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1) Salaries. Many engineers, salesmen, etc who have been out of college for a year or two don't want to go back to making basically nothing. Yes, you can find t
by justin 18y ago
1) Salaries. Many engineers, salesmen, etc who have been out of college for a year or two don't want to go back to making basically nothing. Yes, you can find talented people who will work for you for little, but it's going to take a long time to do so. It's lovely to think that every company should be able to bootstrap off ramen indefinitely, but it turns out that often times you find that in order to do all the things that need to be done you need to expand beyond the founding team, and, so sorry, those new mouths want to get fed.
2) Capital expenditures. It's nice to run on EC2 for awhile, but it might not be the best hardware fit for your product. Similarly, it's nice to use Cisco switches and not crappy switches when you want your network to work at high volumes.
3) Marginal costs. When you have millions of people using your site all the time, bandwidth, power, free tshirts you give new signups, etc all cost more and more money.
For many companies that are pre-product/market fit, raising millions of VC might not make sense. But for many rapidly growing companies where there is a lag time between user acquisition and user monetization, something needs to fill in the gap. Guess what that is.
- zepolen 18y agoThanks for your first hand experience input. Your first two points I can agree with, but it's the 3rd that troubles me. Shouldn't a company that means to stay in business want to have slow but steady growth, a gradual climb, giving the them time to adapt. Doesn't a company want to put its money making plan in action before it goes big time? I know justin.tv has major bandwidth requirements, and from what I can see there is no revenue model apart from adverts in place, which probably can't cover the cost of the bandwidth alone let alone everything else. Please take no offence but if a company has a cash gap it's usually a bad sign, and throwing money at the problem will only work for so long.
- ojbyrne 18y agoIf you want a "slow but steady growth, a gradual climb, giving them time to adapt" then you shouldn't be financing with VC money. That's not what they do.
- redrobot5050 18y agoOrganic growth models, like you suggest, exist. But most of the time VCs want what 37signals calls a "Hollywood Launch". One day your site isn't live, just a beta to a few select friends/classmates, the next, everyone and their mother is checking out your live site. And you have a product to sell/revenue model.
- jfornear 18y agoExactly... startups aren't aiming to maximize profits (where marginal cost is equal to marginal revenue). When marginal cost is greater than marginal revenue a startup can either a) find more vc funding to raise marginal revenue, or b) cut expenses to lower marginal cost. Startups will press a) until the button breaks leaving b) the only option.
- zepolen 18y agoI took an economics class at school and while I don't give much merit to theory vs practice, one lesson that was taught was that if MR < MC you close the business /right away/ because with every passing day you are losing money. Now when investing it's a different matter, but the point stands, and so the after b) the only real option is actually c) liquidation
- jfornear 18y agoBefore closing, you would want to first look at short run vs. long run.
- MaysonL 18y agoThe point is that MR and MC are not fixed. MR tends to go up with number of users (network effects), MC tends to go down (economies of scale).
- zepolen 18y agoMR doesn't go up with number of users. "Marginal Revenue" by definition is the difference in revenue from selling one extra unit. In many cases it would be the price of the product being sold, and is fixed. Economies of scale works on average cost, more specifically long run average cost, while it contributes to the MC going down, MC is more affected by fixed vs variable costs in the short term and more importantly it increases at a certain point when you reach the maximum capacity of your current infrastructure.
- jfornear 18y ago