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How to proceed when you run out of cash, but you still believe? (medium.com)
292 points by aldamiz 6 months ago | hide | past | web | favorite | 202 comments



I empathize completely with this team because my company was in a very similar situation in 2018. We had two very technical computer vision products, had found traction and a growing enterprise user base but revenues didn't grow fast enough and all of the major companies were entering the market.

We were lucky enough to find an acquisition off ramp last year but all of the feels are the same.

The big takeaway I learned is, if your differentiating product/service could be classified as a feature (which most ML or CV products are) inside a platform or application, you'll be run over by the major platforms who rebuild your product/services inside their platform.

Your only hope is that your team/data/IP is so far ahead and the acquiring company can't build what you're doing in-house more cheaply than what you're willing to sell for. Unfortunately it seems like there are fewer and fewer cases where major players can't rebuild your work more cheaply.

Second, it's excruciatingly difficult to prove the value of your product/service to a potential acquirer because you don't know their metrics, and if you do, you don't know their acquisition strategy. We did an intensive integration of our product with a Fortune 50 retailer, and based on their own numbers showed (using their own A/B tests) that our service provided a statistically significant lift in a core metric that they cared about, in this case paid conversions. Their CEO even talked about it at a public summit. However their acquisitions strategy didn't include small companies that aren't major strategic partners (Only >$200M+ acquisitions).

The worst part here is that, the founders (like I was) are absolutely in love with the technology and how amazing it is. The problem is, from a business perspective, that basically doesn't matter. You could be doing the most amazing work in NLP token inference, but if the product doesn't fit perfectly as an acquisition and it's not so compelling as to build a huge platform around, it's probably going to fail.

I wish it weren't the case, but it leaves me questioning what the value of doing really hard technology is as a startup. It seems clear that the most financially successful startups aren't solving fundamentally hard technology problems until they get to scaling something with broad product market fit.


> ... it leaves me questioning what the value of doing really hard technology is as a startup

Totally agree with this sentiment. I think this is why most "hard technology" problems are left to huge R&D departments or the government. Both of which aren't particularly nimble or profitable. There are a few notable exceptions (Oculus comes to mind), but most unicorns don't generally deal with solving tough problems. It's mostly about product-market fit and the balance sheets.


That tech isn't left to them it's just Survivor bias. Those teams fail at hard tech all the time. They're just still here


I completely agree with all of your points, having built a Face Recognition API in the past at Lambda. If it’s a feature, high willingness to pay customers will just build in house. Low willingness to pay customers will want to use it for free or not enough money to keep the lights on. It’s difficult to build an API business with pure CV/AI/ML for that reason.

I know this is unrelated, but I want to thank you for your work on Kessel Run. It’s inspiring to meet folks in the DOD working hard on making software work for our national defense. I ran into some of your colleagues and was very impressed and excited about that program.


I appreciate you saying that!

We're really working hard at changing many different aspects of the DoD all at once, from culture to acquisitions and are starting to see some great fruits but there's still a lot of work to be done.


Agreed but be cautious in the application and don't get jaded.

Microsoft DOS started as a feature of IBM PCs, and Google started as a feature of Yahoo.

Like "tech in search of a problem" IMHO "feature vs product vs company" needs to be applied case by case.


> and Google started as a feature of Yahoo.

The DOS point is correct in spirit. Google however did not in any regard start as a feature of Yahoo, it was an entirely stand-alone search engine for nearly two years prior to the Yahoo deal. Just one year after launching publicly it was handling several million searches per day directly on their own site. Google had already become very famous, with people going directly to Google's site to use their search engine before Yahoo signed a deal to use them to power their portal search. Just prior to the Yahoo deal, Google was routinely handling 15+ million seaches per day - a large figure at the time.

Here is a Salon article from December 1998 noting Google's superiority and promoting google.com specifically:

https://www.salon.com/1998/12/21/straight_44/


Let me share another aspect, the Chicisimo and their company should go down. The whole idea is terrible, instead diversifying between people, they are streamlining wear and if they succeed everyone will look the same. As happened with pop music after ai generators were involved... some things shouldn't be touched by machine.


I have a hard time understanding the value that Chicisimo provides to anyone. The people who might actually use the app are people for whom fashion is not a chore, but a hobby.


Would you say that building technology with the hope of being acquired is probably a bad strategy? It seems to me it should be safer to try to build some kind of product/service using that technology, that way you have at least your product as a revenue channel, and your product can make a business case for the technology you're developing as well (as well as server to increase awareness).


I hope so. Building for acquisition strikes me as studying for the exam.

Resources may be better spent checking the boxes of a potential acquirer instead of working on real problems except if and when they intersect. Like valuing people with acquisition experience from the other side more than the producers of tech or solving a real problem.


"Serial Founders" with multiple exits seem to do exactly that, but it looks like alchemy to me, and takes a certain type of person to do it.

In the ~13 years I've been doing startups I've only run into a few of these people who can pretty consistently build companies for acquisition, and I'm not really sure if it's just survivor bias in a growth market or they really have some secret formula.


Hey AndrewKemendo, such a great comment, so many points to think about. Thanks for sharing!


A takeaway seems to be: if you're going to use AI in product, let the AI power a whole new type of product, not use it as a feature in an existing one.


Looking at your own brand homepage, my impression is that it is too technical. I had expected to see many instagram-like pictures of people who demonstrate that they have managed to dress better by using your product. Isn't your value proposition that people can dress better?

Maybe I have overlooked it but I think you have the perfect software to run an online shop. Pay influencers to use your product and viewers who like the results will want to buy clothes from you. The profit margins of the sold products should be higher than anything that can be made from selling an app.


Thanks bumblebee4 - fashiontasteapi.com is a the b2b side of the company and the value prop is that we can help retailers automatically classify clothes and understand/classify people. It is for technical and business people, not the end consumer. This is a line of business we were just starting, and hopefully will continue.

The consumer website is chicisimo.com :)


Hot take: You need a woman to design this website. None of it screams fashion. When I think fashion, I think instagram influencer not "Omnichannel Personalization."

Your killer app could be a simple FB quiz. People give you their FB/insta and you spit out what looks that they'd think are wicked sick. Ideally culled from Instagram.

This web page sounds like nerds talking about fashion rather than fashionistas. I'm fairly sure that the Kardashians can't spell ontology.

Edit: Also why isn't this app hooking into the hauling subculture? This would totes perfect for folks and YTers planning hauls.


I would say they need someone with real marketing experience. Someone who can define a target market and write for that person.

I could be the target market here. I have a desire to look good for work and casual situations but absolutely no fashion sense. I hang out on HN. ML powered fashion sounds great! But then I go on their website and it looks like it's for 13 year olds who can read at a college professor level.


Yup! I'm their target audience too, and they lost me at the headline.


That’s... definitely sexist


It’s also right. Just replace woman with something appropriate.


I'm even a nerd who consulted a dictionary regarding "ontology", and I can't figure out what they're talking about.


It may be popular to hate on the Kardashians, but this kind of personal attack is really in poor taste.


Actually I have looked at chicisimo.com. The page is full of tag clouds. If I am looking for clothes, why should I install the app?

I don't know your market well, so this is not deep advice. I just think that people who care about their look don't want to deal with words. They want to 'see' why your app helps them to look better.

To convince me, show me before and after pics. I don't care how you label stuff, I just want to see nice clothes that look good on me.


I have to second this. The Chicisimo (how do you even say this by the way) site should be the b2b one. Way too technical and verbose for consumers, yet completely misses the visual aspect of showcasing what it actually can do with clothes & people.

Did you edit the site to make it more attractive to prospective buyers? I can’t see how “Omnichannel Personalization Platform for Fashion Retail” being the first block of content on that page is going to help convince users to install the app. Both “outfit ideas” and “outfit of the day” buttons are broken, and they look disabled with the faded color. The text sells the technology and not consumer benefit. Why are the outfits of the day not shown here, with user profiles to give a sense of reality to it?

Someone already mentioned elsewhere, but I’m curious about two opportunities not mentioned in the post: building an online community based on the app, which could be a strong sales lead generator, or operating your own e-commerce platform to profit directly from the tech you created.


Like machismo i assume


FYI, I get an error when I click on "Outfit Ideas":

undefined method `split' for nil:NilClass


thanks rurp - fixed.


Have you ever thought of targeting by size?

As a tall person dressing and fashion in general SUCK! Online has made it easier but selection is still limited and cost is outrageous.


In our case, size is a property in the ontology.

For some players (second hand for example) size is the number one "personalization" requirement. Imagine you see a feed of products, and none of it is your size...


That is a very sought-after feature and yet not mentioned in any of your pages. Patagonia made waves a couple years ago with software to find matching sizes alone.


FIRST build a successful business, THEN try to sell it. You try so sell something that's essentially worthless, and even worse: you have zero negotiating power. So at best, you would accept an offer of ~10'000 USD. This is the cold hard truth in this case, and I don't mean it in any bad way.


This is a brave post. It takes a lot to share this with the world. I truly hope the right partner comes along and makes the best use of all the hard work you put into this. Respect


thanks sofia :)


Looking at the technical bits, I can't help but feel that you've failed to communicate it well. Case in point, the caption for the edge detection image of the girl:

> “…providing interactive access over a worldwide computer network to the plural fashion images, together with access to the fashion data for the fashion items in each of the plural fashion images and the information linking to the vendors of the fashion items…”

This sentence (with ellipsis!) does not appear anywhere else in the article, so right off the bat it's hard to understand what you're trying to convey. Secondly, it's insanely verbose, the whole sentence can be boiled down to "hosting fashion images with relevant metadata". If it's an excerpt from one of your patents, then without context it only muddles the situation — it makes it seem like you either don't know how to communicate your tech or you're trying to mislead.


Yes you are right, it is an excerpt from one of our patents. I completely agree that it is very confusing as a caption, and I've taken it out. Doing it in a hurry didn't help. Thanks for the heads up.


What strikes me as odd is how unstylish everything in that post and on the fashion taste api website is.

Is that intentional? Because I would think with $3.5M in funding, you can hire professional photographers, models and stylists to make the photos and the videos. And a webdesigner to make the site.

The appstore pages look better. And you have good ratings from thousands of users. So why do you want to close it down? How many users do you have and what are your running costs?


:)

You are right, the fashion taste api website does not intend to be stylish. It tries to convey a message to business and tech teams, and we know it could have a better design. Take a look at the consumer product https://www.youtube.com/watch?v=EMMmdCB1-Wg hopefully you like the design better :)


> and we know it could have a better design

You've REALLY underestimated the power of design.


There are other ways to proceed when your running low - in my experience it depends heavily on how hungry a bulldog you have built (i think paul graham said this) which is often a function of when you raised cash. If you have to make payroll and can't proceed without all those people sat in their we-work seats with computers you need to buy them thats a difficult spot. We have tried to stay lean for as long as possible and avoided taking cash because we work in medtech and don't want investors that do not understand our roadmap and milestones. We have found partnerships with academia, government, and research institutions have helped drive our project forward without needing to play the VC game. We advance our product and havent given equity away.


Are you comfortable sharing what you've built? I'm in the non-profit side of medtech and love seeing well-built products.


Happy to talk about it offline / privately as we are quietly working towards releasing something. Not sure how is best to reach you?


Cool idea but, from watching the demo videos:

(a) That's a messy, unappealing closet.

(b) The Alexa interaction felt awkward. Probably a touch interface would've worked better.

(c) Ugh, (used?) boots on the TV stand.

(d) Many of the clothing items we own are Asian items without barcodes. Wonder how the import would work on those.

(e) The website (chicisimo) could use a lot, and I mean a lot of copywriting love. So many walls of text. Some fashion photos should be front and center. It is hard to understand what is going on in the animated iOS screen.


>> We are a team of 8. We are 2 full-stack, 1 iOS, 1 Android and 4 product people

What were the 4 product people doing day to day?


This stuck out to me too - maybe OP's using product as a catchall for "non-engineers", but with a ratio like that I'd be very curious what kind of bottlenecks the team's facing and what kind of daily work output's being generated.


They shared a link with the bios of the whole team: https://docs.google.com/document/d/1r0IIViwp5MuNcWXZqNI2C60P...

The non-engineers are the: CEO Head of Ontology Head of Product Design & User Research User Research


Yes. I wouldn say our "Product people" are not very traditional product people, you have our bios and focus in the team link in the post and below. Hope that clarifies the doubts. I've also clarified it in the text, and it now reflects the reality better.

https://docs.google.com/document/u/1/d/1r0IIViwp5MuNcWXZqNI2...


It seems like telling the world you are dead in the water gives the upper hand to an acquirer here right?


Having been through this, merely contacting the potential acquirers, confidentially or not, gives the perception that the startup is or will be out of cash, anyway. Every remotely acquisitive company is getting several of these inbound missives every day and they always assume the startup is dying. I don't see much downside to a different tack at this point and, if anything, it may serve to jump-start the auction process.


As long as there are multiple acquirers, the auction may approximately-fairly-value the company.

They make the case that they have talent, domain-knowledge, and patented IP. The company may be out of cash, but it is not intrinsically out of the fight, so long as cash can be made to appear suddenly.

Furthermore, any acquirer would be able to see the company's books, removing any information-asymmetry on the free-cash point.


I hope you can read the post and be more positive. Thanks!


GP is trying to subtly let you know that you've significantly reduced negotiation leverage with any potentially interested party. There no benefit to you to publicly state your cash position.


Any interested party will get access to the books and have that information anyway.


The buyer, yes. But now they can't even spin this as strategic or synergetic. It's obvious and public that it hasn't been a commercial success yet. Granted, that's usually overstated and I don't think it makes much of a difference to most people. But it's something.

But hey - we all got an interesting read out of it.


That's a reasonable point, but it's not the argument that was being made (and that I was responding too).


Weakness can be a kind of leverage. If the interested party knows that the company has weeks to live, they are forced to make a quick decision or lose out on the opportunity permanently.


Perhaps that's not really a mystery anyway?

Could the state of the business be hidden that you could take a big offer, get the money, and then they would discover the business is stalled?

Even if you could do that I wonder about legal issues / the relationship with whomever bought in.


> "We are a team of 8. We are 2 full-stack, 1 iOS, 1 Android and 4 product people."

And that leaves 0 for business + marketing + sales.

Maybe you didn't find the right business model during 5.5 years because you had nobody working on finding the right business model?


Engineers like to hire engineers (and designers/product people). I think its because the utility and scope tend to be pretty obvious and you can always see more and more to build. As a founder with an engineering past (although you never stop being an engineer!), I always find it a bit trickier to hire the non technical parts because you need to do their jobs first to really know what you need and generally, you need to navigate more ambiguity in an area of the business where you have less training and experience. That said, for the right products and business, you can probably get a way with borrowing resources from engineering for some marketing - I find that engineers with high EQ often make great digital marketers assuming they have some creative/content generation skills because they can really tune ads and think about the whole funnel in a very technical and numerical way. I have also found that it helps to have entirely nontechnical for the creative and advertising as well as there are a lot of places where engineers just can't always see past their engineering goggles.


"Product people" is a very generic term, which likely includes some of what you mentioned.


Fair point. But if after 2 years you haven't found a business model, it might be better to fire couple of the product people and get dedicated biz people, as opposed to waiting 5.5 years and then go belly up.


Out of curiosity, do you have direct experience with entrepreneurship? This is extremely easy to say from a distance, and so naturally everyone does, only to bite their tongue once they've gone through it.


I've built a few companies. I think it's super valuable to have some on the team who doesn't give shit at all about the tech and only cares about a) is this the right problem and b) who cares (read: pays).

This person helps you focus, forces (if given authority) the tram to focus on "things that move the needle". Devs and designers simply lack that customer-development focus.

I think every team would benefit from a qualitative analysis role like this - regardless of title. I have one now. We argue every day, but the balance of perspective is key.


Autocomplete just gave away your European origin.

> Devs and designers simply lack that customer-development focus

That’s an unfair generalization. They will have that focus if imbued on them by the company, and the right motivated hires are made.


Alameda, CA now in Seattle.

Me generalization is made from 20ish years as a dev who's now a CEO and was doing a bunch of hiring along the way.

You said my generalization was unfair, and carved out a narrow exception where it would be great. Maybe proving my point.

Query...does your dev team talk about tooling and stack more than customer feelings?

Is it "ohh react native on k8s" or fix the accounting reports and that one UI bug that tricks users into click the wrong button because some eng forgot to use the UI green constant?


The latter for sure. The platform is a nuisance and not a source of fun, and priorities come from product. But I’ve never worked in the US, things might be different. What I was trying to say is that people will adjust to the culture/goals of the workplace. It might be true that an engineer left to its own devices would not care, if it doesn’t affect his performance; but if it the company is clearly focused on the customer everyone will follow.

My comment was regarding “tram” ;)


Yes, 100% at my Co now, we are (not just lip service) customer focused. After some bumps we got a new dev, was unhappy at the old places, specifically about that empowerment. Now the customer to dev feedback loop it tight and they are enjoying it - and it shows from the contribution.


Fair question, I totally get your point. But yes, i've been full-time entrepreneur since i was 19. 6 companies, 20+ years, and lot of mistakes by now.


I do -- founder of a funded company with customers -- and my observation is it's very very difficult to bake a business model into a business after the fact.

And fwiw, a founder friend with a successful exit counts his biggest mistake as not having a founder immediately focused on sales. He built a two-founder (PM, eng) business that had a successful exit but probably nowhere near as successful as could have been possible.


1:1 engineer to product person ratio seems off to me, especially for a small company. Even if that person has to do product/sales/evangelism/marketing, you should really need 2 or 3 people max if you only have 4 engineers, especially when those engineers are building so much from nothing.


I wouldn't say our "Product people" are very traditional product people, you have our bios and focus in the team link in the post and below. Hope it helps

https://docs.google.com/document/u/1/d/1r0IIViwp5MuNcWXZqNI2...


If the business model won't be acquired, then business folks won't count towards asset. Better to let them go or emphasize relevance to product development going forward.


As someone who is interested in one day starting my own business, I have nothing but respect for someone who has the guts to follow through with that and pursue their vision.

That being said... why did you (or if anyone else can chip in) decide to chase funding when you didn't have a business model? Maybe I'm being naïve here, but isn't it kind of crazy to raise 3.5M in funds for a business that has no plan but to be acquired by someone else?

I'm torn, because I believe that people should absolutely pursue passion projects, and that a passion project should absolutely be monetized... if you have developed a respectable business model and a potential product-market fit.

My first thought is that you could get some funding and use this as a platform for fashion retailers to exchange consumer profiles at the B2B level, or as part of the internals of the recommendation system.


"Maybe I'm being naïve here, but isn't it kind of crazy to raise 3.5M in funds for a business that has no plan but to be acquired by someone else?"

That's a sane question. IMO it's the current financial environment that encourages such "leap without looking" strategies.

Fear of missing out is huge right now.

I know of a startup that received a multi-million valuation and many more million in funding. They don't even have a prototype!


This is very real. A friend of mine started a company with over a million in seed funding with what basically amounts to just an idea. Years later, the company isn't doing that well in terms of sales/revenue, but they still manage to raise money because they have a couple obvious acquisition targets. It seems crazy to me to throw millions of dollars at a company with the hopes that one of maybe three or four megacorps in the industry will acquire them, but investors buy into that, and that's all that matters.


Seed and Series A is investment in the people always. They assume if the product doesn't work the team will pivot until they find something that does. It sounds to me like your friend failed to pivot when needed.


Not even. I'm seeing seed and series As/Bs on unproven teams of recent graduates with no experience in the field where the "start up" operates. No business plan, no prototype, huge regulatory walls to climb.

It is worst than tulip mania.


Funds make money on failed investments too. I'd be happy to throw away someone else's money, if I got to keep 20% as a management fee - and a slice of the profits in case one of my lottery tickets is a winner.


Typically they'd get 2% of assets under management, not 20%.


2% a year for 10 years..


Which is about 18% of the original investment, not 20, assuming no gains or losses.


Dude. Conflating seed (median $2.1m 18q4) rounds with B (probably 10x that) rounds is... not serious.


Look closer at the news, it’s not uncommon to see 10M+ rounds for companies that haven’t put out a single ounce of product.


I'm sure you've got a list of 50 or 100 examples handy?


Where? Can you give an example?


FOMO has always been present.

What's changed is that debt is almost free. That allows VCs to take (very!) speculative bets for relatively low risk. They know that if each of their portfolio companies has a 10% chance to reach 30x returns, investing in 10 companies should pay off.


I know this might sound stupid but if you can get that much for something that wow's people, can you get like 100k for a "meh" idea?

Like if you wanted to open a dry cleaners.


Well, yes, but not in the way you mean. If you want $100K for a dry cleaners you get a bank loan, the same way people have been doing it for a century.

Equity capital is solely interested in business models that either wow people or fail outright. The reason has to do with risk: most such business ideas have various things that can go wrong, and those risks are generally manageable but not really quantifiable. Basically a VC wants to see "These are the assumptions in our model, and if we build this it will revolutionize X industry, which is currently worth $50B but could be worth a lot more with our product, and that will give you a 50% annualized return on your fund." And they're giving you money to prove out whether those assumptions are actually true, with the expectations that for a good number of startups they won't be and their whole investment will be wasted.


Yes you can. It's called a small business loan. See https://www.sba.gov/funding-programs/loans and https://www.bankofamerica.com/smallbusiness/business-financi....

You'd finance your dry cleaners with debt rather than equity because (unless you are starting a chain) you are not shooting for the massive, near-zero marginal cost scaling that the venture capital model focuses on. Instead, the bank looks for a modest, predictable return through interest payments.


Yah, but re:wework, throw in a dry cleaning app that schedules a dirty laundry pickup and suddenly the valuation goes from marginal to billions. Especially if you get some machine learning in there to detect spots (or something).



If you put the sarcasm aside (it does make a good joke), a laundry pickup app has in fact orders of magnitude more potential to scale and make money, as dumb as it sounds.


The economics of on-demand are totally different:

First, there's a delivery part. Delivery companies often become very big and make a lot of money.

Second, centralizing many small dry cleaning places into one has Significant economic advantages.

Third, they probably use an asset-lite model like Uber.

Fourth, all those make them somewhat similar to some sucsesfull, high growth companies , so it's possible they'll grow big.


Does centralizing many small dry cleaning places have significant economic advantages assuming that each location has to negotiate independently for it's space and (to parallel wework) items like cleaning supplies and staff management necessarily vary from location to location due to local regulations?

WeWork is sort of the golden example of a business being sold as something that works at scale... except the business doesn't actually work at scale.


It seems in a lot of places (where I live, Austin TX) all the little mom/pop dry cleaning shops are actually shipping the dry cleaning off to a central location. The EPA/etc regulations apparently have forced that part of the cycle to converge.

That is part of why it costs more/takes longer than simple laundry which is frequently still done at the mom and pop location. Although, I think the larger chains (Jack Brown) are entirely just storefronts sending the laundry and dry cleaning off to some centralized location.

So, I doubt there is much advantage to further centralization that hasn't already happened.

Also, I'm not even sure about the hotel bits, most hotel's I've stayed in recently _DO_ their own laundry. They have a couple giant commercial machines sitting in the basement for the sheets/towels. I know this because I always take the stairs and often take a wrong turn and end up in the basement/etc.


The advantage could be in eliminating the jobs of the mom & pop drycleaners and the rent they pay for the space. That's surplus that could be captured by a dry-cleaning app delivery service, assuming that the cost of transportation isn't greater than the cost of rent. In dense urban areas, where rent is expensive but you could hit up several customers on one trip, that might be a valid assumption. Particularly if you have someone good at logistics programming the app's backend, and a pool of inexpensive labor for drivers.


That's a great business plan and differs from WeWork's because WeWork's business plan assumes that the cost of leasing office space in high rent areas is never going to be removable.

When looking at a potential business as something that can be economically scaled you always need to find the saving factor, for WeWork the saving factors are Administration efficiency (to administer 10 properties individually you need 10 administrator labour units, maybe for grouped properties you can get away with 6), rent leverage (being well established might lower the apparent risk of your lease being canceled early, so you may have some savings there) and maintenance (this is a significant one, I bet you could really scale down the expense of janitors and the like if you have multiple properties in a dense area). But none of the costs I listed above are seriously impacting your cost per sale, they're all quite marginal savings, so you'd really need high volume to reap that benefit and it's likely that the cost of marketing, building an app, having a crazy CEO etc... will outweigh the savings you could eek out.


No, because the mania for throwing money at tech startups is specifically because of tech's unique promise of both worldwide scale and zero marginal costs after the initial Big Spend on capex, and hence potentially gigantic returns for investors.

Now, how well the current crop of startups is delivering on that promise is an exercise left to the reader, but it's there in theory. A dry cleaner has marginal costs and no economy of scale, and so can't attract unicorn valuations.


> tech startups is specifically because of tech's unique promise of both worldwide scale and zero marginal costs

This theory fails to adequately explain WeWork.

I mean, I think you should be right, but in principle I do not see why WeDryClean should not work while WeWork does.


much like wework - all you gotta do is convince 1 person who controls vast sums of money that it will work. I'm very convinced by your WeDryClean idea! (Sadly no vast sums of money, though)


Zero marginal cost in theory. In reality, you often find enormous cloud costs combined with huge marketing spend.


As long as your product is perfectly scalable and generates a profit for money spent that way, it makes perfect sense to take a loan, spend a fortune, make a fortune, then pay off the loan and take in profits. Then turn around and do it again.

It isn't the absolute size of the numbers that matters. It is the ability to rapidly scale the business once you have the right business model and product.


And in particular, if you sell low churn saas (like we do), you can comfortably spend the first year's annual contract value on customer acquisition and have an extremely profitable business. Just huge initial marketing costs.

And quite possibly huge ongoing marketing costs! But if churn is low, or even negative, you can assume something like 10 year customer lifetimes, with a comfortable 5-ish percent cost increase per year, on sale for the first year's contract value. If you have cheap-ish money available, you should buy as many of those as the world is willing to sell.


"As long as your product is perfectly scalable..." I agree. Usually it's not, and more difficult to get there than people think.


As parodied some 5 years ago: https://medium.com/signal-v-noise/press-release-basecamp-val...

Once you make money, it's much harder to come up with outlandish numbers. A dry cleaners has a well-established range for revenue and profit, so it's hard to justify why it would be worth $100 billion.


>Once you make money, it's much harder to come up with outlandish numbers. A dry cleaners has a well-established range for revenue and profit, so it's hard to justify why it would be worth $100 billion.

If you want a cleaning company worth hundreds of millions, try ZZZZ Best https://www.investopedia.com/terms/z/zzzzbest.asp


Actually 10 years ago. Here's the original: https://signalvnoise.com/posts/1941-press-release-37signals-...

The Medium version did update the terminology a bit (since RSS and 3G weren't as exciting in 2015 as they were in 2009, hah)


Well, not everyone does that. I applied to YC with my side project [1] and got rejected. I didn't expect to get in, but if I would have, then I would be full-time on it.

Now I can't, which is a shame. So in that sense, I wish someone would fund me. I have a lot of "doodling the internet" type of ideas. I use digital note taking extensively myself, so I know what's missing.

[1] doodledocs.com


I'll give you a hint. You should pivot to a collaborative design app. There are a couple around, but very few that have that "doodle feeling". You should be able to pick up a pen, sketch something quickly and then have someone else be able to modify/review it.

I'll give you another hint. Add shape recognition and move from capturing and storing pen strokes and generating bitmaps to capturing pen strokes and generating shapes. Add rudimentary grouping and ungrouping functionality, ability to move, stretch, rotate, etc. Allow pasting clip art and letting it grow/shrink/rotate when grouped with other objects, but just with a rough scaling, etc -- it doesn't have to look pretty. It's just for sketching things out.

Practically every software/design team needs an application like this and there will be money to pay for it.

P.S. I was on a team that built this as a windows application about 20 years ago, but we were ahead of our time. A SaaS webapp would be the bomb here.


What differentiates you from drawing apps?


Indeed. The flip-side to this is that speculative investment on unprofitable moonshots seems to be where ALL the equity-finance money is.

My company reliably earns low-7-figures on high-7-figures revenue, with respectable but not amazing growth, but the only capital "market" open to us is bank loans and merchant financing.

Nobody cares about boring profitability.


Why is that a bad thing? If you are profitable, why would you want to give up equity and control?


Serious question -- why would you want something besides a bank loan? Because a loan at a couple of percent is way cheaper than VC, who will typically want at least 20% of your company?


> Maybe I'm being naïve here, but isn't it kind of crazy to raise 3.5M in funds for a business that has no plan but to be acquired by someone else?

That's pretty common, and is basically what seed funding is. The paradox behind markets and investment is that logically speaking, if a potential company has a profitable business model, that company should already exist. After all, with millions of potential entrepreneurs across the globe and trillions in funding chasing them, the chance that an obviously profitable business model hasn't already been dreamed up and implemented by an entrepreneur is basically nil.

So what investors and entrepreneurs do is they agree to take on risk with their capital, for the potential of great reward if it turns out they can come up with a better way of doing things that isn't already being done. The only way to do this is to explore virgin territory: do things that seem plausible but haven't currently been tried by existing companies, and then see if you can create a profitable business model with the results. There's a good chance that you can't, in which case okay, it was an experiment, you spent $3.5M to learn something that had the shot of being worth billions.


"After all, with millions of potential entrepreneurs across the globe and trillions in funding chasing them, the chance that an obviously profitable business model hasn't already been dreamed up and implemented by an entrepreneur is basically nil."

This basically amounts to "everything that can be invented has been invented". You sure?


No, more like you should invent a new way of selling things, otherwise the market would have found a way to sell them already.


Yes. And it's true, statistically. Most inventable things will be invented by someone else before you succeed at it. Statistically, no one wins the lottery, even though someone always does.


> Maybe I'm being naïve here, but isn't it kind of crazy to raise 3.5M in funds for a business that has no plan but to be acquired by someone else?

Not exactly. A lot of startups can function as R&D for larger tech companies: Big tech companies have lots of money but aren't great at innovation. They might spend 10s of millions of dollars just to get a lesser quality version of what they could own if they just bought the best startup in the space. This is why companies with $0.00 revenue get acquired all the time. It's a simple calculation: will it be cheaper to buy or build this tech? For many companies it's cheaper to buy.

That being said, Chicisimo is in a very tough situation. The problem with their strategy is:

1. They have to be acquired or they'll go out of business. This is a terrible negotiating position to start from. There is no walk away power. If I was an interested buyer, why wouldn't I offer an insultingly low price? How does $100k to cover legal costs and a nice signing bonus to your employees sound? Do you have a better option?

2. They need a buyer who needs their experimental technology. This is what's called a "strategic acquisition". And they are almost impossible to engineer from the startup's position. The chances of a finding company with a lot of cash with an exec who wants experimental tech enough to spend a decent amount of money on it are almost certainly zero. If they haven't attracted the attention of a buyer by now, it's unlikely that they'll become more attractive now that they're about to fail.

Having been in this situation myself, it is so helpful to have some revenue to fall back on. That way you can demonstrate that the business is worth something.

I wish them the best of luck. Hopefully they pull something out here but the chances are low.


There’s one other sub-angle: that a company may be interested in buying to prevent their competition from buying the tech. Buy and bury is a valid worst case acquisition outcome for some acquirers.


I think a lot of the time the idea of funding is:

From the startup's side: We don't actually know the business yet, so we need resources to fund our runway while we figure it out (ie. interact with the market enough to make smart pivots toward profitability).

The the funder's side: We basically don't give a shit what the business turns out to be, we want to fund talented teams that we believe can pull off profitability.


The real question is who invested, and why? Even though being an investor doesn't mean being smart at it, it's still a signal that those guys are/were onto something and needed the cash to accelerate/deploy. $3.5M for such a small remote team though... I'm not running the numbers but they were cash burning big time, for a long time.


I don't think it's that bad a cash-burn. That's less than $100k per month for a team of 8. Even full remote, salaries and overhead don't seem recklessly out of alignment.


> The real question is who invested, and why?

This always baffles me the most. Who gives money to a startup without a business model? I guess they just have funds to throw at the wall and hope something sticks.


Startups with scalable, repeatable business models are basically not startups anymore, since the whole point of a startup is to search for scalable, repeatable business model. And valuations match that: once the startup has actually found a scalable business model and is in its growth phase, expect to pay $100M or more for it, sometimes into the billions.


People aren't necessarily asking for a business. They're asking for a business model: a way, maybe untested, maybe lightly tested, that you might earn more than you spend. Just needs to be semi-plausible, doesn't need to be bulletproof.


It is not clear at all from the article that they never had a business model. Most likely they had to scratch their original plan at one point.


If you don't care about whether it's tested this startup had a plausible business model: by coming up with an algorithm to identify fashion taste, fashion e-commerce sites could show more relevant recommendations, which leads to more sales, which leads to more revenue. Then they pay this company some fraction of that additional revenue, and both win.


That's why bubbles pop I guess.


I’m no fan of the startup and HN definition of success being valuation, revenue, or market cap while ignoring (the lack of) profitability.

But from a cynical standpoint, why not take VC money if you can get it? It seems like you should take VC money if you don’t have a business model that would lead to being a profitable ongoing concern.

If I can see profitability, why would I give up equity?

You let other people take the downside risk. Why use your own money instead of other people’s money.


Yep, worst case you get lil nice wealth transfer from VCs to the people in the company, all for being an entrepreneur!


its not taking the money thats the problem. spending it is the problem because it accelerates your burn rate


> Maybe I'm being naïve here, but isn't it kind of crazy to raise 3.5M in funds for a business that has no plan but to be acquired by someone else?

I offer you 3.5M to start a business, without needing a business model, why wouldn't you take it?

The real question is, how did they were able to raise 3.5M and why haven't they made sure that they had a strong business model.


My first thought: It's could be very difficult to build a product to a stage where product-market fit can be assessed without external financial assistance. I think most products can be brought to this point in a year or two with a team of 2 or 3 people, but that's a pretty sizable chunk of living expenses and possibly salary that needs to get paid.

If the only people who can start companies are the ones that have at least a few hundred thousand dollars in the bank, that really limits the field. I think VC probably plays a beneficial role here, opening it up to people who otherwise would have no freedom to spend a year or two pursuing an idea that may or may not convert into a profitable business.


>That being said... why did you (or if anyone else can chip in) decide to chase funding when you didn't have a business model? Maybe I'm being naïve here, but isn't it kind of crazy to raise 3.5M in funds for a business that has no plan but to be acquired by someone else?

If you can raise them why would it be crazy? It's only crazy for those that give the money (and for them they could be spare change)


Google didn't have a business model when they started but they were sure they were building something useful. I don't know much about fashion and I don't know if what they have is truly useful, but I respect them a lot and will see if I have contacts I could introduce them to.


Google's initial funding, when they did not have a business model, was around 1 million dollars. By the time they got a significant chunk they had decided to use ads to try to monetize. Not all useful things make sense as income generating businesses.


Not according to In the Plex. They had raised money from Sequoia and Kleiner Perkins and John Doerr was almost losing his mind on how much cash they were burning through with no business model. Finally, in an act of desperation, they copied Overture's model. The rest is history!


$1MM in 1988 is about $2.15MM today, hardly different from what these folk raised.


Asking the real questions.

> That being said... why did you (or if anyone else can chip in) decide to chase funding when you didn't have a business model?

Biggest mistake IMHO. But is quite common these days. Everybody is chasing the unicorn dream.


It's important to consider that most businesses that start in new areas/ try re-defining the market don't have business models, as they are too small to build a model from. Sure they can bootstrap from one idea to the next until something takes hold, but unless it's a new paradigm that is on the cusp, you're many years (think 5+) from attaining a scalable model. The funding is to be able to hire people, and iterate quickly to expand the business, and find a scalable business model. Trying to build a business model with out a pre-existing business is like trying to solve for x when the right side of the equation is missing. You'll come up with answers, but they're probably wrong once tested.


Startups should not create new markets. Too risky. Do what amazon/google does, just with a twist.

You dig where the gold is.


That's sad and I disagree - category creation is amazing. Though indeed, I've observed that almost all VC's are indeed against this until it's been handed to them on a silver platter, despite what they may believe about themselves and their firms. So the tricky part is how to fund it over time :)


They're people as well, the good ones use it as a way to test the conviction of the founding team. If they can't take a few verbal licks, why would they be able to acquire enough customers to gain traction? Not a perfect test, but it has proven to be a workable process where the ones with the most conviction always get _something_. Sometimes it's too late, and sometimes it doesn't work out. That's life.


Yes, I agree -- many like to believe they are into deep tech and category creation, but even of those, most punt until a lot has been derisked. For deep tech / category creation, by the time the risk is gone, you are into growth phase. Someone like Lux Capital is on a very short list of exceptions.


So do category creation. Just be in the same categories that are being created by the big 4.


The business of selling securities is a business.

Tapping into the sentiment steered by macroeconomic trends is wise. Limiting that to the consumer product model is unwise.


That’s an interesting article. To me, that company should have been really valuable and done really well especially in the retail clothing industry. I wonder if it’s more luck and connections than anything that has to do with product when forming a company


The name of the successful version of this company is "Stitch Fix"($2.39B market cap).

> we haven’t found a relevant business model

> We are a team of 8. We are 2 full-stack, 1 iOS, 1 Android and 4 product people.

It's a bad sign if your company is 50% product people and you can't establish product-market fit, especially with a "whale" for a competitor.

I guess it wouldn't be unheard of for a conglomerate like LVMH to acquire, but I'm not sure there's enough traction to justify a scenario like that.


> I guess it wouldn't be unheard of for a conglomerate like LVMH to acquire, but I'm not sure there's enough traction to justify a scenario like that.

+1. Worked on a fashion startup a while back, and being early-stage we still did end up in a meeting with a C-level at LVMH.

They're open to hearing a lot of ideas, but the conversations quickly fell apart at realizing quite how early-stage we were— they generally want validation in the form of success in integrating your product with other fashion companies.

From what we learned, fashion is notoriously behind in tech, and it's a slow climb up the chain if you're B2B.


Thanks for the reference, I hadn't heard of Stitch Fix. They seem to have a great tech blog: https://multithreaded.stitchfix.com/blog/2019/09/10/stochast...


Who you know, luck, being in the right place at the right time are MAJOR components of success in life. Infinite number of equally talented people in this world, without the right path.


This comment showed as burried for me, which I find odd.


Did it fall under a certain upvote/downvote threshold or something? It was the sane for me.


Me as well.


https://www.technologyreview.com/s/610395/if-youre-so-smart-... (If you’re so smart, why aren’t you rich? Turns out it’s just chance.)


Wow, thanks for ruining my life

But seriously. That...feels true. But rather than waiting for things to happen to me, what happens if I go out and expose myself to more events where the dice of fate can be rolled for an outcome in my favor (or against)? Am I manipulating luck that way?


Networking, experiencing new things will ABSOLUTELY increase your chances of being successful in life. I've lost count the number of times I've met someone who led me to bigger things at a party/night out that I initially didn't really want to go to. No matter what it is, no matter how comfy that couch, go meet new people. Best way to advance.


That certainly is the best way to maximize luck. One such type of event is getting to know people, be it through work, networking, online w/e.


There is a positive take away. If it is up to chance, then you "just" need to increase your exposure to opportunities + the longevity of your efforts. More opportunities, over a longer period of time, gives you more coinflips.


Don't confuse a software product with a business model. Their own words state they've "solved" the previous human problem of fashion without figuring out a viable way to capitalize. That means they don't yet have the right product. I think they've solved an intermediate problem on the path to the actual underlying pain that people would pay for.


> One of our processes.

This process needs some work. It replaced the girl with an entirely different girl, and swapped her Metallica tee for H&M, effectively removing her taste.


Indeed -- I found it difficult to read the post after studying the first mangled diagram.


"An In-Bedroom Fashion Stylist that understands the user and her taste and knows what clothes she has in her closet." That's from Clueless.[1]

Is there anybody who really wants that? People with too much money and no fashion sense? Is that a market?

[1] https://www.youtube.com/watch?v=XNDubWJU0aU


Assuming this can recommend clothes that someone is going to immediately love based on previous purchases, this seems incredibly valuable for all the fashion e-commerce sites starting from Amazon, and could in fact turn any large site with this technology into a monopoly at least until someone replicates it.

Of course it needs to actually work though, which is not clear from the article (categories like "comfy" aren't going to cut it, you probably need a sophisticated deep learning approach on product images plus brand identity data and maybe Instagram posts with a lot of training data).

Obviously you can also run a store or an affiliate-based site yourself with it, but the problem is that you are going to be missing data on customer's taste; maybe you could exclusively cater to people who love posting their photos on Instagram, connect to their Instagram account and understand their fashion taste from their posted photos - or you could even support imitating someone else fashion's taste by looking at their Instagram profile.


Yeah, this is sort of confusing to me. I know that B2B/SAAS is a preferred model for VC these days, but I'm sort of baffled that you wouldn't just take the tech that's been developed (assuming it works) and just integrate it with your own e-comm platform. Like, couldn't something be bootstrapped here? Maybe add a subscription/service model to create revenue?


I agree with you, the product looks pretty cool and promising, and seems it could be a good fit within Amazon or something with a vast array of clothes.


There's kind of three problems you run into with that sort of thinking.

1. Is there a difference between great recommendations and random recommendations?

Maybe purchases are bottlenecked on money rather than desire, so your customers can already find as much stuff as they can afford to buy. Maybe your customers want to browse and look at literally every product on your website and will find it on page 1 or 100. Maybe your customers need to see a lot of options to realize how much they like the perfect recommendations, so showing them what they'll end up purchasing first doesn't really make a difference. Maybe your customers are lazy and will buy the first shirt you show them regardless of how good it is.

2. Can you get by being dumb if you have enough data?

A company like Amazon has soooo much data on shopping preferences based on past purchases. They can construct extremely naive models from their 20 years of logs and expect them to perform very well given your ten years of personal shopping data with them.

3. Does your superior algorithm create a moat?

For any interesting problem, you can get like 80-90% of the quality while spending 1% of the programmer-hours as the best of class. So if you're best of class, does your extra quality buy you anything, or is 80% as good as you good enough for most customers? Eg, can your potential acquirers just halfass something and get all the value you provide for a fraction of the cost, or do they need your extra years of experience to compete?


We need an inverse of this too "How to proceed when you're flush with cash, but don't believe"


Put the money in a CD. Probably better than anything else you can do when you're about to flush someone else's money down the toilet.


Haha, that is exactly what is going on with us now. We just launched our first Kickstarter[1] and its not going well.

We will go ahead, eat ramen, and pursuit this, and its a HW product. Wish us luck.

[1]: https://www.kickstarter.com/projects/pycno/pulse-building-sm...


Just a heads up, there's another IoT product called pulse: getpulse.co


You need to begin the Kickstarter page with way better examples of problems you can solve.


> We finally found the right path 36 months ago, but we haven’t found a relevant business model.

The best use case for such technology is a B2C fashion app targeting 16-36 women with an extremely well-designed UX, that doesn't force to signup or enter any payment details.

Look at the Fashion Finder[1] by Daily Mail, and how it was successfully monetized via affiliate networks[2].

I could easily see such an app being acquired by one of the latest unicorn fashion startups, such as TheRealReal[3], Poshmark[4], thredUP[5], or Vinted[6].

[1] https://www.dailymail.co.uk/femail/fashionfinder/index.html

[2] https://skimlinks.com/resources/case-studies/case-study-the-...

[3] https://techcrunch.com/2019/04/23/luxury-consignment-e-taile...

[4] https://www.forbes.com/sites/bizcarson/2018/12/14/next-billi...

[5] https://www.forbes.com/sites/glendatoma/2019/08/21/thredup-r...

[6] https://techcrunch.com/2019/11/27/vinted-the-second-hand-clo...


If there is a smaller part of your business that can generate $, it can be a good way to help you stick around/simmer until the timing is right for the demand to increase.

Products are about as much as deciding what part of your solution you're building that lines up with what the market is ready to actually do and growing from there incrementally.

A neat example of this I read about was how the iPad was designed for many years before the iPhone came out, but the iPhone in a way was a starter/training device for a larger touch computing experience.


Move on. It's a bitter pill to swallow but that's the reality. It's game over. You might be able to scrape some cash together and you will be in the same place 6 months later.


For the patent section, I don't understand how any of the 3 are worthy of a patent or were able to be patented. I'm not sure of timelines, but for the 3rd[1], isn't that what Instagram integrated ages ago with circles linked directly to a checkout - prior art?

[1] system to automatically match an item in an image, against its equivalent in a database with ecommerce links to purchase that same product.


I haven't read these claims, but I have been involved with patents here and there and: aren't almost all granted software and business model patent claims bogus in one way or another, usually either obviousness or prior art?


The most important factor of product success is probably timing. If you have had a problem for years, you are not likely to adapt a solution. But if you've only had the problem for a short time, like from one day up to a month, then you are much more likely to adapt the solution. So you basically have to be lucky, or go to market fast (within one month).


Wow, thank you for this. I admire your team's dedication and bravery. I found the details of all the assets of your company fascinating, since I myself know very little about classification or fashion. This is a bit of a business review type article, and I hope you write more about this and things go well for you all.


thanks theicfire :) maybe in the future!


We were in the same situation 4 years ago for our computer vision company, same team size. We targeted the wrong industry (beauty) and that was a mistake. Lessons to be learned and plenty of contacts for you as we went through the process of an acquisition. PM me, I am easy to find.


“Blogger” started like this, according to the interview in “Founders at Work”, an interesting book.

The guy of blogger had to fire pretty much everyone, and it was on bay still running, and everyone angry at the former employer. A few months pass and Blogger took off.


The product seems good but I can't help but think it would have been a much better strategy to try and look for an acquisition as soon as the patents were filed.

Also would have preferred a browser extension and website for the reverse image searching.


Society tends to tell stories about survivors. Just believe, believe even harder, sacrifice all, and you'll succeed.

We don't share stories of people who believed so hard, and then ended homeless and broke.

xkcd touches on the subject too ( https://xkcd.com/1827/ ), as they tend to do regardless of the topic.


reading the blog post I learned everything I needed to know to understand why they haven't been successful commercially. I wish them good luck but their business skills seem to be awfully lacking.


I have some criticism of the idea, actually. As someone who doesn't think they have good taste in clothes, I would not use this. I would want to upgrade my wardrobe and improve my style.


It seems like this idea could also achieve that by providing some kind of union of two taste-graphs. I'll input my wardrobe, then select from a set of pre-uploaded designers, and the algorithms can recommend clothes for me to purchase that are inspired by both my taste and the designer's.

What would be neat is if this system could automatically mine the taste graph from historical photographs pulled from social networks and the like, without effort on the user's part. (For example, everything you've uploaded to common social networks, or everything in your phone - if you choose to provide them)


If you run out of cash, maybe you shouldn’t still believe.

I don’t mean to tear it down, but the idea as it stands apparently isn’t a business.

You must change the product if you still want to achieve market fit somehow.


seems like tech that boutiques would say they’re interested in, but don’t bother because ‘what we’re doing now seems to work, so why change’. the one shop/brand who does understand and utilize the tech will take off


"If you read all the way until the end, I appreciate it. In return, I want you to discover a song in a language you’ve probably never heard before: Basque."

I've heard of Basque, off of Northern Spain. Also isn't there a bit of France involved?

Good luck for the future.


Start minting believe coins.


So they built some tech with no business model? Ooph


Eskerrik asko! ;-)


:)


Dangit I was hoping medium had decided to call it quits. Wish hn would highlight the blog name not the domain.


It's on our list.



killing medium or changing the tagging?


Good luck!


According to Genius you sue google.


I'm reading about your product and can only think one thing: "But, why?...."


Those arguments for acquiring patents are as weak as the patents themselves. I'll admit that I only skimmed and read parts of them but nothing seems patentable or particularly innovative to me. It just looks like standard software engineering.

> as a startup we need to create value and this method has proven successful in the past

This means nothing to me. You did something I'm not a fan of in the past (patenting software) so that makes it okay to do now?

> we’ve never thought of using patents against others

It doesn't matter that you've never "thought of using patents against others". Things change. And the way that business is going it seems inevitable that these patents are going to end up in the hands of patent trolls. Patent trolls don't usually come up with their own patents. They buy companies that aren't doing well just for the patents.

> And now, our number one driver for building IP: companies sometimes need leverage to negotiate or deal with the big tech players

I don't understand this one at all. What negotiations are you having where patents help?




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