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Business

What have we done?

We are in deep doo-doo if people are only now discovering that Internet entrepreneurs need to get people to pay for things instead of just giving everything away for free. Is such a concept so novel?
Written by Phil Wainewright, Contributor

What have we come to when a respected VC feels no shame or embarrassment when actually publishing a blog post entitled When Talking About Business Models, Remember That Profits Equal Revenues Minus Costs, as Fred Wilson did last weekend? Has the world become so blind to the basics of commerce that it needs reminding of such a basic tenet?

Apparently yes. Even Wall St can't count, as Robert Cringely revealed last week. (An analyst at JP Morgan came up with a graphic to illustrate the extent to which bank market caps shrank in 2008. It was widely circulated in financial circles without anyone noticing the elementary error in basic geometry which meant it massively overstated the shrinkage).

Fred Wilson's blog post cited Chris Anderson's WSJ article of last week on The Economics of Giving It Away, which, he notes, "suggest[s] that Internet entrepreneurs are going to have to get people to step up and pay for something instead of just giving everything away for free ..." Really? Is such a concept so novel?

Have we brought up an entire generation to believe that cash isn't important? Is this the payback for all those millions of dollars spent educating a multitude of MBAs? It turns out it was all a waste of money, because all it's done is encourage the hubris that this generation is so smart it can defy the rules of economics (as well as remain oblivious to the tenets of geometry). For a few years there, the self-appointed masters of the universe deluded themselves that they had bypassed the normal rules of finance. Now they, along with the congressional Democratic caucus, get lectured on basic economics by Steve Ballmer, of all people:

"The hard truth is this, in my opinion: The private sector of our economy has borrowed too much money, businesses and consumers alike ... The bubble has burst ... America really has to return to growth that's built on innovation and productivity, rather than leverage and private debt."

My worry is that the culture of free money has become so ingrained that everyone under thirty-something is convinced that money can simply be conjured out of thin air by making promises for the future, rather than having to be earned from actual work that delivers real-world value today.

And then, out of nowhere, we have Fred Wilson all of a sudden saying that what matters is living on current revenues rather than spending from future projected revenue. The emperor of debt is deposed without even a shirt on his back and cash comes from nowhere to usurp the throne. In an instant the conventional wisdom switches from spending tomorrow's wealth to conserving today's. If we are to pursue that mantra as unthinkingly as the one it replaces, then we are in for a depression as deep and unforgiving as the levity and irresponsibility of the boom that preceded it.

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