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  • How does your company fail after raising $50MM?

  • This was a real comment/question on one of our Startup Forensics videos.

  • For someone outside the startup ecosystem, the amounts of money these companies raise

  • just seem obscene.

  • Uber has raised $20 BILLION dollars in funding, and it's yet to turn a profit.

  • WeWork raised $22 BILLION dollars, and it's currently on life support (which is funny

  • because our New York office is in WeWork, which makes it... weird).

  • Even smaller companies deal with rounds in the millions of dollars, and valuations in

  • the hundreds of millions.

  • So why do investors pour so much money into these tech startups?

  • Today, I'm going to tell you why.

  • Why do tech startups raise money?

  • Most tech companies raise money to accelerate their expansion.

  • Let's look at some examples,

  • There is an open market opportunity, and the company can be the first one to make it (Vivino).

  • The first e-commerce platform dedicated to wine. Which is a pretty huge market.

  • The company has a new technology that can replace an existing product or service on

  • a very large/established market (Uber and Taxis, or Facebook in Social Media).

  • The company can generate a lot of profits in the future, but the model only works if

  • they scale (Amazon).

  • Neither of these businesses could be what it is today if they hadn't raised the money

  • they did.

  • Who would have paid for Facebook's servers before they ran ads?

  • Or Uber's subsidized rides?

  • 'Traditional' businesses that can't scale this fast are usually not venture-funded,

  • because their growth is not that capital intensive.

  • Companies typically raise money to expand rapidly.

  • Rapid expansion is capital intensive and will make the company spend more than they make

  • (burn rate).

  • A good round of funding should be a number that lasts the company between 18 and 24 months,

  • after which they either:

  • a) raise another round of funding (for continued fast growth),

  • b) become self-sufficient/profitable (which likely translates to slower growth),

  • c) or go out of business (and they make it to our Startup Forensics series).

  • During those 18-24 months, as I said, the company will deploy its budget aggressively,

  • certainly spending more than they make, with the promise of maintaining or accelerating

  • their growth rate and increase their chances of raising more money.

  • Now, this is a common misconception.

  • Raising money is not the goal, but as we saw before, companies like Uber or Amazon can

  • only be profitable, well, if they own the world.

  • As a general rule, you could take a round of funding and divide it by 24 to calculate

  • how much money the company is burning every month.

  • $3MM is more money than the majority of the world population will earn in their lifetimes,

  • but it seems like pennies to a tech company.

  • Well, that's because it is.

  • We know many of these tech companies are based in the Bay Area or New York, so let's talk

  • about salaries.

  • A full-stack engineer in either of those cities is likely expecting to make north of $100,000/yr,

  • probably closer to $150,000/yr.

  • In early company stages, they might take a below-market salary in exchange for some stock

  • options (go check our video on Stock Options), but the 10th or the 20th employee will want

  • some benefits- because everybody else is offering benefits.

  • That might range from Uber rides to subsidized food, computer upgrades, medical insurance,

  • paid vacation... and all of that adds up.

  • You also have to count the extra seat in your office, which is at least $800/mo on most

  • co-working locations.

  • So you are probably looking at an overhead cost of 25% on top of every employee.

  • Let's round that to $200K/yr per full-stack engineer.

  • Five engineers in these cities translate easily into $1MM per year.

  • If you are building a tech product, you need quite a few of those.

  • There's a delicate balance of how many people you need to build a product as fast as possible.

  • Doubling your staff doesn't translate into 2x productivity!

  • Companies have other expenses, of course- accountants, lawyers, servers.

  • To give you an idea, a company like us, Slidebean, spends about $20,000/mo in web services alone-

  • that is, server costs to AWS and SaaS fees to the many platforms we use in our day to

  • day operations.

  • The first time we spent more than $1MM in a year, it blew my mind how I held $1MM in

  • my hands, and then let it go.

  • I made a video about it.

  • Let's take the Facebook example.

  • First, Instagram.

  • Instagram raised 3 rounds of funding.

  • a Seed $500K round in October 2010.

  • A Series A, $7MM in February 2011 and finally a $50MM Series B round in April 2012.

  • At that point, the company was valued at $500MM.

  • The valuation determines how much stock in the company investors get.

  • In April 2012, FB acquired Instagram.

  • For 1B dollars in a combination of cash and FB stock.

  • At the time, Instagram had 27 million registered users and 13 employees.

  • This means that the investors that had wired the money only weeks prior, made a 2x return.

  • So the last investors just doubled their money in a matter of weeks.

  • Previous investors probably made upwards of 100x their original investment.

  • This transaction is what every single angel investor and venture capital

  • investor looks for.

  • It's a high risk, high reward business.

  • Now, if you've watched 'The Social Network' you probably remember how much Mark Zuckerberg

  • stalled monetizing the site.

  • The script is based on true events and indeed, 'ads aren't cool'.

  • Facebook rolled out ads in 2007.

  • The date the press release came out on Facebook ads, the company had already raised about

  • $300MM.

  • It hadn't made a single dime in revenue.

  • Why did they get $300MM for a business that makes no money?

  • The company had around 450 employees.

  • Simple math tells us this operation costs at least $100MM per year.

  • The page was seen by 40 million people per month and people spent upwards of 4 hours

  • per day on the platform.

  • And finally, while the business made no money then, it had a clear path to making money:

  • enabling ads for this massive amount of traffic that the site had.

  • This is a long term bet, but it paid off.

  • Facebook made $70.7 billion dollars in revenue last year.

  • They translated into $6.9 Billion dollars in profit.

  • Again, Facebook would not be the company that it is today if they hadn't expanded that fast,

  • that aggressively.

  • Also, Trump probably wouldn't be president, but that's none of my business.

  • Sometimes that bet doesn't work out.

  • A likely story is that the company can't expand fast enough to bring in a new round of investors,

  • and does not have the ability (or the willingness) to cut down costs and become profitable.

  • One of our competitor products, a company called Bunkr, ran out of business because

  • they bet on getting millions of free users into the platform, rather than focusing on

  • monetizing them.

  • They couldn't get to the number of customers they needed to get investors to believe in

  • the business.

  • A very valid approach.

  • They eventually tried to monetize the platform, but it was likely too late.

  • This story has stuck with me because it's very close to our own experience at Slidebean.

  • We considered the 'millions of users' route, but the guys from 500 Startups pointed us

  • in the other direction and quite literally saved us from that destiny.

  • I connected with the founders briefly after their announcement, and I have nothing but

  • respect for them: like-minded people who sought to solve the same problem

  • we are trying to solve with Slidebean.

  • It was just a simple bifurcation in the path and they just chose the other route.

  • Our new series Startup Forensics explores these failed company stories, trying to understand

  • what went wrong, and hopefully letting you learn from their mistakes.

  • So in summary, companies raise money to expand fast.

  • These are business that is capital intensive, but if their variables align, they could change

  • the world (and make a shit ton of money).

  • Both of those things motivate entrepreneurs, and that's why we're here.

  • If you want more of our videos on how to start a company, how to run a company,

  • and then how to fail a company in Startup Forensics, hit that Subscribe button.

  • See you next week!

This video was brought to you by us: Slidebean.

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B1 中級

なぜスタートアップはミリオンの後に失敗するのか? (Why do startups fail after MILLIONS of dollars?)

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    吉川友章 に公開 2021 年 01 月 14 日
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