For what it's worth, I emailed with the CEO of Everpix a couple of days ago to tell him that my organization may be interested in buying the app so that they wouldn't have to shut it down.
All I was asking for was a telephone call to discuss the possibility, but I was denied even that opportunity. I wish I knew what was going on behind the scenes at this point that would lead to the decision not to field last-minute offers.
One of the articles mentioned they already sold some of the tech (but not the branding) to fund the orderly shutdown. Not sure what that involved, maybe just someone wanted the source code.
Yes it is fun to hate on VCs as there is a lot wrong with the model, but this article is misguided. If you want to run a business growing linearly which makes a profit, don't take VC. There is nothing wrong with that, but it doesn't fit their model.
But if you take VC, go in knowing how they measure success. And it's based on mega-wins - not on profitable, dividend-paying companies.
Everpix might have been a great co. They just weren't a great VC- backable biz.
Agree so much. Everyone getting VC investment should know they're looking for 10x return. By aiming for a $5M Series A, Everpix indicated they were expecting an exit at least in the $60M+ range.
Everpix had a great business that could have easily hit $1M/yr in revenue, giving everyone a good income and a great place to work. However this wasn't the business they were trying to get funded.
Can someone explain why a fund cannot be structured to make wins at the $100m level as opposed to the $1b level? Its bizarre that free money creates funds so big they need insane 1,000x deals to return a net 15-20% portfolio premium over bonds trading at (yield-equivalnt) peanuts.
The problem in going for $1B's (as an investment thesis) is that these companies are outliers so extreme you are beyond lucky to predict them, and even if they show up on your radar, and you can get some edge, they are so small in number that they cannot sustain N=Large number of VCs. Its just not a strategy 200 funds (20? maybe) can pursue rationally at the same time. Or am I missing something?
Those funds exist. They're smaller funds. Everpix was going to the "best" (biggest) VC funds and asking for a relatively large amount of money for a Series A. VCs typically aim for 10x return (let's keep the hyperbole out of this discussion, please) so Everpix indicated they expect a return of at least (1.5M + 5M) x 10 = 65M. Add in later rounds of funding and the ~1B goal is not unrealistic.
It takes a roughly constant amount of time to do a deal, so funds have a minimum deal size below which they aren't interested.
VCs typically aim for 10x return (let's keep the hyperbole out of this discussion, please)
Thats why I said $100m should work. You suggest $65m. That's the same order of magnitude. It was reported that the VCs were turning them down because $1B was "never gonna happen"[1]. That's why the math piqued my interest. If its just reporting hyperbole...that would be one explanation.
[1] Which implies they were looking for that extra ~order of magnitude
You're assuming their business plan included only the one round of funding. I'm assuming they were planning extra rounds or the VCs believed they would need extra rounds.
If they went up to, say, a Series B at 10M and a Series C at 20M, which are reasonably conservative multiples, they are at ~36.5M, so looking for a ~400M exit. It's not hard to need that ~1B exit if your business plan is "everyone in the world using my product," and it appears this is what Everpix were aiming for.
I hear what you are saying. But i still feel like there is some mixture of thought that should let these guys take a shot at a 50 to 100m exit, without (on the one hand) tripping over 35k aws bill; and on the other blowing through 50-100m of invested capital. because clearly, if the team is pitching those are the only options, its gonna make people nervous. but now it seems the mirror is pointing back at the guys and not at the VCs...
Because of power law distribution,
"... the 100th employee at Google did much better than the average venture-backed CEO did in the last decade."
So even being late on a $1b+ company is better then being first on a $100m company but orders of magnitude. And it's not worth the opportunity cost of going after $100m companies.
Most VC funding is about winning the lottery. But where an actual lottery is a zero-sum game (less than, actually), in the VC lottery many investors can be winners, all it takes is being sufficiently diversified into enough different startups with strong potential.
Not everyone is going to win the facebook lottery (Accel Partners, for example, achieved a ~40,000% RoI), but there are lots of lotteries in play. And the VCs that win those lotteries then end up with the most money. So the most money in play in VC-land tends to be from people who have played the lottery game and like it, so they want to continue to play the lottery game.
It's a numbers game. Let's say that 99% of your investments flop. That means the 1% of successful investments have to make up for all of the losses from the others (and earn a return). To earn a total return of Y%, you need that 1% of investment to earn (100+Y)x returns. If you want to do this annualized over a 5 or 10 year investment, the required return jumps dramatically (and you start talking about 1000x deals)
There is a very good reason why investors and a lot of entrepreneurs in the consumer space tend to support free or freemium products and that is because building a paid for consumer service is extremely difficult.
Reaching users is incredibly expensive (once you have the audience, you can charge others to access it - see how it works), conversion rates are low and consumers are reticent to spend.
By being free your product becomes your marketing. You either have a paid product and start paying $50-500 to acquire each user, or you have a free product and pay $0.05-10 to acquire each user.
You can't just cut out the free product part and magically retain the paid part, as this example does with Everpix.
There is also an element of network effects in a lot of consumer business models, with a winner-takes-all (or most) landgrab.
Things are entirely different in the enterprise sector, or selling to people at work.
The article in The Verge and Andrew's post[0] do a good job of explaining that
With the amount of money they had raised, the expectation from investors was that their flywheel would already be setup and working and new funding would accelerate it (Series A being the new Series B).
Media coverage of startups is all at the pointy end - companies that have raised money and are successful, most startups don't raise continuing rounds and the "Series A crunch" is real. The question should be inverted, why should Everpix get funded.
Despite having a product that was loved, was free, had good word of mouth and coverage etc. they still didn't get funded. Not a unique or unusual situation, and only covered in this case (as opposed to the startups that die out quietly) since the founder was willing to speak to a journalist about it.
Could it have worked with no funding, a leaner startup and as a paid product? Who knows, but I wouldn't use their freemium numbers to make that case.
I think it was covered so widely because everpix did a great job on pr and getting the story out there. I assume the story will help with either generating more offers for investment, sale, or employment for the team.
Isn't image hosting a horribly crowded space, completely filled with big hitters? It seems like they just weren't close to competing in scale with the likes of flickr, imgur, or instagram. It just seems like there isn't room for another small image host unless they're showing serious potential to be one of the big ones. Instead of being an image host, they could have stayed leaner by being a hub for other image services, but that also would probably be less interesting to investors because they'd just be latching off other image spaces.
I'm not sure that Everpix is the case study some are making it out to be.
Yes, there were obviously things the company could have done differently, but at the end of the day, you still have a business that, according to the original Verge article, only generated ~$250,000 in subscription revenue against spend of more than $2 million.
Forget headcount and payroll (both of which are arguably "modest" by Bay Area standards today): operating expenses alone exceeded revenue by $100,000. Everpix could have halved salaries and even if you mistakenly assume that the company could have attracted and retained employees talented and motivated enough to continue building a great product, it wouldn't have made a difference.
If Everpix transitioned from a freemium to paid model, it wouldn't have made a difference either. Operating expenses would decrease, but user acquisition costs would almost certainly skyrocket (as nikcub points out above).
Venture capital can help build great companies, and it can lead companies to pursue a high-risk growth strategy that ends in failure. But in this case, based on the numbers and story as told, it appears that we simply have a very good product that was never likely to be the foundation of a sustainable business, with or without venture capital.
It seems like there are two paths to sustainability in a startup:
1) Become profitable early and stay profitable. This gives you the luxury of not relying on outside investment, though the option to take funding still exists.
2) Grow, grow, grow. If you take a million dollars today and come back for more money a year from now, you need to justify that the million dollars produced something.
Everpix did neither. They weren't profitable and their growth did not justify the money the took.
> (both of which are arguably "modest" by Bay Area standards today)
Not all business models and great tech companies need to be created in the Bay. Does it reduce HR risk to do so - sure, but there is an ugly side effect to this, increased risk of operating expenses.
Unfortunately this line of thinking is pretty infectious and affects more than just the Valley's pre-IPO startups.
I work for a large-ish company (will be approx 3000. employees by YE 2014) that has been public since the last tech bubble. We've run in the red for the last six years pivoting into an entirely new line of business -- essentially new investors bought an already public company and sold off the existing business to avoid having to IPO. Their exit strategy for the business is to eventually have one of our client companies buy us out. All of our contracts are structured to make such an acquisition a (from our management's perspective) sweetheart deal.
Only the way we've been going about it is all wrong. Basically these "very large companies" that we work hard to land contracts with we allow to give us very unfavorable terms and to pay us below cost. This is in a market where we have only one competitor and they can't come close to providing our level of service. It's blatantly obvious that they're getting better deals at the price for service they have now while we take all of the risk/loss.
We had our very first break-even quarter sometime this year (even by GAAP principles!) and the board cut everyone very big checks that put us back in the red (even by our non-GAAP principles!). Our executives are not tech executives, they're MBA-types from the retail and call center industries, but they drink the exact same Kool Aid.
I think their line of thinking goes something like this:
1) We have a really awesome product.
2) We lose tons of money providing that product. (Aside: Holy shit, employees that actually are our product are expensive! We couldn't possibly afford to hire developers to make our large staff more efficient! No way! We're a technology company!)
3) ???
4) Our customer base that we're totally supplicant to will buy us out because fairies.
Eventually this is going to end in tears and 3000 very overworked people are suddenly going to be much less so.
No self-respecting engineer should or would take $50/60k a year in the Bay Area (heck, most of the country). It's fine for founders to pay themselves that (and, indeed, they probably should) but asking employees to take that tiny salary for your dream is never going to fly.
Depends on the type of business, if they are going for the get big fast model that is probably true. If they are in it for the long haul something more sustainable will prevent founders from eventually loosing motivation due to finding it hard to make ends meet.
This is why the Bay Area is a horrible region for a lot of startups, especially ones that plan on pursing monetization early. Few startups can afford inflated Bay Area salaries with minimal VC funding. Unless you're really capitalizing big-time on the VC culture of the Valley, it's a bad place to be for a startup--and this is illustration of that.
For comparison, a $60k/year starting salary is the norm in most American cities (and it provides exactly the same lifestyle that $100k does in Silicon Valley).
I would argue that the intangibles of basing in SV are probably worth more than the inflated salaries are. After all, you really shouldn't be hiring anyway until you're funded.
Starting salary for engineers on average is about that level. Imagine if you took out all the Valley and NYC salaries- you'd be far closer to the above number than you'd think.
Everpix got beaten by Google, Apple and Yahoo who offered free personal photo libraries. Sure the big companies don't have all of the features of Everpix, but they have the ability to instantly advertise to their 100 million user+ networks. This is why VC's always ask you what you're going to do when Google does "your idea."
The thing about ephemeral messaging is that no one would trust Apple, Google, Facebook or Yahoo to actually delete your content because their business models are based on collecting and mining your data. Snapchat is in a position that could only have been achieved by being the "little guy" and no other little guys are contesting them right now.
How on earth does one spend $35,000 on hosting/storage a month? It simply baffles me that people would even consider this an option.
There are so many better ways than just blindly throwing money away like this. Heck, you could buy your own servers and have a dedicated guy for it and still be off cheaper. Geez...
The article's main point seems to be that Everpix could have done well by paying employees well under (half?) market rates and succeeded. Maybe by handing over a lot of equity to employees (probably most of it), it may have even worked. But I think the author is missing the opportunity cost here. All of these Everpix employees could likely have easily found employment in other startups with more VC money and received twice the pay Everpix could give them. This is the market in action - we have enough of these photo sharing gimmicks already. Those employees are better used in other startups who can actually make enough money (read: fulfilling market needs better) to pay them properly, and so I think it was the right move to shut down and move on.
RE: "we have enough of these photo sharing gimmicks already"
RE: "I think the author is missing the opportunity cost here"
The fact that there's already entrenched photo sharing kings means that you don't have to be first to market, overspend, or rush. There's no time crunch here, meaning that a great product could have been built well - over time - on budget, and still have had success.
Did you even read the article? The photo storage / sharing / librarian market is HUGE. Definitely large enough to support multiple players, even marginal ones that make $3-400k/yr.
Instead of paying employees half market rates, those employees can go and work on creating a VR app that could be used by millions of people, or some other opportunity. And they could receive full pay.
Why should these employees need to receive half pay when there is opportunity for them to receive full pay working on a different problem? I'm sure they could make great waiters at a local restaurant and receive a livable wage, but is it the best use of the opportunities they have? I'm going to go out on a limb and assume those 6 employees were excellent given how well Everpix was run.
> Instead of paying employees half market rates, those employees can go and work on creating a VR app that could be used by millions of people, or some other opportunity. And they could receive full pay.
Yes, you're right. But does a photo sharing service really need those kind of employees? Is there a need to be located at a technology cluster like the SV where developers are expensive and a scarce resource?
Services like Everpix are - in terms of technology - pretty trivial. They can be built anywhere in the world by average developers. No need to hire expensive Stanford PHDs to do a job a kid from the local community college in Kentucky could do.
What really scares me about the US economy is that truly innovative and sustainable companies like Tesla are only possible because there's a single huge investor, and the unwashed masses of investors throw money at handwaving feel-good agencies like Facebook and Twitter.
This wouldn't have been enough to save them, but if your AWS bill is $35,000/month, it's likely much cheaper to buy (or even lease) hardware and co-locate -- even if you factor in making 1-2 new hires to support the hardware.
They were making enough money to pay the AWS bill; it was the salaries that were too much. They were profitable per-user, they just didn't have enough users.
(by 'much' I mean volume, not amount. Developers are expensive.)
I'm guessing they just didn't care, because they were VC backed, and didn't understand that 2M is not that much money if you have 6 people and a storage-based hosting service.
You underestimate the costs associated with hardware. Multiple locations, redundant tier 1 pipes, 1-2 new hires per location, etc. While you can save some money, it isn't as much as you'd think.
I am really starting to dislike this approach to building tech companies. I have been speaking out about it too. There are too many startups that have no real value besides the fact that someone has invested in them. The cycle is: fund a company, make it appear successful so others invest in it, cash out and let it fail. 99% of startups will never be as big as facebook and it's ridiculous to treat them the same. Silicon Valley is really strewing shit up for the rest of us. I want a long term, viable career and all venture capitalists seem to be interested in is mining wealth from the industry until it's dead. Essentially every company that is propped up by investment is a small bubble ready to burst. There should be a law against investing so much money in otherwise worthless ventures. It's not a level playing field and it's barely a free market. I have to go with crappy companies because the good ones were put out of business by bloated subpar startups. I don't always want something new. I want things with long term value and use ability. Don't get me wrong. I apply for funding in ycombinator an others but it's not because I believe in what you do, it's because I want your money. Money equals power and I want to change some stuff.
So what's the link between charging money and growth?
P/M-fit is easier to achieve when price is $0.00, but that isn't a sustainable business model.
Perhaps the ideal is achieving P/M-fit in a large market at price that moves the needle for the business (i.e. demonstrates revenue traction) but does not appear to hinder growth.
Growing Virally (where virality coefficient and cycle are really important[1]) is different than growing with Paying Users (where Lifetime Value (LTV) and Cost to aqcuire customers (CAC) is really important[2]) that its different than growing through very high retention rates[3]. You can achieve P/M fit with any of them.
You can argue that you don't need growth. Which investors won't particularly like (in particular, VCs have LPs to give a return on investment[4]). But ultimately, if your company is not growing in any way, is any of your work actually making a difference? Are the people working on the company getting a return on investment on their time investment?
Growth also doesn't need to be about money (or eventual money, as it can be the case if you are growing virally). Think of Khan Academy (which is a Non Profit[5]): they can grow on more people using them, and on people using them more. They can also grow on impact they have on the students.
Although, Everpix was great as a product it was market that killed their chances. Today, for every photo I take from iPhone it is backed to Google+ and iCloud. And then there are other platforms like Flickr etc. However, I believe Everpix had superior organization technology. But did that matter to masses?
Institutional investors and VCs don't take market risks. They are willing to take risks associated with product, technology and even the team. But they never take risks with the market opportunity.
In the verge article, what did they get in terms of feedback when investors passed their opportunity -
"The reaction was positive for you as a team but weak in terms of whether a $B business could be built."
Also, I'm surprised why didn't team focus on any other revenue streams?
While the first part covers my feelings very well about the current 'state of the nation', I'm more concerned that newly minted millionaires (not just from a recent IPO, but others too) see this as status quo as they join the Angel/VC group.
This is not the trend, and making it so is very dangerous.
Silicon Valley has a great opportunity to become an integral part of the resuscitation of the US economy. This is a bad time for a bubble burst.
If the bubble is about to burst, smart money will start making safe bets.
Interesting that this story is popular the same day Twitter goes public. Twitter didn't focus on revenues or profits early. Twitter didn't take months and months to get to market and agonize over every product look and feel decision. Twitter made it's early investors billions of dollars. Twitter is a household name. Twitter may or may not end up generating billions from mobile. FB certainly showed it can once that became critical.
I don't know what you do or don't understand, but your post isn't entirely accurate. VCs invest in early-stage companies with strong potential for high growth. That means companies like SnapChat, yes, as well as companies like Amaranth Medical [1].
Your post takes the example of two startups in the consumer photo industry and generalizes it to startups and VCs operating across an entire spectrum of industries. That alone suggests a limited understanding of VC funding.
I won't suggest taking VC funding in all (or even most) cases. But it is the right thing to do when your company's interests are aligned with the VCs.
So, I'm trying to wrap my head around this. In order to be like Snapchat[Facebook|Twitter|and the like], you must defer monetization. But when you're starting up, cash is scarce and you need money ASAP. Since you can't always depend on getting external funding, you need to charge customers early.
How do you start a business if you can't convince investor to put money in, and not allowed to receive money from customers?
If you can't convince an investor like Evan Williams could, then you need to either be extremely frugal and keep your day job for a while, or quit your job and bet your life savings, or don't bother. There isn't a "bootstrap to become the Next Facebook" path.
I think it is a good idea when founders are able to always project what is going to happen with money and adapt earlier, instead of waiting to be out of money or hoping in the next round. This mindset not only saves you from early failing, also is very valuable once you turn your startup into a profitable stage.
I wonder if Facebook though of becoming the next MySpace when they built their platform.
I would wager not. The goal was to build something useful and they were never looking to be acquired if they were we would probably never have heard of Facebook but good look recreating the great successes with a failed paradigm.
what's 6800 paying users of everpix to millions of non paying users of snapchat? snapchat has the sporadic but consistent attention of millions that has considerable value and should not be written off because it hasn't been monetized... yet
Snapchat also hasn't proven it can generate a single real-world dollar from end users or advertisers.
They could implement advertising, fuck the entire service up, and all the teens jump ship to the next app that allows you to easily import all your contacts.
There's no "lock in" with social networks like Snapchat. Want proof? Friendster, Myspace, etc.
The main theme I was trying to get across is that it's more realistic to build a profitable business, instead of throwing efforts towards eyeballs, vc-cash, and a lottery ticket chance of cashing out.
Hmm it's actually somewhere in between, it looks like about a quarter is sticker purchases, a quarter sponsored stickers, and a half in-app purchases. The above articles is off, if you read the link in the article it gives the breakdown above.
There's nothing about Snapchat that is valuable. It's an app that could be thrown together in a few days, and a userbase that is fairly fleeting. If they incorporate invasive advertising, then people will just move to a clone of it. How else would you make money with the retched thing?
I was at a social apps conference a few months back and some interesting statistics were shown about Snapchat. One of the statistics was that Snapchat allows picture messages to be sent 10x faster than regular SMS. I found this fascinating because this is when I stopped looking at Snapchat as an incognito picture sharing app and more of a new, more efficient communication channel.
I don't know how Snapchat plans to monetize. It might be advertising. It might not be. But it's hard to dismiss Snapchat as being valueless when clearly millions of users are using it every single day.
Yeah, Snapchat is much more than a new way to send dick pics to unsuspecting girls. I use it more than SMS these days for legitimate communication with friends. Not the kind of serious communication which requires precision, but the informal type of chitchat you have with people when you hang out. People are underestimating the concept, some form of picture-based communication is around to stay. But I can't say that it'll be Snapchat which is the end of the line, and I do think they will have trouble monetizing.
I've never used it. Is there not a network effect, like Facebook, where leaving is costly "because all my friends use Snapchat"? This switching cost is what ultimately allows social networks to place ads without people jumping ship.
You're right and this is the actual measured risk taken by VC in this case. It's a straight forward bet: if the horse they are better on (snapchat) is given enough of an opportunity (money) to implement far better than any potential competitor without that opporunity, then Snapchat can become a Facebook.
The key differentiator between Snapchat and other competitors is that Snapchat has millions of dollars to throw at problems which, if implemented well, will give them considerable product differentiation through access to the best talent and marketing.
It's a high risk gamble - welcome to VC capital - but it's the business VC is in.
There was a comment on this page that just disappeared when I tried to reply to it - not [deleted], just gone. id=6695365. And nothing obviously trollish about it to merit deleting. Database problem?
Path is another interesting example. They seem to be circling the drain right now, but they might still be able to raise funding at a flat valuation (same valuation as last time).
All I was asking for was a telephone call to discuss the possibility, but I was denied even that opportunity. I wish I knew what was going on behind the scenes at this point that would lead to the decision not to field last-minute offers.