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Venture Capital - Friday, September 30, 2005

Underpants Gnomes Business Model Vs. Google Is Our Business Model

Rafe Needleman has pointed out in a post that when talking with content and Web application companies these days, the answer to the question 'How will you get to profitability?" is invariably and cleanly "Google Adsense dollars."

We find that this answer often suffices for bootstrapped companies with low overhead, but whenever a company is venture-backed, overhead gets loftier, bigger returns are expected and the "Google" response doesn't fly. Instead, we get the classic Underpants Gnomes response (see SouthPark transcript below if you are not hip to the reference) where step one is traffic, step 2 is silence and step 3 is profits.

As we posted yesterday, the Underpants Gnomes model is working for WebMD's IPO and we are seeing lots of other companies getting Gnomes' Underpants funding. Given News Corp.'s spendy buy of MySpace we expect to see dozens more in social networking. The a:c will keep its eye on the madness.

[In the gnomes' cave]
Gnome 1: This is where all our work is done.
Kyle: So what are you gonna do with all these underpants you steal?
Gnome 1: Collecting underpants is just phase one. Phase one: collect underpants.
Kyle: So what's phase two?
[Silence]
Gnome 1: Hey, what's phase two?!
Gnome 2: Phase one: we collect underpants.
Gnome 1: Ya, ya, ya. But what about phase two?
[Silence]
Gnome 2: Well, phase three is profit. Get it?
Stan: I don't get it.
Gnome 2: (Goes over to a chart on the wall) You see, Phase one: collect underpants, phase two-
[Silence]
Gnome 2: Phase three: profit.
Cartman: Oh I get it.
Stan: No you don't.
Kyle: Do you guys know anything about corporations?
Gnome 2: You bet we do.
Gnome 1: Us gnomes are geniuses at corporations.