
Everpix, Snapchat, and the Startup Lie - wensing
http://subimage.com/blog/2013/11/07/everpix-snapchat-and-the-startup-lie/
======
legutierr
For what it's worth, I emailed with the CEO of Everpix a couple of days ago to
tell him that my organization may be interested in buying the app so that they
wouldn't have to shut it down.

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.

~~~
smackfu
One of the articles mentioned they already sold some of the tech (but not the
branding) to fund the orderly shutdown. Not sure what that involved, maybe
just someone wanted the source code.

~~~
legutierr
That makes sense. It's too bad that the existing service wasn't part of the
package.

~~~
smackfu
Ah, too late to edit my previous comment but here's the tweet:

[https://twitter.com/sameersundresh/status/397791703391670273](https://twitter.com/sameersundresh/status/397791703391670273)

------
asanwal
Yes it is fun to hate on VCs as there is a lot wrong with the model, but this
article is misguided. If you want to run a business growing linearly which
makes a profit, don't take VC. There is nothing wrong with that, but it
doesn't fit their model.

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.

~~~
001sky
_They just weren 't a great VC- backable biz._

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?

~~~
noelwelsh
Those funds exist. They're smaller funds. Everpix was going to the "best"
(biggest) VC funds and asking for a relatively large amount of money for a
Series A. VCs typically aim for 10x return (let's keep the hyperbole out of
this discussion, please) so Everpix indicated they expect a return of at least
(1.5M + 5M) x 10 = 65M. Add in later rounds of funding and the ~1B goal is not
unrealistic.

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.

~~~
001sky
_VCs typically aim for 10x return (let 's keep the hyperbole out of this
discussion, please)_

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_

~~~
noelwelsh
You're assuming their business plan included only the one round of funding.
I'm assuming they were planning extra rounds or the VCs believed they would
need extra rounds.

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.

~~~
001sky
I hear what you are saying. But i still feel like there is some mixture of
thought that should let these guys take a shot at a 50 to 100m exit, without
(on the one hand) tripping over 35k aws bill; and on the other blowing through
50-100m of invested capital. because clearly, if the team is pitching those
are the only options, its gonna make people nervous. but now it seems the
mirror is pointing back at the guys and not at the VCs...

------
nikcub
There is a very good reason why investors and a lot of entrepreneurs in the
consumer space tend to support free or freemium products and that is because
building a paid for consumer service is extremely difficult.

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.

~~~
jacalata
That doesn't explain why investors wouldn't support everpix, because they
_did_ have a free product.

~~~
nikcub
The article in The Verge and Andrew's post[0] do a good job of explaining that

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...](http://andrewchen.co/2013/11/05/when-a-great-product-hits-the-funding-
crunch/)

~~~
cmicali
I think it was covered so widely because everpix did a great job on pr and
getting the story out there. I assume the story will help with either
generating more offers for investment, sale, or employment for the team.

------
7Figures2Commas
I'm not sure that Everpix is the case study some are making it out to be.

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.

~~~
ssharp
It seems like there are two paths to sustainability in a startup:

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.

------
busterarm
Unfortunately this line of thinking is pretty infectious and affects more than
just the Valley's pre-IPO startups.

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.

------
morgante
> 1 - PAY OUT LOWER SALARIES

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.

~~~
robryan
Depends on the type of business, if they are going for the get big fast model
that is probably true. If they are in it for the long haul something more
sustainable will prevent founders from eventually loosing motivation due to
finding it hard to make ends meet.

------
joeblau
Everpix got beaten by Google, Apple and Yahoo who offered free personal photo
libraries. Sure the big companies don't have all of the features of Everpix,
but they have the ability to instantly advertise to their 100 million user+
networks. This is why VC's always ask you what you're going to do when Google
does "your idea."

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.

------
Tehnix
How on earth does one spend $35,000 on hosting/storage a month? It simply
baffles me that people would even consider this an option.

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...

~~~
dinkumthinkum
The echo chamber has blinders on when it comes to AWS.

------
RyanZAG
The article's main point seems to be that Everpix could have done well by
paying employees well under (half?) market rates and succeeded. Maybe by
handing over a lot of equity to employees (probably most of it), it may have
even worked. But I think the author is missing the opportunity cost here. All
of these Everpix employees could likely have easily found employment in other
startups with more VC money and received twice the pay Everpix could give
them. This is the market in action - we have enough of these photo sharing
gimmicks already. Those employees are better used in other startups who can
actually make enough money (read: fulfilling market needs better) to pay them
properly, and so I think it was the right move to shut down and move on.

~~~
subimage
RE: "we have enough of these photo sharing gimmicks already" RE: "I think the
author is missing the opportunity cost here"

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.

~~~
RyanZAG
Instead of paying employees half market rates, those employees can go and work
on creating a VR app that could be used by millions of people, or some other
opportunity. And they could receive full pay.

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.

~~~
kybernetyk
> Instead of paying employees half market rates, those employees can go and
> work on creating a VR app that could be used by millions of people, or some
> other opportunity. And they could receive full pay.

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.

------
plus-
Eric Ries sum it up already in the Lean Startup:

 _Zero invites imagination, but small numbers invite questions about whether
large numbers will ever materialize._

------
_pmf_
What really scares me about the US economy is that truly innovative and
sustainable companies like Tesla are only possible because there's a single
huge investor, and the unwashed masses of investors throw money at handwaving
feel-good agencies like Facebook and Twitter.

------
spamizbad
This wouldn't have been enough to save them, but if your AWS bill is
$35,000/month, it's likely much cheaper to buy (or even lease) hardware and
co-locate -- even if you factor in making 1-2 new hires to support the
hardware.

~~~
wensing
I'm guessing the effort to switch to a different cloud wasn't something they
wanted to invest in?

~~~
jbverschoor
I'm guessing they just didn't care, because they were VC backed, and didn't
understand that 2M is not that much money if you have 6 people and a storage-
based hosting service.

------
websitescenes
I am really starting to dislike this approach to building tech companies. I
have been speaking out about it too. There are too many startups that have no
real value besides the fact that someone has invested in them. The cycle is:
fund a company, make it appear successful so others invest in it, cash out and
let it fail. 99% of startups will never be as big as facebook and it's
ridiculous to treat them the same. Silicon Valley is really strewing shit up
for the rest of us. I want a long term, viable career and all venture
capitalists seem to be interested in is mining wealth from the industry until
it's dead. Essentially every company that is propped up by investment is a
small bubble ready to burst. There should be a law against investing so much
money in otherwise worthless ventures. It's not a level playing field and it's
barely a free market. I have to go with crappy companies because the good ones
were put out of business by bloated subpar startups. I don't always want
something new. I want things with long term value and use ability. Don't get
me wrong. I apply for funding in ycombinator an others but it's not because I
believe in what you do, it's because I want your money. Money equals power and
I want to change some stuff.

------
wensing
So what's the link between charging money and growth?

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.

~~~
DanielRibeiro
Growing Virally (where virality coefficient and cycle are really
important[1]) is different than growing with Paying Users (where Lifetime
Value (LTV) and Cost to aqcuire customers (CAC) is really important[2]) that
its different than growing through very high retention rates[3]. You can
achieve P/M fit with any of them.

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...](http://www.forentrepreneurs.com/lessons-learnt-viral-marketing/)

[2] [http://www.forentrepreneurs.com/startup-
killer/](http://www.forentrepreneurs.com/startup-killer/)

[3] [http://larslofgren.com/marketingbasics/the-three-engines-
of-...](http://larslofgren.com/marketingbasics/the-three-engines-of-growth-
with-eric-ries)

[4] [http://www.danshapiro.com/blog/2010/08/vc-insanity-
economics...](http://www.danshapiro.com/blog/2010/08/vc-insanity-economics/)

[5]
[http://en.wikipedia.org/wiki/Khan_Academy](http://en.wikipedia.org/wiki/Khan_Academy)

------
dm8
Although, Everpix was great as a product it was market that killed their
chances. Today, for every photo I take from iPhone it is backed to Google+ and
iCloud. And then there are other platforms like Flickr etc. However, I believe
Everpix had superior organization technology. But did that matter to masses?

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?

------
pokoleo
While the first part covers my feelings very well about the current 'state of
the nation', I'm more concerned that newly minted millionaires (not just from
a recent IPO, but others too) see this as status quo as they join the Angel/VC
group.

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.

------
jusben1369
Interesting that this story is popular the same day Twitter goes public.
Twitter didn't focus on revenues or profits early. Twitter didn't take months
and months to get to market and agonize over every product look and feel
decision. Twitter made it's early investors billions of dollars. Twitter is a
household name. Twitter may or may not end up generating billions from mobile.
FB certainly showed it can once that became critical.

------
hnriot
i'm getting tired of all these people that don't understand how the startup
world works and feel like they need to write whinny blog posts about it.

~~~
subimage
Yeah, I don't understand it at all. I've only been involved with startups
since 1999, and run one myself.

I'm a huge fraud. You've exposed me!

~~~
eaurouge
I don't know what you do or don't understand, but your post isn't entirely
accurate. VCs invest in early-stage companies with strong potential for high
growth. That means companies like SnapChat, yes, as well as companies like
Amaranth Medical [1].

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...](http://www.mddionline.com/article/bioresorbable-stent-startup-
raises-20m-series-b-round)

------
wiradikusuma
So, I'm trying to wrap my head around this. In order to be like
Snapchat[Facebook|Twitter|and the like], you must defer monetization. But when
you're starting up, cash is scarce and you need money ASAP. Since you can't
always depend on getting external funding, you need to charge customers early.

How do you start a business if you can't convince investor to put money in,
and not allowed to receive money from customers?

~~~
wensing
If you can't convince an investor like Evan Williams could, then you need to
either be extremely frugal and keep your day job for a while, or quit your job
and bet your life savings, or don't bother. There isn't a "bootstrap to become
the Next Facebook" path.

------
antirez
I think it is a good idea when founders are able to always project what is
going to happen with money and adapt earlier, instead of waiting to be out of
money or hoping in the next round. This mindset not only saves you from early
failing, also is very valuable once you turn your startup into a profitable
stage.

------
Fuxy
I wonder if Facebook though of becoming the next MySpace when they built their
platform.

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.

------
joyeuse6701
what's 6800 paying users of everpix to millions of non paying users of
snapchat? snapchat has the sporadic but consistent attention of millions that
has considerable value and should not be written off because it hasn't been
monetized... yet

~~~
nwh
There's nothing about Snapchat that is valuable. It's an app that could be
thrown together in a few days, and a userbase that is fairly fleeting. If they
incorporate invasive advertising, then people will just move to a clone of it.
How else would you make money with the retched thing?

~~~
hansy
I was at a social apps conference a few months back and some interesting
statistics were shown about Snapchat. One of the statistics was that Snapchat
allows picture messages to be sent 10x faster than regular SMS. I found this
fascinating because this is when I stopped looking at Snapchat as an incognito
picture sharing app and more of a new, more efficient communication channel.

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.

~~~
marvin
Yeah, Snapchat is much more than a new way to send dick pics to unsuspecting
girls. I use it more than SMS these days for legitimate communication with
friends. Not the kind of serious communication which requires precision, but
the informal type of chitchat you have with people when you hang out. People
are underestimating the concept, some form of picture-based communication is
around to stay. But I can't say that it'll be Snapchat which is the end of the
line, and I do think they will have trouble monetizing.

------
lmm
There was a comment on this page that just disappeared when I tried to reply
to it - not [deleted], just gone. id=6695365. And nothing obviously trollish
about it to merit deleting. Database problem?

------
kmfrk
Path is another interesting example. They seem to be circling the drain right
now, but they might still be able to raise funding at a flat valuation (same
valuation as last time).

------
wellboy
The crux is that this blog post compares Everpix with 55,000 users to Snapchat
with 26M users and them having been around for the same amount of time.

See the crux?

------
mahyarm
I'm wondering what was the reasoning behind not raising the price when they
saw that their costs were over what they were spending.

------
rabino
I'm so sad about this. I really, really love Everpix. It's one of the best
photo-related startups out there.

------
fiatjaf
All these heavily-funded companies just waste too much money on unnecessary
bureaucracy.

