Sources: Magic Is Raising $12M from Sequoia at a $40M Valuation
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Even spaces that are easy to get into and replicate still have winners, household names to rule over all others (Dropbox, Github to name a couple of services that, ignoring scale, can be replicated pretty easily). At the seed stage, investors mark those winners in advance. At later round stage, investors back the de-facto winners (A16Z style). At some point the investment creates a momentum of its own, preventing viable competition and drawing in even more money (all the way to an IPO or acquisition).
The competition eventually dies and if the business case/segment has merit, the winner and their investors will stand to make all the money.
So Magic has just been marked as the winner in their segment (whatever you can call it). Whether or not this service is easy to replicate is irrelevant.
> Magic was selected to win the space
Yes they have money. Can they execute using it? Who the hell knows? Can they execute better than some kids whose uncle gave them £20,000? Maybe, or maybe they'll piss it up against the wall on some stylish offices and seats.
That said, I'm not saying they have won - they've just been marked by Sequoia to do that. That's a hefty thing.
We don't like to admit it because its painful, but the cool kids with the VC money, get the hype, the coverage, the big names C-level executives and the follow investment that are needed to win big. Many fail, but this is how you build a first rate startup.
For example, if Magic grow to £x00m in a year, what would stop Uber adding a similar service to their app? They have the capital, the customer base, the delivery network, and no overhead from using third parties to do the delivery. $12m and a year wouldn't magically beat that.
This isn't an example of a bubble. It's an example of a really comically silly investment.
Whether or not Magic is a smart investment - I can't really tell, but I suspect that if I were to choose between Magic and Twitter back when they were just ideas, I would bet on the former.
Some say this is unsustainable because of low barrier to entry, but I would say actually they are in a perfect position. With investment like this, direct partnerships with service providers are possible. Partnerships are a barrier to entry.
[0] https://milesrichardson.com/the-magic-of-service-business-ca...
I liken it to Segment.io who managed to move up the analytics stack and being the integration point for a product. This lowers the switching costs to using other analytic services and gives Segment all the leverage to create the highest value products in the future and offer one button migration. Additionally they have efficient platform economics with their emerging app-store. If I was an analytics provider I'd be really worried about Segment. Now Magic has something that could be similar, defaulting them to owning all the relationships with the consumer in the very hot on-demand industry.
apples and oranges.
Example:
"Send a cake to my girlfriend"
"That'll be $45.43 in 90 minutes".
"ok, do it"
> There is no way for them to know if the girlfriend has
> become an ex or if the person is still living at the
> same location. They would have to confirm it every time.
Big deal.
"send X to my girlfriend at 123 bubble st"
So I stand corrected. This is obviously a massive, defensible industry. Nevermind the fact that there are a dozen of these things in Europe, and none are notable businesses.
What's your modeling look like here? They capture payment on day 0, are sent an ACH from Stripe on day 2, and physically have it in the bank on day 3~5. The worst possible credit terms they'll have with vendors is "We put it on our Amex on day 0, are invoiced by Amex on day 15, and pay the invoice on day 22." That lasts until they can tell without-loss-of-generality 1800Flowers "We did 100k with you last month. Give us 30 day net on a rolling monthly basis. [+]" My back-of-envelope math suggests they have ~15 days of float at present and will have ~40 days once they have direct relationships with suppliers.
They're almost certainly generating tremendous positive cash flow, limited only by their ability to generate transactions.
[+] That will not be the only ask in that conversation, believe me. I'd take pertinent note that 1800Flowers has fat, fat margins and is willing to pay affiliates 25% commissions, then ask them for their top-tier affiliate offer. Who benefits from that discount? Magic, because they're selecting for price-insensitive customers. If 1800Flowers doesn't want to play ball, you just update your CS docs to say "Our preferred flower vendor is $EMPLOYS_SANE_BD_TEAM."
Despite what people think, Amex is not unlimited [1]...in fact it has a limit, they just don't tell you what it is. Although he edited the comment, a very ignorant person posted below that they could just charge a few million dollars to their Amex, and pay it off at the end of the month. No, they couldn't. When you hit the Amex limit you don't know about, your card gets declined. That's why they don't say "unlimited," they say "no pre-set spending limit".
So that may have been good for maybe $20K or so (depending on the credit of the person whose card it was) but that doesn't get them anywhere near the finish line if they really had 17K requests in the first 2 days.
I agree with you that they could work out discounts/affiliate agreements with some large merchants, but given that this is a long-tail business, that won't be the norm.
[1] http://www.moneyunder30.com/american-express-cards-do-have-s...
The main question is whether you can scrape together $100k~200k for your first 48 hours. I don't know what to say about that other than "It's clearly doable." (Anecdata: My personal credit limits total about $100k and have since BCC was my main source of income. That's the "No phone calls required" number for what a young professional with a fairly modest income and good credit habits can have just lying around. Do I have difficulty thinking that a team in Silicon Valley can float $X00k for N days? Not in the least.)
Possibly, but I don't think that consists of calling Amex and telling the phone rep to log into your Stripe account to check out your mind blowing pending balance. Anyway all I was saying is that this was a weekend project of a YC company that had already (presumably) burnt through a good portion of their cash on their initial idea. You are right though, if you're a YC company, there are people you can call to deal with cash flow issues.
Chase bank didn't give me a $25k credit line because they're uber impressed with my HN karma. That's basically their get-you-in-the-door offer if you have good credit.
Amex has floors of people who do underwriting and convincing them to let you give them money is by far not the hardest sale required of a startup founder. (An early tactic to try: "Would you accept written confirmation from our accountant that we added $100k in accounts receivable in the last 24 hours and will probably add $100k in AR in the next 24 hours if we can get a credit limit increase from you? I can have him fax it to you on letterhead. This is time-sensitive and while I'd greatly prefer to work with Amex you are not the only bank with a fax machine.")
Stripe is full of friendly and accessible people, and should you be cursed with $100k of transactions on launch day (oh noes!), you have options including "Use the HN search function to find the CEO's email address and ask him for help, which he'll happily give you, because it makes his company very happy when non-fraudulent operations rack up $100k of transactions in a day. If he had a magic wand that could conjure up businesses like that he'd do virtually nothing other than wave it."
I'm not saying there are no cash flow issues here, but it would not take a very unusual team to be able to scrape together $500k-$1m in credit on cards alone.
It's something everyone can do, but it's also not something that's necessarily going to be all that difficult.
In the current scenario, all those instacarts, eat24s, etc are also looking to get paid first, so this advantage should evaporate (leaving only those which are systemic -- ie banks, processors, etc).
Example: Suppose I am in a "Buy things for $50, sell them for $60" like Magic is. Day 0 is the transaction day. I buy the good/service for $50 on my Amex and capture a $60 transaction from the end-user using Stripe. Stripe sends me 97% of $60 on day 2. It arrives in my bank account on day 5. My next Amex statement is, probabilistically, issued on day 15, and includes the $50 I spent to service my customer. On day 22, I instruct my bank to transfer Amex $50. (We'll ignore the relevant detail that I'm generating cash rewards from Amex up the wazoo once I hit scale.)
In addition to $8.20 or so of revenue I've also had ~17 days of use of someone else's $58.20.
Might as well give two examples of how it looks like with different business models:
+ SaaS is often cash-flow negative if you're doing month-to-month billing, since cost of customer acquisition (marketing spend + sales commission) is routinely 4~8 months of billings. If you increase MRR by $100k in a month you're doing great, unless you don't have $500k in the bank account, in which case you just bankrupted yourself.
+ E-commerce: If you're in a model where you actually hold inventory, it is very possible to need to pre-purchase a large amount of inventory in advance, occasionally on non-favorable credit terms (like e.g. cash before delivery), prior to being able to sell it. Many of the great e-commerce businesses are built on various hacks which flip this cash flow cycle around. Amazon, for example, was famous for (ab-)using traditionally prevailing payment terms in book publishing which are hilariously in the favor of retailers ("We'll just give you free inventory and only ask you for money if you sell it." "OK. Tell you what, how about we sell it, only then even take delivery, and then pay you." "My, you tech people sure don't understand how this game works. OK, sounds great.") -- that's one of the reasons they picked books as their first base of operations.
http://blog.mbaco.com/importance-of-a-good-working-capital-m...
The thought process is more along the lines of: - is this a VC fundable concept?
- are the founders impressive enough that Sequoia thinks they can pull it off?
- how much money does the company need to build what they need to build?
- how much does Sequoia need to own in order for them to get 10-100x return if the company succeeds?
Think of the $40M valuation as simply a back-calculated parameter based on how much Sequia needs to own with respect to how much capital the company needs and how big the opportunity could be.
The thought process is not: how much is Magic objectively worth now based on their EBITDA?
Is there such a thing? At the end of the day a company is worth whatever someone is willing to pay for, which is always subjective.
Also, maybe Stripe should issue temporary cards instantly for just this sort of business. You charge a customer, then can get a one-time-use virtual card number to be able to order the items that you just charged the customer for, up to the amount you have in "escrow" with Stripe. People could do "roll your own" affiliate programs anywhere, with anything, without the cooperation of any other business.
i don't understand what the mystery here is. it could have come from anywhere. credit cards, savings, cofounder investment, mom and dad, etc.
in major US cities regular professional people easily have six figures of cash in their bank account and the whole point of money is that it's fungible.
also, after doing some reading, this isn't the ceo's first startup. maybe they just had the cash.
let me ask you something - how do you think people are buying houses in these insane real estate markets? do you think they're royalty, or aristocracy? no, they're professional people spending their hard earned money.
a good 30 year old lawyer easily makes 200k a year. the smart ones spend very little of that. the really smart ones invest the rest, and have been for years.
if imagining a major city like LA or SF or NY where lawyers and bankers and entrepreneurs have six figures to their name is tough for you, i really don't know what to tell you, dude.
even in tech, i personally know sysadmins and programmers who make ~100k but save most of their money and have done so for over a decade, who easily have 100k saved up. most of them are either trying to buy property, or pull the escape hatch with a huge cushion.
quite frankly if you're a professional (a REAL, ACTUAL, professional, with a respectable salary) in your 30s and you don't have at least one account with six figures in it or a house to show for it instead, you kinda sorta fucked up somewhere along the way. where in the hell did ~$1M of cumulative gross income go?
if you are a working professional who is gainfully employed, it's not hard to save 10k a year for a decade. it just isn't. you're not thinking critically about this.
quite frankly if you're a professional (a REAL, ACTUAL,
professional, with a respectable salary) in your 30s and
you don't have at least one account with six figures in it
or a house to show for it instead, you kinda sorta fucked
up somewhere along the way.
you either spent it all or were financially raped through e.g. a divorce, those are the only 2 scenarios i can think of.
I also think Magic is going to be hard to be sustainable due to fraud. Get Magic to buy you thousands of dollars worth of something and then do a chargeback on the card (or use a stolen credit card). There's nothing they can really do about that other than try to detect fraud before it happens.
It's neither.
Early stage investors make calculated bets on teams that they think can succeed in the long run. Valuation is a technicality, and depends on how well founders can pitch their idea, and how desired they are by other competing VCs. Ultimately, what really matters, is the potential of the team, and the size of the space they're exploring.
In this case, Sequoia is not investing in a simple messaging app that can be "replicated in a couple of hours" (regardless if that's true or not). They're giving money to a team they believe can do something great with it. And one that spent 3 months being personally trained by Paulg plus some of the best minds in the startup ecosystem, to seize opportunities and create something big.
From a purely statistical perspective, 80% of investments will fail. It's very likely that Magic will fail, too. But the 20% that succeed will pay for all the other ones.
For anyone interested, I strongly recommend "The Launch Pad: Inside Y Combinator" [1], by Randall Stross. It shows in incredible detail the ins and outs of YC, and explains why angels and VCs do things that seem, at face value, crazy for outsiders. It will give you a totally different perspective on deals like this.
[1] http://smile.amazon.com/Launch-Pad-Inside-Combinator/dp/1591...
It's a bet that for every $1 the team spends they can create about $3 in value. Which at 5x revenue is to say, they can spend $12m and at the end of the day be cash flow neutral and have about $8m in ARR.
Throw in a liquidation preference on that $12m and what you actually have are golden handcuffs and high expectations but the work for this team all lays ahead of them not behind them.
I often pay by Paypal - using an account that's never funded, but paying straight from my debit card - simply because I don't want the hassle of re-entering my card details, for example. It takes very little added convenience before there's a switching cost. And the perceived switching cost may be far greater than the actual switching cost.
Too late, yeah you can build it --- but would you get funded for something so simple when someone else is already ahead?
Market validated ... but barely, and definitely not enough to fuel more ... and if they do ... ha.
There's plenty of room to build useful and valuable businesses, products, and services with new technologies. The hype bubble I see is just classic sales flare amongst VC investors. Make a solid business and there shouldn't be a problem.
I guess you give part of the answer yourself:
> I also think Magic is going to be hard to be sustainable due to fraud.
In other words, you can't launch an identical service for free, essentially instantly, without being prepared to put in a huge amount of gruntwork afterwards to solve hard problems - like fraud.
now apparently worth $40M, so why don't they?
seems like an easy return on investment if you believe the theory
Bubble prediction is easy. I have predicted it already some time ago :) The value is in predicting of the burst of the bubble. And so far there is no such in sight... When this sentiment consume majority - i guess that would be the time :)
I agree getting noticed and getting users is hard, but did Magic really generate millions of dollars worth of brand recognition in only a few weeks?
If this is the metric being offered as evidence of virality, and was likely given to investors, it's misleading. It implies at face value that 17k unique people tried out Magic, but transactions take many SMS messages, as evidenced by the example conversations given. This is why vanity metrics are a bad thing.
As with Meerkat, I am very skeptical of the short-term-virality-indicates-long-term-success logical fallacy that seems to permeate Silicon Valley nowadays.
I can't wait until every hackathon has endless amounts of poorly-thought-out "Magic for X" clones, as was the case with Yo.
Would be helpful to pin down the factors that led to Sequoia to invest $12 and take only a little more than 20% of the company.
"Or, in my case, Insomnia Cookies. After I paid $50 to jump 178 spots in line, I got a VIP number and texted again. By now I was hungry, so I ordered a dozen chocolate chip cookies. Five minutes and $26 later, they were supposedly on their way—but they never arrived, and I never heard why. I never got my money back, either."
But how is magic going to save me time. Seems like I'll spend more time typing the stuff out than doing it myself.
Maybe I should just bite the bullet and try it.
But once you've done that, you can just activate the voice commands on your phone and say, "Text Magic: order a massive burrito delivered to my house." One more quick command to confirm, and boom, massive burrito at your house with ten seconds of effort on your part.
(Not that I've tried it myself.)
Currently use Caviar, and Postmates.
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