
Sources: Magic Is Raising $12M from Sequoia at a $40M Valuation - dcre
http://techcrunch.com/2015/03/26/sources-magic-is-raising-12m-from-sequoia-at-a-40m-valuation/
======
flyinglizard
Before anyone talks about a bubble and how easy this service is to replicate,
consider that by putting $12M in, Magic was selected to win the space. Now to
win over Magic you need to replicate the concept AND get matching resources.

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.

~~~
peteretep

        > Magic was selected to win the space
    

What does that even _mean_?

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.

~~~
flyinglizard
They can pivot, refine, experiment and endure temporary setbacks in a way that
would kill those kids with their uncle's money. Their margin of error is
incredible compared to someone bootstrapping. Obviously this has a flip side
as well - they might be too lenient and careless. But money is a major factor,
always.

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.

------
chatmasta
Funny enough I just wrote one of my first blog posts in years, minutes before
this article was written, about Magic. [0] My theory is that by positioning
themselves as an aggregator, or a "platform for platforms," they retain the
cashflow advantages of service based marketplaces, without the need to build
supply because they piggyback on existing supply.

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...](https://milesrichardson.com/the-magic-of-service-business-cashflow/)

~~~
bitsweet
This.

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.

~~~
timr
To use a different analytics service, I have to change my code. To use an
alternative to Magic, I have to text a different phone number.

apples and oranges.

~~~
martythemaniak
I haven't used magic, but their demos imply that they keep data on you.

Example:

    
    
      "Send a cake to my girlfriend"
      
      "That'll be $45.43 in 90 minutes".
      
      "ok, do it"
    

Who's the girlfriend? Where does she live? It's evident they've asked these
questions the first time she's come up and then recorded them for later use.
Since the service relies to much on personalization, the longer you use it the
higher the switching cost will be.

~~~
krisgenre
Think they might have over simplified it in the demo. 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.

~~~
peteretep

        > 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.
    

"That'll be $45.43 in 90 minutes to Kate at 123 Bubble St".

Big deal.

~~~
timr
Yeah, it's _so_ much harder to just type that the first time:

"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.

------
axiom
People are incorrectly thinking of this round as meaning that Magic is worth
$40M. That's not how fundraising at this stage works.

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?

~~~
Mahn
> objectively worth

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.

------
downandout
I'm a little bit curious if anyone knows or someone from the company is
willing to answer: Magic charges the customer, then pays for the items. Since
this was a weekend project and they use Stripe (which pays in no less than 2
business days, and in most cases 7 days)...where did they get the money for
such a large "float" at the beginning? They have to have the money to pay out
in advance, well before receiving it back.

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.

~~~
beachstartup
_> where did they get the money for such a large "float" at the beginning_

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.

~~~
downandout
They had 17K messages in the first 48 hours (I realize those aren't orders,
but still). Let's call it 5K orders. Maybe $50 average order. $250,000, or
$125,000 per day in required float - to wait 7 days for Stripe they'd need at
least $1M. That's from the beginning - it may have grown by now. So we aren't
talking about credit cards or mom and dad type investment, unless you have a
stratospheric credit limit or mom and dad are very wealthy.

~~~
beachstartup
yeah, wtf indeed, i'm editing this because i gave away too much personal
information in the post.

~~~
downandout
I think I speak for everyone when I say...wtf.

------
bhayden
With all the bubble talk and speculation recently (of which I have no real
opinion either way) - to me, this is the biggest evidence I've seen of a
bubble. The day after Magic posted on HN, someone posted how to make an
identical service with only a couple hours (tops) of configuration. Per user,
this valuation seems insane. You could launch an identical service for free,
essentially instantly, and for tremendously less than $12 million you could
get the same number of users and same brand recognition. I have no idea how
this can be justified.

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.

~~~
IgorPartola
Getting to the proof of concept like they did is easy. Going from there to
having many millions of recurring users is not. They can easily be as big as
Amazon's retail arm is, but they need to grow fast. After this $12m is spent
on marketing and tech, you will have a much harder time competing with them
with your two hours of configure editing. They have identified a good business
model and are actively building a moat around it while we sit here debating.

~~~
jmckib
I don't disagree, but where do you see the moat? $12m could be spent on
developing hard-to-copy technology eventually, but I don't know if that
explains the current valuation. Also, I believe Amazon has strong economies of
scale, but I'm not sure if Magic does or not.

~~~
vidarh
For their solution to be attractive, they need to learn your preferences. The
more customers they get to place more orders, the less attractive it will be
for those customers to sign up with another service and have to go through all
the motions of teaching those services about them _again_.

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.

------
minimaxir
> _In the first 48 hours of the service going live, Magic co-founder Mike Chen
> said the service had already seen 17,000 text messages._

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.

~~~
bhahn
I would assume that the partners at Sequouia are smart and diligent enough to
follow-up or ask for clarification if presented with a potentially misleading
metric like that.

------
tempestn
Wow, that was fast. 33 days ago was the original Magic post to HN:
[https://news.ycombinator.com/item?id=9087819](https://news.ycombinator.com/item?id=9087819)

------
stephancoral
Is Magic still taking people's money without actually doing anything?

"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."

[http://www.wired.com/2015/02/magic-the-
startup/](http://www.wired.com/2015/02/magic-the-startup/)

------
rhino369
Is there a huge market for this? I'm probably right in their demo. UMC
professional millennial with a time suck job. I ubered to work today and I'll
uber home. I ordered dinner on postmates.

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.

~~~
mikeash
I imagine the first time, where you have to give them your credit card number
and address and whatever other info, won't be any faster than doing it
yourself.

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.)

------
Tonyflo
Does anyone have any idea of their numbers? Even just estimates of users and
revenue. I ask because $12 mill Series A is definitely on the high side, and
I'd love to know what numbers helped them get that valuation. (I know there
are other factors like the team, market size, momentum, etc).

------
colinsidoti
Magic + DoorDash seems like a great pairing. DoorDash wants to get away from
just food pickup, Magic needs better delivery options. (When I tried Magic,
they priced out delivery via a cab.)

~~~
armasK
Do people actually use Door Dash? Seems like Postmates is winning that race by
quite a long margin.

~~~
nijiko
Wow, didn't even know this company existed.

Currently use Caviar, and Postmates.

------
sjg007
It's the personal assistant for the rest of us.

------
Pizzalover
This is retarded. There, I said it.

