Everpix, Snapchat, and the Startup Lie
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All I was asking for was a telephone call to discuss the possibility, but I was denied even that opportunity. I wish I knew what was going on behind the scenes at this point that would lead to the decision not to field last-minute offers.
https://twitter.com/sameersundresh/status/397791703391670273
But if you take VC, go in knowing how they measure success. And it's based on mega-wins - not on profitable, dividend-paying companies.
Everpix might have been a great co. They just weren't a great VC- backable biz.
Everpix had a great business that could have easily hit $1M/yr in revenue, giving everyone a good income and a great place to work. However this wasn't the business they were trying to get funded.
Can someone explain why a fund cannot be structured to make wins at the $100m level as opposed to the $1b level? Its bizarre that free money creates funds so big they need insane 1,000x deals to return a net 15-20% portfolio premium over bonds trading at (yield-equivalnt) peanuts.
The problem in going for $1B's (as an investment thesis) is that these companies are outliers so extreme you are beyond lucky to predict them, and even if they show up on your radar, and you can get some edge, they are so small in number that they cannot sustain N=Large number of VCs. Its just not a strategy 200 funds (20? maybe) can pursue rationally at the same time. Or am I missing something?
It takes a roughly constant amount of time to do a deal, so funds have a minimum deal size below which they aren't interested.
Thats why I said $100m should work. You suggest $65m. That's the same order of magnitude. It was reported that the VCs were turning them down because $1B was "never gonna happen"[1]. That's why the math piqued my interest. If its just reporting hyperbole...that would be one explanation.
[1] Which implies they were looking for that extra ~order of magnitude
If they went up to, say, a Series B at 10M and a Series C at 20M, which are reasonably conservative multiples, they are at ~36.5M, so looking for a ~400M exit. It's not hard to need that ~1B exit if your business plan is "everyone in the world using my product," and it appears this is what Everpix were aiming for.
It's pretty common for A-round investors to be diluted by 50%. http://www.bothsidesofthetable.com/2011/10/14/understanding-... shows it pretty well.
Not everyone is going to win the facebook lottery (Accel Partners, for example, achieved a ~40,000% RoI), but there are lots of lotteries in play. And the VCs that win those lotteries then end up with the most money. So the most money in play in VC-land tends to be from people who have played the lottery game and like it, so they want to continue to play the lottery game.
Because of power law distribution, "... the 100th employee at Google did much better than the average venture-backed CEO did in the last decade."
So even being late on a $1b+ company is better then being first on a $100m company but orders of magnitude. And it's not worth the opportunity cost of going after $100m companies.
There are, on average, four $1b companies created each year, so being even a small part of one of those may not be as crazy as it seems. http://techcrunch.com/2013/11/02/welcome-to-the-unicorn-club...
There are plenty, they are called "Angel Investors" and they look for 5x - 10x return (or less, or more, depending on what kind of person they are).
Reaching users is incredibly expensive (once you have the audience, you can charge others to access it - see how it works), conversion rates are low and consumers are reticent to spend.
By being free your product becomes your marketing. You either have a paid product and start paying $50-500 to acquire each user, or you have a free product and pay $0.05-10 to acquire each user.
You can't just cut out the free product part and magically retain the paid part, as this example does with Everpix.
There is also an element of network effects in a lot of consumer business models, with a winner-takes-all (or most) landgrab.
Things are entirely different in the enterprise sector, or selling to people at work.
With the amount of money they had raised, the expectation from investors was that their flywheel would already be setup and working and new funding would accelerate it (Series A being the new Series B).
Media coverage of startups is all at the pointy end - companies that have raised money and are successful, most startups don't raise continuing rounds and the "Series A crunch" is real. The question should be inverted, why should Everpix get funded.
Despite having a product that was loved, was free, had good word of mouth and coverage etc. they still didn't get funded. Not a unique or unusual situation, and only covered in this case (as opposed to the startups that die out quietly) since the founder was willing to speak to a journalist about it.
Could it have worked with no funding, a leaner startup and as a paid product? Who knows, but I wouldn't use their freemium numbers to make that case.
[0] http://andrewchen.co/2013/11/05/when-a-great-product-hits-th...
False. I did it, and it worked fine.
http://cashboardapp.com/blog/2013/05/01/freelancer-plan-anno...
Now, do you actually have data, or are you just filling up the comment box with words?
Just the same, a single anecdote is the exact amount of "data" as the person you're responding to provided...
Yes, there were obviously things the company could have done differently, but at the end of the day, you still have a business that, according to the original Verge article, only generated ~$250,000 in subscription revenue against spend of more than $2 million.
Forget headcount and payroll (both of which are arguably "modest" by Bay Area standards today): operating expenses alone exceeded revenue by $100,000. Everpix could have halved salaries and even if you mistakenly assume that the company could have attracted and retained employees talented and motivated enough to continue building a great product, it wouldn't have made a difference.
If Everpix transitioned from a freemium to paid model, it wouldn't have made a difference either. Operating expenses would decrease, but user acquisition costs would almost certainly skyrocket (as nikcub points out above).
Venture capital can help build great companies, and it can lead companies to pursue a high-risk growth strategy that ends in failure. But in this case, based on the numbers and story as told, it appears that we simply have a very good product that was never likely to be the foundation of a sustainable business, with or without venture capital.
Not all business models and great tech companies need to be created in the Bay. Does it reduce HR risk to do so - sure, but there is an ugly side effect to this, increased risk of operating expenses.
1) Become profitable early and stay profitable. This gives you the luxury of not relying on outside investment, though the option to take funding still exists.
2) Grow, grow, grow. If you take a million dollars today and come back for more money a year from now, you need to justify that the million dollars produced something.
Everpix did neither. They weren't profitable and their growth did not justify the money the took.
I work for a large-ish company (will be approx 3000. employees by YE 2014) that has been public since the last tech bubble. We've run in the red for the last six years pivoting into an entirely new line of business -- essentially new investors bought an already public company and sold off the existing business to avoid having to IPO. Their exit strategy for the business is to eventually have one of our client companies buy us out. All of our contracts are structured to make such an acquisition a (from our management's perspective) sweetheart deal.
Only the way we've been going about it is all wrong. Basically these "very large companies" that we work hard to land contracts with we allow to give us very unfavorable terms and to pay us below cost. This is in a market where we have only one competitor and they can't come close to providing our level of service. It's blatantly obvious that they're getting better deals at the price for service they have now while we take all of the risk/loss.
We had our very first break-even quarter sometime this year (even by GAAP principles!) and the board cut everyone very big checks that put us back in the red (even by our non-GAAP principles!). Our executives are not tech executives, they're MBA-types from the retail and call center industries, but they drink the exact same Kool Aid.
I think their line of thinking goes something like this:
1) We have a really awesome product.
2) We lose tons of money providing that product. (Aside: Holy shit, employees that actually are our product are expensive! We couldn't possibly afford to hire developers to make our large staff more efficient! No way! We're a technology company!)
3) ???
4) Our customer base that we're totally supplicant to will buy us out because fairies.
Eventually this is going to end in tears and 3000 very overworked people are suddenly going to be much less so.
No self-respecting engineer should or would take $50/60k a year in the Bay Area (heck, most of the country). It's fine for founders to pay themselves that (and, indeed, they probably should) but asking employees to take that tiny salary for your dream is never going to fly.
http://www.forbes.com/sites/susanadams/2013/09/20/the-colleg...
For comparison, a $60k/year starting salary is the norm in most American cities (and it provides exactly the same lifestyle that $100k does in Silicon Valley).
The thing about ephemeral messaging is that no one would trust Apple, Google, Facebook or Yahoo to actually delete your content because their business models are based on collecting and mining your data. Snapchat is in a position that could only have been achieved by being the "little guy" and no other little guys are contesting them right now.
There are so many better ways than just blindly throwing money away like this. Heck, you could buy your own servers and have a dedicated guy for it and still be off cheaper. Geez...
The fact that there's already entrenched photo sharing kings means that you don't have to be first to market, overspend, or rush. There's no time crunch here, meaning that a great product could have been built well - over time - on budget, and still have had success.
Did you even read the article? The photo storage / sharing / librarian market is HUGE. Definitely large enough to support multiple players, even marginal ones that make $3-400k/yr.
Why should these employees need to receive half pay when there is opportunity for them to receive full pay working on a different problem? I'm sure they could make great waiters at a local restaurant and receive a livable wage, but is it the best use of the opportunities they have? I'm going to go out on a limb and assume those 6 employees were excellent given how well Everpix was run.
Yes, you're right. But does a photo sharing service really need those kind of employees? Is there a need to be located at a technology cluster like the SV where developers are expensive and a scarce resource?
Services like Everpix are - in terms of technology - pretty trivial. They can be built anywhere in the world by average developers. No need to hire expensive Stanford PHDs to do a job a kid from the local community college in Kentucky could do.
Zero invites imagination, but small numbers invite questions about whether large numbers will ever materialize.
(by 'much' I mean volume, not amount. Developers are expensive.)
P/M-fit is easier to achieve when price is $0.00, but that isn't a sustainable business model.
Perhaps the ideal is achieving P/M-fit in a large market at price that moves the needle for the business (i.e. demonstrates revenue traction) but does not appear to hinder growth.
You can argue that you don't need growth. Which investors won't particularly like (in particular, VCs have LPs to give a return on investment[4]). But ultimately, if your company is not growing in any way, is any of your work actually making a difference? Are the people working on the company getting a return on investment on their time investment?
Growth also doesn't need to be about money (or eventual money, as it can be the case if you are growing virally). Think of Khan Academy (which is a Non Profit[5]): they can grow on more people using them, and on people using them more. They can also grow on impact they have on the students.
[1] http://www.forentrepreneurs.com/lessons-learnt-viral-marketi...
[2] http://www.forentrepreneurs.com/startup-killer/
[3] http://larslofgren.com/marketingbasics/the-three-engines-of-...
[4] http://www.danshapiro.com/blog/2010/08/vc-insanity-economics...
Institutional investors and VCs don't take market risks. They are willing to take risks associated with product, technology and even the team. But they never take risks with the market opportunity.
In the verge article, what did they get in terms of feedback when investors passed their opportunity -
"The reaction was positive for you as a team but weak in terms of whether a $B business could be built."
Also, I'm surprised why didn't team focus on any other revenue streams?
This is not the trend, and making it so is very dangerous.
Silicon Valley has a great opportunity to become an integral part of the resuscitation of the US economy. This is a bad time for a bubble burst.
If the bubble is about to burst, smart money will start making safe bets.
I'm a huge fraud. You've exposed me!
Your post takes the example of two startups in the consumer photo industry and generalizes it to startups and VCs operating across an entire spectrum of industries. That alone suggests a limited understanding of VC funding.
I won't suggest taking VC funding in all (or even most) cases. But it is the right thing to do when your company's interests are aligned with the VCs.
[1] http://www.mddionline.com/article/bioresorbable-stent-startu...
How do you start a business if you can't convince investor to put money in, and not allowed to receive money from customers?
I would wager not. The goal was to build something useful and they were never looking to be acquired if they were we would probably never have heard of Facebook but good look recreating the great successes with a failed paradigm.
Look how that turned out.
The key differentiator between Snapchat and other competitors is that Snapchat has millions of dollars to throw at problems which, if implemented well, will give them considerable product differentiation through access to the best talent and marketing.
It's a high risk gamble - welcome to VC capital - but it's the business VC is in.
I know you were being snarky, but those numbers are pretty solid. Probably not the best counterexample.
Snapchat has the same demographic, but it's now much larger and their users are spending way more time in the app.
"Toys are not really as innocent as they look. Toys and games are preludes to serious ideas.”
I don't know how Snapchat plans to monetize. It might be advertising. It might not be. But it's hard to dismiss Snapchat as being valueless when clearly millions of users are using it every single day.
They could implement advertising, fuck the entire service up, and all the teens jump ship to the next app that allows you to easily import all your contacts.
There's no "lock in" with social networks like Snapchat. Want proof? Friendster, Myspace, etc.
The main theme I was trying to get across is that it's more realistic to build a profitable business, instead of throwing efforts towards eyeballs, vc-cash, and a lottery ticket chance of cashing out.
See the crux?