Ask HN: What do startups do with millions of funding? | Hacker News Reader

Ask HN: What do startups do with millions of funding?

16 pointsrefrigerator15 comments

Almost every day I read a post on Techcrunch saying 'X has raised $Y million from...' - almost all of these are primarily online businesses/services, do they really need all that money?

If you were to give a rough breakdown of what they spend it on, what would it be?

This is something that I've always wondered, so if you can shed any light on this that would be great, thanks

View on HN

For most software companies, the overwhelmingly highest expense is going to be employee salaries and direct costs of employment. At many companies that is 80% of all expenses. (Exceptions: companies with large advertising costs, and platform companies with exceptionally large costs that scale with the success of the core business, like you might imagine Twilio, Heroku, or Stripe having.)

Consider a 3 man company which raises $5 million in investment and expands to 10. They'll chew through a million every six months just in payroll costs.

Ten is a fairly small company. There are many VC-backed companies which are in the 100~200 employees range. Payroll scales pretty much linearly, so...

Companies with large advertising costs is probably a larger group than you think.

Many businesses with high customer lifetime value spread over a prolonged period (SaaS, Gaming, etc) have the problem that they need to spend the money on customer acquisition upfront but may need 12+ of revenue from that customer before they make that acquisition cost back. Hence it makes sense to use external money to for marketing.

Startup devs really get paid 200k/yr?

The VC backed company I worked for was a fraction of that.

He's counting fully loaded cost, which includes taxes and benefits.

Considering the average salary for a competent software dev in SV-area is what? 120k? + social costs, insurance etc. That adds up very quickly.

Not to mention once you earn a certain size you do need to employ support staff, accounting, marketing etc. Ads aren't cheap for competitive niches either.

For 120k you can employ 2-3 developers in Europe, outsource development, and keep marketing and business stuff in usa.

Outsourcing development rarely works if you're building a tech company.

That may or may not be doable depending on your company however.

If you are a software shop, you are likely going to want to recruit locally. Outsourcing is has its own drawbacks.

It is simply asking yourself, as a business, will my business get more value for 1 120k developer in my local office or 2-3 remote developers. Depending on your business it may work out better with the remote devs, but outsourcing has disadvantages. Especially when considering time zone, cultural differences and such.

Now, if you are already located in say Poland, random example, then that is another story. But then you may also get a lower valuation to begin with. USA is a huge market and has a very large chunk of the venture capital. I believe Germany is in top for Europe but I don't recall, I tried looking for a list I've seen before about but I could not find it right now.

Google "never outsource your core competency".

I just found an old post titled "Ask HN: What do these startups need so much money for?"

There are some great responses so check it out:

https://news.ycombinator.com/item?id=455687

8/10 piss it away quickly on new hires, new offices and "marketing". The other 2 piss it away just a little slower than the other 8 to give the illusion that they might eventually become profitable or survive to raise another round of funding.

Twenty employees at $100K each is $2M.

A popular site can easily cost $60K a month.

Office space in SF/PA/NYC is going to be about $50 per square foot.

It all adds up pretty fast.

How do start-ups justify spending that much when there is not the same amount of profit generated per month? Are the VC's they guessing what the potential revenue will be?

Yes. That's what it's all about: risk.

It takes resources to create an illusion of knowing the future in front of someone who think he knows better.

Reply on news.ycombinator.com