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I find this article much more interesting as a cultural snapshot than a cautionary tale for founders. $20 million in investment before creating a minimal produc

I find this article much more interesting as a cultural snapshot than a cautionary tale for founders. $20 million in investment before creating a minimal product, $200 million to find out users won't pay for what you made, and everything propped up by a shell game around online ads. The assumption that the founder of this should have walked away with a fortune is just the cherry on top.

nostrademons 12y ago
I think that's part of the author's point: that valuations are, in a very important sense, largely fictitious, and that other actors in the ecosystem can make your valuation as large or as small as possible to suit their purposes. If you want to build a business, your actions need to actually do that, and you should be aware of and mitigate the implications of any wild valuation swings. Similarly, if you want to get rich (which may or may not be aligned with building a business), your actions should do that, and that also may or may not follow from getting a big valuation.
- paulpauper 12y ago
  As lot of people are saying that, but the empirical evidence suggests that the valuations, as high as they are, are remarkably sticky. I can only name two web 2.0 duds, zynga and fab, but the rest of the unicorns have either held their value or keep rising. It's not like Uber or Snapchat will become the next friendster and myspace. The failure rate for the $40-90 million valuation range seems much higher than the >$1 billion.
  - lacker 12y ago
    Zynga is still worth $2.6B so I would not call them a "dud". http://finance.yahoo.com/q/ks?s=ZNGA+Key+Statistics http://finance.yahoo.com/q/ks?s=ZNGA+Key+Statistics
    - notahacker 12y ago
      They might not be staring death in the face, but you'd call it a dud if you'd bought it at the "unicorn" valuation of $11.5Bn. Given Zynga is losing money not trying to grow so much as reinvent themselves to keep up with their users' short attention spans, I'd be much happier being short on them than long too. Though FWIW, I think Zynga's performance is probably better than Snapchat will do long term, since they at least nailed the art of generating revenue.
      - encoderer 12y ago
        Mind you, I've never used it, but Snapchat has 100 Million monthly uniques. I can't think of a single company who has reached a critical-mass consumer audience and not been able to monetize. Sure, winds change, MySpaces rise and fall, but it wasn't a monetization failure. Anecdotally, just a month ago I was walking and because i live in San Francisco I happened across a corner (Howard and New Montgomery) where there were ~20 girls about 13 years old being polled about their tastes, and the questions I heard waiting for my light was "Do you guys like smartphones?" ("yes", duh), "Is your phone more important than your TV?" ("yes", duh), and "What is your favorite app?" and the answer was unanimously Snapchat. Snapchat is the teenagers answer to the question many millennials have fretted about -- "how will ppl born today deal with having all 18 years of their development online". The answer is: they don't put it online. It's peer-to-peer and temporary by social contract, even if the technology is imperfect. So far, snapchat has played a savvy game. As an engineer, if they were based in SF, I'd consider working for them. They have tapped into something. Because my 28 year old wife has also been hooked on Snapchat for what seems like a lifetime now. Her most frequent contacts? Both of her 60+ year old parents, numerous cousins and aunts, etc. Her dad uses it to send stupid pictures that you might not expect from a 65 year old white haired CEO-type whose work is about as far away from tech as you can get.
        netcan 12y ago
        Popular and sticky in a revenue generating sense are not always the same thing. Crocs were a huge hit. They sold a lot of sandals quickly.
  - nostrademons 12y ago
    Plenty of once-highflying companies from the 2004-2007 vintage exited in down-rounds. Loopt. Xobni. Slide. Digg. Valuations were, in general, less than they are today, and the term "unicorn" hadn't been coined, but these were still companies that were valued at several hundred million at their peak and then sold for 10-50 cents on the dollar. It's easy for valuations to keep rising in a bull market - that's sort of the definition of a bull market. The big question is how many of those companies stick around when the tide goes out. Historically, bear markets result in a consolidation around a few winners that have managed their cash well and stayed ultra-focused on growth, but they also result in the death of everyone who hasn't been capital-efficient. Their places are taken by "sleeper" hits (remember, AirBnB was started in 2006, but they didn't close their A-round until 2009) that raise at a much lower valuation but have done the work to get true product/market fit.
  - _delirium 12y ago
    Groupon comes to mind as another one, relevant to the propped-up-by-ad-spend part of this story. They IPO'd at a valuation of $12.7 billion in 2011, and have since lost about 2/3 of that market value. However as a post-IPO loss of market value it doesn't implicate the same sorts of things described in this article.
    - funkyy 12y ago
      Poor market bet imo, Groupon is great at what it does no matter valuation. I would be very sad seeing it to run in serious issues due to its dropping valuation.
  - 31reasons 12y ago
    >> It's not like Uber or Snapchat will become the next friendster and myspace. They may very well become that. At least in Snapchat's case, things can change very quickly.
    - funkyy 12y ago
      I would actually bet on Uber to go there. Karma is a b.
      - ghshephard 12y ago
        On the flip (karma) side, as a non-driver, Uber has materially changed my life. I rank it up there with google maps, cell phones, and SMS/imessage/whatsapp in terms of its impact. I can click a button, and in most major cities, have transportation, often at a price less than taxies that would sometimes never show up, in less than 5 minutes. The transportation is safe, clean, and polite (something I would also not have ascribed to taxis in most cities.) And that's before it gets into logistics.
        dublinben 12y ago
        You could get the same thing from Lyft, and not support an unethical company. Most users of Uber probably don't care though.
        cwp 12y ago
        Yeah. I use Lyft rather than Uber, not to avoid supporting an unethical company, but because I don't want an unethical company tracking my movements.
        deleted 12y ago
        [deleted]
      - 31reasons 12y ago
        What about Coca-Cola ? It sells sugar water to kids.
  - abalone 12y ago
    Why are you so sure Snapchat won't become the next MySpace?
    - funkyy 12y ago
      Probably because he is user of it or his friends are. When you use something a lot of your friends are talking about, you tend to think of it as universally used product.
  - gaius 12y ago
    Lots of people said things like this in 2000 too.
BadassFractal 12y ago
Where do I find VCs that will throw that kind of money at me with no product? Am I in the wrong SF neighborhood? Getting to a much more modest A in our industry took years of work, and millions of users in traction.
- jforman 12y ago
  Moving to SoMa won't do it, but if you have a successful exit and a personal relationship with ballsy VCs you have a shot: http://techcrunch.com/2015/04/02/an-ex-googler-is-launching-an-in-home-care-startup-called-honor-and-raised-20-million/#.ijkzrh:MwZA http://techcrunch.com/2015/04/02/an-ex-googler-is-launching-...
x0x0 12y ago
I thought the key point was this: Before you close on any round, you should create a waterfall spreadsheet that shows what you and each other stakeholder would get in a range of exits – low, medium and high. What you will generally find is that, in high, everyone is happy. In low, no one is happy, and in medium (which is where most deals settle) you can either be penniless or "life-changingly" compensated, depending on how much money you raised and what terms you agreed to. It is simply foolish to sell part of the company you founded without understanding this fully. Given the most likely outcome conditional on that outcome being positive is a modest success, you should negotiate terms to optimize for that and assume that if you build the next dropbox, everyone will be so rich it will all work itself out. But yeah, if you blow $200mm without building an enormous business how on earth do you justify getting paid?
krychu 12y ago
That's exactly what I was thinking. "With the $10 million, Richard rents space in SoMa on a seven-year lease, hires lots more people, and within a few months he is able to roll out the minimally viable product to test the market." There was also $1 million of prior angel investment. So total of $11 million raised before having an MVP to test the market. Is this really representative scenario?
- adventured 12y ago
  There are cases of it, even though it's rare. Color Labs raised a $13 million series A, at a time in which it really did not have a product.
api 12y ago
But... He probably went to Stanford or Harvard. That certainly means he's entitled to get rich by 30, right?

nostrademons 12y ago

I think that's part of the author's point: that valuations are, in a very important sense, largely fictitious, and that other actors in the ecosystem can make your valuation as large or as small as possible to suit their purposes. If you want to build a business, your actions need to actually do that, and you should be aware of and mitigate the implications of any wild valuation swings. Similarly, if you want to get rich (which may or may not be aligned with building a business), your actions should do that, and that also may or may not follow from getting a big valuation.

paulpauper 12y ago
As lot of people are saying that, but the empirical evidence suggests that the valuations, as high as they are, are remarkably sticky. I can only name two web 2.0 duds, zynga and fab, but the rest of the unicorns have either held their value or keep rising. It's not like Uber or Snapchat will become the next friendster and myspace. The failure rate for the $40-90 million valuation range seems much higher than the >$1 billion.
- lacker 12y ago
  Zynga is still worth $2.6B so I would not call them a "dud". http://finance.yahoo.com/q/ks?s=ZNGA+Key+Statistics http://finance.yahoo.com/q/ks?s=ZNGA+Key+Statistics
  - notahacker 12y ago
    They might not be staring death in the face, but you'd call it a dud if you'd bought it at the "unicorn" valuation of $11.5Bn. Given Zynga is losing money not trying to grow so much as reinvent themselves to keep up with their users' short attention spans, I'd be much happier being short on them than long too. Though FWIW, I think Zynga's performance is probably better than Snapchat will do long term, since they at least nailed the art of generating revenue.
    - encoderer 12y ago
      Mind you, I've never used it, but Snapchat has 100 Million monthly uniques. I can't think of a single company who has reached a critical-mass consumer audience and not been able to monetize. Sure, winds change, MySpaces rise and fall, but it wasn't a monetization failure. Anecdotally, just a month ago I was walking and because i live in San Francisco I happened across a corner (Howard and New Montgomery) where there were ~20 girls about 13 years old being polled about their tastes, and the questions I heard waiting for my light was "Do you guys like smartphones?" ("yes", duh), "Is your phone more important than your TV?" ("yes", duh), and "What is your favorite app?" and the answer was unanimously Snapchat. Snapchat is the teenagers answer to the question many millennials have fretted about -- "how will ppl born today deal with having all 18 years of their development online". The answer is: they don't put it online. It's peer-to-peer and temporary by social contract, even if the technology is imperfect. So far, snapchat has played a savvy game. As an engineer, if they were based in SF, I'd consider working for them. They have tapped into something. Because my 28 year old wife has also been hooked on Snapchat for what seems like a lifetime now. Her most frequent contacts? Both of her 60+ year old parents, numerous cousins and aunts, etc. Her dad uses it to send stupid pictures that you might not expect from a 65 year old white haired CEO-type whose work is about as far away from tech as you can get.
      - netcan 12y ago
        Popular and sticky in a revenue generating sense are not always the same thing. Crocs were a huge hit. They sold a lot of sandals quickly.
- nostrademons 12y ago
  Plenty of once-highflying companies from the 2004-2007 vintage exited in down-rounds. Loopt. Xobni. Slide. Digg. Valuations were, in general, less than they are today, and the term "unicorn" hadn't been coined, but these were still companies that were valued at several hundred million at their peak and then sold for 10-50 cents on the dollar. It's easy for valuations to keep rising in a bull market - that's sort of the definition of a bull market. The big question is how many of those companies stick around when the tide goes out. Historically, bear markets result in a consolidation around a few winners that have managed their cash well and stayed ultra-focused on growth, but they also result in the death of everyone who hasn't been capital-efficient. Their places are taken by "sleeper" hits (remember, AirBnB was started in 2006, but they didn't close their A-round until 2009) that raise at a much lower valuation but have done the work to get true product/market fit.
- _delirium 12y ago
  Groupon comes to mind as another one, relevant to the propped-up-by-ad-spend part of this story. They IPO'd at a valuation of $12.7 billion in 2011, and have since lost about 2/3 of that market value. However as a post-IPO loss of market value it doesn't implicate the same sorts of things described in this article.
  - funkyy 12y ago
    Poor market bet imo, Groupon is great at what it does no matter valuation. I would be very sad seeing it to run in serious issues due to its dropping valuation.
- 31reasons 12y ago
  >> It's not like Uber or Snapchat will become the next friendster and myspace. They may very well become that. At least in Snapchat's case, things can change very quickly.
  - funkyy 12y ago
    I would actually bet on Uber to go there. Karma is a b.
    - ghshephard 12y ago
      On the flip (karma) side, as a non-driver, Uber has materially changed my life. I rank it up there with google maps, cell phones, and SMS/imessage/whatsapp in terms of its impact. I can click a button, and in most major cities, have transportation, often at a price less than taxies that would sometimes never show up, in less than 5 minutes. The transportation is safe, clean, and polite (something I would also not have ascribed to taxis in most cities.) And that's before it gets into logistics.
      - dublinben 12y ago
        You could get the same thing from Lyft, and not support an unethical company. Most users of Uber probably don't care though.
        cwp 12y ago
        Yeah. I use Lyft rather than Uber, not to avoid supporting an unethical company, but because I don't want an unethical company tracking my movements.
        deleted 12y ago
        [deleted]
    - 31reasons 12y ago
      What about Coca-Cola ? It sells sugar water to kids.
- abalone 12y ago
  Why are you so sure Snapchat won't become the next MySpace?
  - funkyy 12y ago
    Probably because he is user of it or his friends are. When you use something a lot of your friends are talking about, you tend to think of it as universally used product.
- gaius 12y ago
  Lots of people said things like this in 2000 too.

BadassFractal 12y ago

Where do I find VCs that will throw that kind of money at me with no product? Am I in the wrong SF neighborhood? Getting to a much more modest A in our industry took years of work, and millions of users in traction.

jforman 12y ago
Moving to SoMa won't do it, but if you have a successful exit and a personal relationship with ballsy VCs you have a shot: http://techcrunch.com/2015/04/02/an-ex-googler-is-launching-an-in-home-care-startup-called-honor-and-raised-20-million/#.ijkzrh:MwZA http://techcrunch.com/2015/04/02/an-ex-googler-is-launching-...

x0x0 12y ago

I thought the key point was this: Before you close on any round, you should create a waterfall spreadsheet that shows what you and each other stakeholder would get in a range of exits – low, medium and high. What you will generally find is that, in high, everyone is happy. In low, no one is happy, and in medium (which is where most deals settle) you can either be penniless or "life-changingly" compensated, depending on how much money you raised and what terms you agreed to. It is simply foolish to sell part of the company you founded without understanding this fully. Given the most likely outcome conditional on that outcome being positive is a modest success, you should negotiate terms to optimize for that and assume that if you build the next dropbox, everyone will be so rich it will all work itself out. But yeah, if you blow $200mm without building an enormous business how on earth do you justify getting paid?

krychu 12y ago

That's exactly what I was thinking. "With the $10 million, Richard rents space in SoMa on a seven-year lease, hires lots more people, and within a few months he is able to roll out the minimally viable product to test the market." There was also $1 million of prior angel investment. So total of $11 million raised before having an MVP to test the market. Is this really representative scenario?

adventured 12y ago
There are cases of it, even though it's rare. Color Labs raised a $13 million series A, at a time in which it really did not have a product.

api 12y ago

But... He probably went to Stanford or Harvard. That certainly means he's entitled to get rich by 30, right?