I recently got into a conversation with a close friend about the current state of the economy.  We have both seen the natural ebbs and flows of the financial system and concluded that at any particular point in time we are only one event away from a major economic collapse.  It amazes me just how fragile the global economic environment is and how little it takes to change things in an instant.

This got me thinking about why things are the way they are and I couldn’t help but think of the way businesses are run these days.  At some point the fundamentals of business were thrown out the window and wild speculation and guessing took over.  I remember back to the dot com boom when companies were boasting stock prices above $300 per share, the same companies that either now no longer exist or trade for pennies on the dollar.  While even the most basic investor should have questioned the valuation and market capitalization numbers being put forth at the time, everyone allowed greed to dictate their moves.  Then of course the bottom fell out of everything and people lost a ton of money.  But shouldn’t there be something in the system that prevents this from happening in the first place?

Fast forward to today and I exactly why we are in our current recession.  Once again companies were allowed to do whatever they wanted and all the warning signs of collapse were completely ignored.  Everyone  put their hand in the pot to get a share of the money and quite a few made off with billions of dollars.  Of course this means that for every person who made money, another 1000 lost everything they had.

I’m currently in the process of launching my own company, a parking reservations service called QuickPark.  When I first sat down and came up with the concept a few years ago one of the first things I did in my initial due diligence was come up with a revenue plan.  Now while its easy to sit down with Excel and put together a spreadsheet of numbers that get you excited about the future, it’s a crucial step for anyone serious about launching a new business.  As the title of this post points out businesses make money.  Anything else is no different than an 8th grade science project.  This needs to be the #1 rule taught in every business class  around the world.

Far too often I see my fellow entrepreneurs come up with great ideas that have no supporting revenue model.  Again I say if you don’t have some plan of generating money, then it doesn’t matter how clever of an idea you have come up with it is not a business.  Right now the whole world is infatuated with Twitter.  As recently as this past September Twitter was valued at $1 billion.  Now don’t get me wrong I completely love the site and all that it has to offer but there’s no way any company should be valued at nearly $1 billion when they have never generated a dime. You cannot get through a hour of TV without seeing some reference to Twitter whether it be in a Sprint commercial or the local news station advertising their page.  Twittermania is in full effect and yet they have failed to capitalize on their success.  There has been talk about premium services for business and possible inclusion of ads on the site.  I’ve heard these rumblings for years and still nothing has been implemented.

The problem with operating a business in this manner is that you are relying on your popularity to fuel your existence.  While Twitter is very well funded, receiving over $55 million to date, at some point your popularity wanes and people move on to the next big thing.  Just ask Friendster if you don’t believe me.  While Twitter may very well pull through and eventually become a profitable company, it is not a sound strategy for starting and running a business.  The only way to make sure that companies can withstand the frailties of our economic system is making sure they are built on a solid foundation.  This means operating with morality, focusing on gradual and long term growth and of course generating revenue along the way.  At least that’s my two cents.