Everpix VC Feedback
github.com
github.com
http://research.ivanplenty.com/2014-economics-everpix-shutdo...
(Submitted to HN a few hours ago as https://news.ycombinator.com/item?id=7052593)
tl;dr Everpix sold its product at a marginal loss and closed its doors after the financing ran out. Since the marginal costs always exceeded the marginal revenue we now know that Everpix should have shut its doors immediately as it never could be a viable business in either the short or long runs. There doesn't appear to be a what-if cost structure change that it could have made realistically to stay in business. Shutting down was the right decision for the business, and this evidence suggests it should have shut down a long time ago.
I think comparing average revenue to average cost would be better served as a stacked area graph rather than superimposing them, since your method makes it look like average costs actually shrinks to a very small amount (when its just that the gap between the two figures is shrinking.)
And I completely agree with your analysis of personnel costs. It was bloated. In this day and age, with fractional cost labor, it was unforgivable.
This isn't right. The return on capital must exceed the cost of capital, at the very least the market rate of interest. Otherwise you're not taking into account opportunity cost.
I have another issue with your analysis. It's quite blinkered, focused on immediate profits with the zeal of an accountant. Solutions to the photo problem have potential for being strategic, and I don't think it's been figured out yet.
A better focus on cost structure could have extended the lifetime of the company, but it likely would have grown too slowly for "$B". I think the founders tried hard to generate growth metrics, betting that the growth would convince investors they could hockey-stick. But they didn't get quite enough growth, and their burn rate was too high to put on the brakes[1] - and likely they weren't interested in putting on the brakes. So I don't think your analysis is particularly relevant in the end. It deals mostly with cash-flow level tactics, whereas this was a strategic play.
Don't get me wrong, I think you're a decent analyst. But I expect people use you for your specific focus, not for the big picture. I think you would have predicted YouTube to be a failure, for example.
[1] I'm relying on the burn rate being in a vehicle of some sort for this not to be a mixed metaphor...
The fixed costs are allowed to be obscenely high. Growth will overcome that. If you build an obscenely expensive server farm and spend $Xmillion developing software, you can get that back if you get X paying customers eventually.
However, if each user you get means you have to fork over another $12/mo to Amazon when the user only is paying you $10? There's no way to make that work. More users would actually cost you more.
Maybe there's way they could've torn out their infrastructure and rebuilt it as self-hosted. Maybe there were some optimizations they were missing that could've cut those cloud-based costs.
But on the surface? Every dollar the user handed them got handed right off to Amazon, and Amazon's prices go up as you get more users.
Of course they could have stayed in the black by growing more slowly and managing costs better. I think that's obvious, and uninteresting. It seems clear to me that the guys at Everpix were making a somewhat desperate effort to get VC traction. IMO that's what led to their increased burn rate.
I don't think they didn't know they were burning their reserves, that their cost structure was unsustainable.
I feel we may be talking past one another.
You're right that capital should seek the highest returns, but one way to measure the likelihood of getting that return is by evaluating the marginal costs and revenues of a product. When a company sells each product for a loss, it is impossible for the company to provide a positive return on the capital. In those cases, like with Everpix, it becomes a question of "when" and not "if" the business will fail and the return will be zero. The only rational way to play the game that way is to hope for an acquisition.
That's why I look at detailed parts of business models like this, it helps elicit the overall picture in the same way functional a test case elicits overall product health. There is an art to ensuring proper overall coverage with multiple tests.
> I don't think they didn't know they were burning their reserves, that their cost structure was unsustainable.
This is where I disagree and why I wrote the analysis. I think the company didn't understand they were selling their product for a marginal loss:
> "Long story short, the infrastructure was paying for itself through subscription revenues." https://news.ycombinator.com/item?id=7041640
> "AWS infrastructures costs were already being covered by subscription income." https://news.ycombinator.com/item?id=6676906
From the numbers neither statement was true, and from the confidence in the tone it seems like they didn't know for a while. Subscriptions did not cover AWS costs. It looks like it might have become known internally when asked directly from others taking a look:
> "The reason we were getting closer and closer to being positive on variable costs ... is, yes, improved monetization, but more importantly AWS optimizations." https://news.ycombinator.com/item?id=7043555
I provided some extra context and counter-points here: https://news.ycombinator.com/item?id=7053473.
We just have different opinions and philosophies about building businesses: For me it's important to sell products at a marginal profit generally. I don't think whether the business is VC-backed or bootstrapped makes one difference: I look at both of those are tools to finance fixed costs, not to subsidize ongoing variable operations. The underlying economic principles are the same to me. But, that's this man's humble opinion.
I'm not sure I buy that the "marginal loss" [was] "easily" fixable through infrastructure [changes]. If it were easy you would have done it that way from the beginning or sooner in 2013. I buy that the infrastructure changes required more investment or planning, but in general in software "easy" things are the things you've already done. Otherwise we'd be experts at planning and estimating :)
Best of luck in the next venture, and again thank you so much for releasing the data!
<opinion rel="armchair">Just looking at the two products, I think Snapchat's #1 business priority should be getting as big as possible as fast as possible, whereas I think Everpix's #1 business priority should've been to make the unit economics work.</opinion>
Companies that haven't started monetizing can be more hand wavy about the potential revenue and growth.
It depends on the business and product.
First, Everpix had revenue, yes, but they had negative marginal profit (http://en.wikipedia.org/wiki/Marginal_profit). Since their business is based around charging customers $X/month, their unit economics are incredibly important. If I buy candy bars for $3 and sell them for $2 I can also show "real revenue," but nevertheless this is still a terrible business.
Second, what's a better business, Google + Adwords or Google + charging $5/month/user. The latter puts a tight upper limit on the total size of your market. Google is unquestionably more profitable with the former business model rather than the latter, but it took Google years of not being profitable before they made it happen. If you look up articles about Google in the late 90s they were filled with hand-wringing about how they'll make money. The same goes for Facebook, which I think most HN users still dismiss as a fad. Nevertheless, they're very profitable and have been for many years.
VCs care mostly about the size limiting case and how likely we are to reach that limiting case. You can say this is stupid, counterproductive, etc., but for whatever reason that's the course Everpix decided to pursue. The logic of VC investing makes sense and it was Everpix's decision to take that route vs. remaining small-but-profitable, assuming the latter was actually an option.
Third, we can also contrast SnapChat and Everpix's situation from a game-theoretic perspective. Let's say SnapChat was charging, I dunno, $5 to download the app. Conservatively, let's assume that had no effect other than X% fewer people downloading the app. So, fewer people download the app, but we now have a very, very nice gross margin. In fact, let's say there were 5 similarly-sized SnapChat clones, each charging the same amount.
What would you do if you were one of those competitors? I can tell you what I'd do — I'd make my application free and build up the largest network I possibly could, knowing that the main value users get out of a communication app/network is the number of people on the network with whom they want to communicate (cf. http://en.wikipedia.org/wiki/Metcalfe's_law).
Since a player in this hypothetical SnapChat space could improve their situation by changing their strategy unilaterally, we see that the "charge for SnapChat" situation is not in a Nash equilibrium and it'd be irrational for us not to adopt this new strategy ourselves.
Of course, this only works when the new strategy is viable — in this case, the "free for users" strategy. Because their marginal costs are much lower, it is significantly more viable for Snapchat than Everpix. Indeed, for Everpix it will just make their overall situation worse.
HN is too obsessed with bubbles. Too many people forget that the same bubble that gave us pets.com also gave us Google
What if some "greater fool" came in and bought Everpix for $50 million, like Yahoo, or AOL? Then we wouldn't be coming up with all these reasons why they failed, but instead would've congratulated them on their hard work, smart strategy and success (funny how these things work, huh?)
If Facebook didn't buy Instagram, they would've had the same outcome as Everpix eventually. If eBay didn't acquire Hunch, they've flunked eventually. If Google didn't acquire Blogger, they would've sunked too. I'd love to see Foursquare survive for 4 more years without an exit.
Thus, in their specific case, it's hard to make the case that it's a bubble. And if they are bleeding users away from Facebook, then FB will pay a premium to stop that bleeding. Thus the FB offer is not unreasonable, no matter how ridiculous it looks on the surface.
Now, if their user growth slowed for some reason, then yes they will be kicking themselves for not taking said offer. It has happened before - e.g. Friendster, etc. But those are usually self-inflicted wounds. Assuming their investors keep them from such moves, there is a good chance they can be a large sustainable company.
To a VC yes. That's the business model of their fund. I think if Everpix had attracted a different class of investors they might have been more successful fundraising.
I can't say if they would have had more success with a free model. But in any case start ups are never a safe investment, and blocking adoption rates with a subscription fee certainly limits the appeal to a fund that has to see a potential for extremely high returns.
Pivot for everpix maybe?
This somehow has the same vibe as the becoming of Mattermark to me.
Their own servers would run their code, searching/indexing, and thumbnails up to 1080p which are very small.
A user's cloud account would only be used for the originals and to generate search indexes/thumbnails as needed.
By the way, what other startups have published such detailed postmortems, if any?
Fundraising is such a giant waste of time. (I've been there)