you are severely limiting your chances of getting the funding that you are looking for. There are exceptions to the rule, like the one mentioned above. Another exception, and you see it often, is if you are a serial entrepreneur and have a track record of success, but if you are a first time entrepreneur, when the VC says “show me the money” you better be able to show them how it is going to be made (thanks Cuba Gooding for that line, it still stands strong 10 years later).