
When a great product hits the funding crunch - _pius
http://andrewchen.co/2013/11/05/when-a-great-product-hits-the-funding-crunch
======
carsongross
At some point many entrepreneurs need to ask themselves WTF they need the
venture money for anyway. If you are going to have to go ahead and build a
viable product to get any money... why not just keep on keepin' on, and keep
the upside? You can scale costs with the success of your business anyway, and,
if you aren't insane, you are billing recurring, so you've got a pretty good
idea where minimal revs will be for the next year.

Sure, there are perpetually money-losing ideas, like twitter, that still need
the old model, but most startups I see these days don't have to be built that
way.

> A modern startup’s costs are all people costs

Very true. And one of the things that startup founders can arbitrage.

And, let me say again, thank you everpix team. You've done the startup
community a huge service by being so open about things.

~~~
phillmv
Because making a successful living heading a $10-20 million company that took
5-10 years to build isn't the lottery ticket we've all been sold on.

~~~
carsongross
Right, but note that the VCs are effectively asking you to bootstrap _anyway_
before you get any real VC, and absorb all that risk yourself, regardless of
whether or not the lottery ticket story is true.

That's not to say there aren't ideas that really scream for VC: enterprise
sales take a long ass time and require expensive sales-bots to get done, for
example. But for a lot of SAAS type stuff, that isn't the case.

------
ChuckMcM
This is a good read. Clearly if the series A type people get too risk averse
they will lose out on winners, if they are not risk averse enough they sink a
lot of capital into non-winners. Greed and Fear the eternal balance.

What is interesting to me about the analysis is the people vs infrastructure
costs. 15% of their costs went to the product, most everything else was people
cost. Inverting that number suggests to me that you have to have 85% gross
margins just to break even[1], and you're looking at "growing" the business on
one or two points of margin better than that. Ouch. Mitigating legal and
office costs might help.

[1] I understand that at their current subscription level vs new subscribers
and lifetime value of the subscribers they get, but as gross measure breaking
down the costs and separating the people costs from the 'product' costs it is
pretty sobering.

------
austenallred
"You can see that other than the top-line metric of total signups, the other
metrics are quite solid."

Try as you might, I don't think it's possible to downplay that statistic. The
overall numbers of signups need to be higher than they were in 2003, but
anecdotally it seems like the percentage of the market you need to capture
(and percentages of the market the startup will reasonably capture) haven't
changed drastically. 1,000,000 users used to be almost the entire iOS App
Store market - now it's a small sliver. Everpix was the rare scenario in which
there's a solid product, solid team, and traction that _seems_ like great
traction, but casts too much doubt on its ability to grow to where it needs to
to justify investment.

After the exception (that will always exist), your seed round says, "Alright,
I think this could have potential. Let's try an experiment." Your Series A
says, "Experiment successful. Let's grow this thing." There are more
experiments being tried, but if you take those same ratios into 2003 (user
adoption would be much slower, and the numbers would be lower), and Everpix
would still be a failed experiment. It's harder to hit x users than x/2 users,
surely, but it's easier than ever to _get_ x users. I would argue easier than
it used to be to get x/2 users.

The ratios of companies not getting a Series A is different, but that's
largely because more experiments (seed rounds) are tried than ever. It seems
like you can raise a seed round (<$50K) on almost nothing. Raising a Series A
is still hard.

The target is moving, but so is the consumer. Comparing numbers today vs.
numbers 5 years ago isn't a testament to the investment scenario changing,
it's a testament to the Internet and the world changing.

------
jmduke
While I don't think this is a particularly bad analysis, I think its a short-
sighted look of what happened with Everpix. Yes, human capital is a massive
sinkhole, but this article seems to be focused on the funding/HR side of
finances as opposed to the reality of running a business with non-trivial
variable costs.

Andrew argues that "Monetization won’t save you if it’s not combined with
growth". I'd argue that monetization won't save you if its not combined with a
sane business model in which marginal revenue is larger than marginal cost.

I prefer this analysis, posted by an HN user on one of the previous Everpix
discussions:

[http://research.ivanplenty.com/2014-economics-everpix-
shutdo...](http://research.ivanplenty.com/2014-economics-everpix-shutdown-
decision)

~~~
malyk
I think that analysis is also short sited. Yes, they where upside down on
their marginal costs right now, but that's because they went the minimal
engineering effort way and used AWS to get things started. By raising a
large(r) round they, presumably, could have hired an infrastructure engineer
or three and moved away from the higher costs of amazon.

If they had gone that route from the beginning they would have had to
sacrifice some other part of their business because they would have had to
hire for that role...and that could have been more expensive than just paying
Amazon to get things off the ground.

So yes, they could have saved on operations, but either at the expense of
product or at the cost of another engineer or two...thus increasing depth of
the human capital sinkhole.

------
rpedela
With yearly revenue of $340K, why couldn't they keep going? I realize that is
smaller than their costs, but $340K is enough to pay 2-3 employees and the
other costs (hosting, etc). Didn't they only have seven employees? Why are the
total office expenses $128K? Why $565K for legal fees? Seems like they wasted
a lot of that $2.3 million investment.

~~~
jonathanjaeger
Someone posted an in-depth overview about why their business model was flawed.
If you're selling something for less than it costs you, you can generate a ton
of revenue, but it's still at a loss. This is why they couldn't keep it going:
[http://research.ivanplenty.com/2014-economics-everpix-
shutdo...](http://research.ivanplenty.com/2014-economics-everpix-shutdown-
decision)

~~~
georgeecollins
That post on the economics was great, and it offers a convincing explanation
of why they shut down.

The funny thing is that the author often thanks the team for making their
numbers public. But he also calls them reckless and irresponsible. I think
people's judgement looks worse in hindsight. And if you are benefiting from
someone's candor it would be smart to speak of them more charitably, if only
to encourage future candor.

But that link is a great analysis.

------
dasil003
Total tangent, but this really jumped out at me:

> _The secrecy that’s so deeply embedded in the organization facilitates their
> distribution strategy- can you imagine building your company culture around
> your marketing strategy? That’s what Apple’s done, though it’s not often
> talked about._

I've never thought about Apple that way at all. To me Apple was always about
the product first, and the secrecy and marketing was built around that. They
don't announce a product until it's ready to ship because it's stupid to talk
about something that's not finished yet (unless you're Microsoft and you need
to do it to keep your long-term enterprise customers on the hook). Jobs
greatest strength may arguably have been as a pitchman, but wasn't his
greatest passion the product itself? At the very least, Apple could not hire a
retain the level of technical talent they have had based on being marketing
first.

~~~
jonnathanson
I don't think Apple's success can be isolated cleanly to one pivotal variable.
Steve Jobs was obsessed with product _and_ obsessed with product marketing.
Apple doesn't see product and product marketing as two wholly distinct
functions, either. Most companies do -- and the fact that Apple doesn't is, in
itself, a corporate strength.

People could probably quibble for days about whether Apple is a "marketing
first" company, or what that phrase actually means. I think it's more apropos
to say that Apple is a company that understands both product and marketing.
And it understands the "full stack" of marketing in a way most tech companies
do not. Apple is phenomenal at brand marketing, for instance -- not just
MarCom, or advertising, or conversion optimization. A lot of its competitors
relegate marketing to a series of discrete, necessary-but-evil functions, and
not a pillar of corporate culture.

~~~
dasil003
That's fair, I don't think you can tease apart the product and the marketing.
But the reason I find the quote strange is that the marketing depends on the
product, not the other way around.

~~~
jonnathanson
Sure, but it depends on how you define marketing. In some respects, Apple
views marketing more along the lines of the CPG model than the typical tech
model. It's a model in which a fair amount of product itself falls under the
rubric of marketing.

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

------
AndrewKemendo
_My question is, in 2016, will the bar be even higher? Maybe angel investors
will expect a working product, reasonable traction, and product /market fit
all before they put in the first $1M?_

Try 2013/14.

Just as an example using our company, we have a well rounded team with
experience in the industry, working beta (nothing scalable), letters of intent
from large industry players and several beta users. Every Angel I have talked
to says they can't invest (even low 6 figures) without significant traction,
on the order of thousands of monthly paying customers.

By that time I won't need their money.

The problem is, for leading edge technology and people with families working
part time its that extra layer of difficult to move quickly with iterations
and improvements, so that slows our entire dev cycle down SIGNIFICANTLY.

I have spoken to others in our region (D.C.) who say the same thing, so its
not unique.

------
thatthatis
Everpix failed to achieve basic unit economics:
[https://news.ycombinator.com/item?id=6678135](https://news.ycombinator.com/item?id=6678135)

It's a nice story and all to say that they failed even though they were
successful. But that's not the truth. They failed as a business, and thus
their business wasn't funded further.

When you can't cover your COGS as an Internet company, your business model is
what sucks, not the funding environment.

~~~
amirmc
> _" When you can't cover your COGS as an Internet company, your business
> model is what sucks, not the funding environment."_

There are plenty of examples of SV companies with no revenue and no business
model in sight who are still able to get huge amounts of funding. Typically,
these companies have focused on (and achieved) huge growth rates.

~~~
thatthatis
Sure, there are plenty of examples of zero revenue, hundred million dollar
valuation. Fb, pinterest, snapchat, instagram come immediately to mind. These
businesses though are all building networks and social graphs.

Everpix's business was reselling storage and bandwidth with value added
software, but they resold at a marginal loss. There is no "if we get a billion
users our value per user goes throug the roof" payoff like when you build a
social graph.

I don't know of any high valuation zero revenue companies that are essentially
resellers.

------
ig1
The milestones have definitely moved, but so have the underlying costs. It
costs far less to build a solution, deploy it and acquire users. Modern
languages, frameworks and API services save man-years of time, cloud hosting
means you can get on demand for pennies what would have cost thousands in
upfront server costs.

The milestones for user numbers have also inflated, because simply the number
of people on the internet has exploded as has the amount of time they spend
online across multiple devices. It's also become much cheaper to acquire users
due to the collapse of ad prices and virality of modern distribution
platforms.

Seed rounds are also much bigger, a seed round of $1m would have been
exceptional in 2004. Now people wouldn't batter an eyelid. You've also seen
VCs who were previously Series A investors now doing seed investment as well.

------
mgkimsal
"If anything, this trend will only continue. San Francisco housing costs
continue the rise, while computing infrastructure only gets cheaper and more
flexible."

So... don't do this in SF. One of the primary arguments I've heard for moving
to SF is "that's where the money is". Well... if they're not handing out the
money like they did in 99, or 2004... there's one less reason to relocate
yourself (or a team) there.

Yes, there are certainly other benefits to SF, but if you're expected to have
built a product/service, marketed it, and begun building a customer base
before you get useful angel or VC funding... you can at least attempt to do
that from many less expensive locations.

------
mathattack
"A modern startups costs are all people costs."

This one sticks with me a lot. All the
cloud/virtualization/thisandthat/outsourcing really puts the people at the
center. It makes fighting for sustainable competitive advantage that much
harder.

------
smoyer
"My question is, in 2016, will the bar be even higher? Maybe angel investors
will expect a working product, reasonable traction, and product/market fit all
before they put in the first $1M? How much can market-risk be proved out
before any professional money is raised?"

At some point, the start-up founders have done all the work _and_ bootstrapped
themselves into a thriving business. If the VCs (or Angels) delay the funding
too long, there's no value for them to add between those rounds and an
acquisition.

~~~
jtbigwoo
It's basically a game of chicken where VC's try to get in as late as possible
but the investment terms get less and less attractive to both parties as they
wait.

------
codegeek
"6 FTEs plus operations costs about $100k/month"

Genuinely interested in understanding this. If we divide 100k by 6, it is
about 17K (rounded). Other than Salary,Payroll,benefits etc, what comes under
"operations". Rent ? hardware cost ? datacenter/hosting ? Would really like
some details in general on this because on the surface, 17K /employee/month
seems very high for a startup.

~~~
greghinch
To hire good devs in the Bay Area, particularly mobile, you'll easily start
approaching $150k/yr. in salary. Couple in employment taxes, benefits, etc.
and you are easily in that neighborhood

------
saturdayplace
Seems like an argument in favor of a bootstrapped companies which
intentionally keep costs low and intend to go for slow growth instead of a
spectacular flameout. Because infrastructure costs have come down so much, it
now feels like companies are more likely to remain viable as bootstrapped
concerns than shoot-for-the-moon operations.

------
smackfu
Notice that this article is from November at the time of the shutdown, and
Everpix has released a lot more data now.

[https://github.com/everpix/Everpix-
Intelligence](https://github.com/everpix/Everpix-Intelligence)

------
anatari
If this trend continues, the implication will be that venture capital will
cease to exist as we know it, but instead will resemble traditional private
equity where capital is mostly allocated to established viable businesses.

~~~
akbar501
> venture capital will cease to exist

There is a general consensus that venture capital as we know it will not
continue indefinitely.

1.) AWS and it's ilk virtually eliminated the high cost of hardware/hosting
from the previous era.

2.) Open source software has eliminated server software expenses. The
contribution of OSS to lowering startup expenses cannot be understated. I
still remember flying from SF to LA will a million dollars worth of software
in my backpack in the 90's. Server software was a big cost that's been nearly
eliminated.

3.) Development. Given that #1 and #2 are now close to zero, it follows that
entrepreneurs should be responsible for hacking out a prototype, if not a 1.0
release. Obviously, this cost will remain high as a business scales and
venture capital will continue to play a role in helping startup founders scale
development team. But, there is no reason outside capital should be wasted on
building a prototype (with a few exceptions).

4.) Marketing. This will be one of the last vestiges of high cost. Winning in
the market is expensive. Venture capital adds value in scaling marketing
faster than a company can organically generate cash. It follows that it is
fair and reasonable for VC to demand that their financing be used for growth
capital, not search capital (i.e. searching for P/M fit)

5.) Management. Building and running a business will continue to be expensive.
As with #4, VC will continue to add value here when a company can grow bigger
and/or faster with outside capital than it can with organically generated cash
flow.

However, there are new models emerging. Capital, at least in a capitalist
economy, will move to its most profitable use. If venture capital for
technology startups is a profitable use of capital, then VC will continue in
one form or another. If not, then it'll die, and the world will be no worse
off.

~~~
AznHisoka
I disagree with #1. Did you see how much they spent per month on AWS? If a
normal bootstrapped startup was spending that much, they wouldn't last more
than a couple of months.

~~~
akbar501
@AznHisoka, I did not mean to imply that hosting is free.

What I was driving at is that hosting was previously a multi-million dollar
investment.

Before LinTel became the norm, servers ran on Sun, which was extremely
expensive at their scale.

------
clamchowderz
he makes a lead gen pop up come up when you visit...not a fan.

