

How much money should a startup have in the bank? - jasonmcalacanis
http://launch.is/blog/how-much-money-should-a-startup-have-in-the-bank.html

======
staunch
At first you want a small hard core team of dedicated people. They all have
meaningful equity and are "the founding team". Maybe 2 co-founders and 2-5
employees that work really well together. They're like a special ops team that
can quickly maneuver around a problem.

They can probably do just fine with 12 months runway and a low burn rate. If
they do figure out a repeatable/scalable business, they can raise a lot more
money and grow it. If they don't, they can shut the company down.

The problem with Mahalo is that they skipped the first stage completely.
Calacanis was "hot" and (like everyone) he thought his idea was a sure thing.
He raised $20M because he could.

Even so, if he had created a small team and spent a year or two iterating it
might have worked very well. With no pressure of running out of money it might
have been harder to keep the the team focused, but it would have probably been
fine. Hell, the company could have been breakeven off the _interest_ of $20M.

Instead, they started scaling the business from day one and never really had
that hard core team to perfect the processes, product, and business model.
Even if he had wanted to, the VCs would have never let him keep the company to
5-10 people for the year or two it might have taken.

Due to the perverse incentives of raising that much money so early he's
actually "forced" to make a bluff bet of the whole company rather than build
it methodically.

The first bet was made by scaling the company before they figured out the
business. The second is an even more extreme version of the first. After it
fails there will not be a third.

tl;dr: Mahalo will fail because it raised too much money too early.

~~~
jasonmcalacanis
Actually, we can't fail now.... we have a lot a revenue and 30M+ users a
month.

I don't thin it was a lack of focus that caused problems for us. The main
problem for us was that building a search results that is--sometimes--20%
better than Google's does not incentivize people to switch.

This is a problem Wikia Search, Blekko, Bing, DuckDuckGo and countless others
have faced or are facing.

Although it's easy to change your search engine technically, it's not
necessary unless your search engine is failing. The problem is that innovators
look at the times when Google fails (i.e. when you see 2-3 horrible results in
a SERP), but not when it succeeds (the other 7-8 search results).

We took a really hard run at making better results and we proved we could make
something incrementally better. In our business making something slightly
better is, essentially, failure because it will not cause folks to switch.

Now, in terms of educating folks, that's a wide open space. Right now there is
no wikipedia, google or facebook of learning. There's Lynda for software,
Rossetta Stone for language, Khan Academy for math and bunch of individuals
teaching one-off things on YouTube.

We are making a brand that runs from how to do your hair, to how to solve
angry bird, to how to make a movie poster in photoshop to how to make a vegan
shake.... and on and on and on.

We have 40k+ videos now and make over 1k a week (with 90 people). We'll get to
3k a week in the next year (with 150-200 people). Then 5-6k videos (with
300-500 people).

We're already, we think, the largest providers of orignal (non-UGC) content to
YouTube. And we only pivoted a year ago to do learning videos.

our ipad apps/courses should really drive traffic too... and forget about it
when every TV is internet connected (which really starts this christmas and
goes forward for the next 7 years).

best j

~~~
staunch
The truth is that you pivoted Mahalo years ago to being a "How To" site. It
wasn't a real search engine for very long at all. You saw what Demand Media
was doing and did exactly the same thing. You denied it the whole time and
then finally admitted it only recently when Panda broke the model for you.

During those denials you would always point to a couple decent pages on Mahalo
that were well done. Now you can point to a few _videos_ that are well done.

The problem is that your product was, and is, 95% mass produced crap and 5%
good stuff.

Look at the recently uploaded content on Mahalo's YouTube accounts. It's
almost nothing but 1-5 minute clips of crap like

"How to say 'Knife' in Spanish"

"How to say 'Door' in Spanish"

"How to say 'Chocolate' in Spanish"

And the music/computer/gaming equivalents.

This isn't the kind of product that people are going to come to rely on or
love. They'll only find this stuff when they SEO-stumble across it.

If YouTube decides to slap down video content farms you'll have the same
problem all over again.

If you look at some of the best SEO-driven sites like StackOverflow,
TripAdvisor, or Yelp you'll notice something entirely different from Mahalo.
Those sites have massive followings of people that actually _love_ them. They
are reliant on SEO, but in a very different way from Mahalo.

People search Google for a programming question and _scan the page_ for the
stackoverflow.com link. They search Google for a restaurant and _scan the
page_ for the yelp.com link. Same with TripAdvisor.

No one is searching Google or YouTube then scanning the page for the Mahalo
videos.

You have a head start on video content farming and Google seems to be pretty
slow. Eventually the focus on quantity over quality will catch up to you and
you'll suffer the same way you did with Panda.

The product just isn't good enough to stand the test of time.

~~~
jasonmcalacanis
You're taking the simplest piece of what we're doing and taking it out of
context.

Yes, we are doing the top 1,000 words in _every_ language and they are short
(2-3 minutes) by design. This is because people search for this kind of
information CONSTANTLY. And they want to consume it in a video and hear
someone say it.

We are adding to these grammar and situational videos that will be longer
(i.e. how to order coffee in French).

These will be put together into a course and will be free and available on
iPad and Android in apps, as well as on the web and YouTube.

I think these are very, very valuable.

~~~
staunch
Well, I'll stay tuned Jason. It looks like more of the same content farming
right now. Hopefully one day it will become something I can recommend to
people.

Good luck.

------
tom100cities
12 months of cash, if it gets less - cut burn or increase revenue

------
dennisgorelik
Jason seems bitter about Google's Panda update.

~~~
jasonmcalacanis
Yes, I am. :-)

~~~
dennisgorelik
1) Your opinion about quality of Mahalo content is obviously biased, so we
cannot really rely on that.

2) Isn't it too expensive "burning $500K a month" just to find out what idea
works?

Discovery phase should be lean, right?

~~~
jasonmcalacanis
I'll start with your second question:

In some categories lean can be a big number: search, making chips and (today)
building a social network. Can you start with 10 people and 150k a month burn
in these categories? Sure. However, if you're going to take a real stab at
this type of problems in a massively competitive market with HUGE incumbents
you need 30, 40 or 50 people.

Also, "too expensive" is relative. Spending $500k a month might seem too
expensive to someone starting out as an entrepreneur, but to VCs and founder
who have been in the game for a long time they would rather risk blowing out
10m and figuring out a lot of problems quickly, than sit around and slowing
figuring stuff out.

The whole industry is biased toward big success. Just the nature of the beast.
If you want to do something more modest--and i did on my last two companies--
you raise small amounts of money and shoot for a small target.

Neither model is wrong.

In terms of #1, you can go check out youtube channels yourself. We basically
stopped writing pages with great writers (but not experts) to creating videos
with experts in them. This costs 10x as much, but the result is stunning.

Not sure if you're into styling your hair, but we have one of the best
stylysts in Los Angeles doing a series--think of it as a Khan academy course--
on styling your hair.

[http://www.mahalo.com/how-to-style-your-hair/how-to-do-a-
per...](http://www.mahalo.com/how-to-style-your-hair/how-to-do-a-perfect-
salon-blowout-at-home/)

or photoshop tutorials like Lynda--except free:

<http://www.mahalo.com/learn-adobe-photoshop-introduction/>

[http://www.mahalo.com/photoshop-video-tutorial-how-to-
make-a...](http://www.mahalo.com/photoshop-video-tutorial-how-to-make-a-movie-
poster/)

Now imagine those not only as courses on mahalo, but also iPad apps. And
imagine 1M videos with that level of instruction.

That's what we're doing.

... and that all came from my vision of search results + content. Now, I still
believe in that vision, but the truth is Google went from ten blue links in
2007 to what it is today: content + answers + some search links. we knew that
was possible--that they would wake up--and they did. c'est la vie!

~~~
dennisgorelik
When I'm thinking about lean discovery, $150K/month seems too expensive too.
Initial version of Google Search was developed by team of two or three people.
That's less than $30K/month burn.

"Neither model is wrong." -- I agree. However "lean model" is much more common
and relevant to majority of founders than "$150K+/month burn during discovery
phase".

Another consideration: you made your previous company profitable with lean
approach. But you did not make Mahalo profitable with "$500K monthly burn"
approach.

That should teach us something.

"The whole industry is biased toward big success." - I assume under "whole
industry" you imply "Venture Capital industry", not "Information Technology
industry", right?

~~~
jasonmcalacanis
1\. The Google example is only relevant in 1999, when the market was nascent.
Now that you have a big, established product there is--in all likelihood--no
way to create a google killer at $30k a month. If there was one at that level,
it probably would have been found by now. Established markets take bigger
checks... nascent markets take smaller checks.

2\. I actually did get Mahalo to profitability last December. :-) Of course,
the Panda Update endend that brief, beautiful moment.

3\. Actually, I do mean the entire industry. Now that the internet is global,
fast and ubiquitous (mobile) everything good tends to get really big, really
fast. Heck, bad things get big fast (Rebecca Black's Friday comes to mind),
and so do super simple things (i.e. Angry Birds).

the internet is biased toward big...

~~~
dennisgorelik
1) While Google is efficient, there is no market need to create Google killer.

Even if there is such a need, the goal of startup would be to create a model
that at scale would overperform Google. Such model is likely to be created at
less than $30K monthly burn.

For example, team of two developers in couple of years may implement and fine
tune some efficient social way of ranking search results. $30K/month * 24
month = $720K.

2) Jason Calacanis empirical rule: "if startup is overfunded then as soon as
profitability is achieved it would be crushed by Google." :-)

3) "The internet is biased toward big..." -- I agree. But it's "big product
scale", not "big organization".

~~~
jasonmcalacanis
1\. The problem with this assumption is that Google is standing still--they
are not. When Mahalo started doing comprehensive search in 2007 google was
just 10 blue links. As we added more content to our results they did the same.
We were a year ahead of them... in fact we still would be. It just wasn't
enough against a scale player.

2\. ha

3\. agreed

