Teespring Says It's Minting New Millionaires Selling Its T-Shirts, Raises $35M(forbes.com)
forbes.com
Teespring Says It's Minting New Millionaires Selling Its T-Shirts, Raises $35M
http://www.forbes.com/sites/alexkonrad/2014/11/18/teespring-says-it-making-millionaires-raises-millions/
9 comments
Yeh absolutely. It's another extension of the sharing economy. These kind of business models change societal habits and as generations shed, the sharing model will become more prominent (It's even been predicted by Gartner; not that this should be taken as gospel). Think about the amount of income you could make from renting your flat (AirBnB), Being a driver on Uber, Selling your skills on Udemy and now selling your fanbase personalised t-shirts on TeeSpring. Indeed it's similar to sites like Zazzle but adds a twist by combining the concept with Kickstarter.
We are making entrepreneurs out of ordinary people, it's fking awesome.
We are making entrepreneurs out of ordinary people, it's fking awesome.
It's not fking awesome. Most people should not be entrepreneurs. They don't have the correct risk profile. We're turning every job into a casual arrangement, and because there is a tech based intermediary we cheer it on. How many of us want to actually build a career, raise a family, or retire on the backs of a half dozen hustles?
"Uber driver" is just another term for unemployed.
"Uber driver" is just another term for unemployed.
You know, getting paid on commission is nothing new or invented by techies. Do you think cab drivers had steady salaries before Uber came about? No, they earned depending on the rides they made. And in places like NYC, they actually start the day underwater, after paying $100+ to lease a medallion for just one shift.
Not all sharing economy "jobs" are created equal though. Being an Uber driver (or Taskrabbit or Instacarter or Postmate courier,etc) is certainly closer to being a servant than being an owner of a business. If we're thinking of societal impact, we have to also keep in mind the widening disparity between owners and workers.
I'm not sure I agree that it's part of the sharing economy because the users aren't gaining income from assets they already own. Teespring is making sure that they control the platform that users need to continue doing business, similar to how Apple controls the App Store, Google with AdSense, Amazon, etsy, eBay, etc. If they can expand the offering beyond t-shirts, this is a really interesting way to open small scale production to a broader audience.
> We are making entrepreneurs out of ordinary people, it's fking awesome.
Or, people are naturally entrepreneurs stifled by regulation and AirBnB, Uber, Udemy and TeeSpring are simply allowing the people's natural entrepreneur spirit to shine through by shifting the compliance burden away from them.
Or, people are naturally entrepreneurs stifled by regulation and AirBnB, Uber, Udemy and TeeSpring are simply allowing the people's natural entrepreneur spirit to shine through by shifting the compliance burden away from them.
>>We are making entrepreneurs out of ordinary people, it's fking awesome.
>people are naturally entrepreneurs stifled by regulation and AirBnB, Uber, Udemy and TeeSpring...
Not really. Renting out your house to someone is not entrepreneurial. Neither is driving people around in your car or teaching people. Further, I know of no regulation that prevents people from teaching for money. As far as Teespring "designers", those people are not entrepreneurs either. They are simply affiliates who market for Teespring and who also happen to give over whatever creative ability they have to Teespring with the hope of being paid for it.
In all of these cases, the people being touted as "entrepreneurs" are no different from employees working as independent contractors, and in some cases it's worse. The only entrepreneurs here are the companies that built the platforms and convinced people to give over their time and resources to generate revenue for their business.
One can make value judgments about whether it's good or bad for the people who participate, but to say that they are creating entrepreneurs is literally saddening.
>people are naturally entrepreneurs stifled by regulation and AirBnB, Uber, Udemy and TeeSpring...
Not really. Renting out your house to someone is not entrepreneurial. Neither is driving people around in your car or teaching people. Further, I know of no regulation that prevents people from teaching for money. As far as Teespring "designers", those people are not entrepreneurs either. They are simply affiliates who market for Teespring and who also happen to give over whatever creative ability they have to Teespring with the hope of being paid for it.
In all of these cases, the people being touted as "entrepreneurs" are no different from employees working as independent contractors, and in some cases it's worse. The only entrepreneurs here are the companies that built the platforms and convinced people to give over their time and resources to generate revenue for their business.
One can make value judgments about whether it's good or bad for the people who participate, but to say that they are creating entrepreneurs is literally saddening.
I agree with your points. I was stretching my usage of 'entrepreneurs' to make a point as you noticed.
> Further, I know of no regulation that prevents people from teaching for money.
I do, because unfortunately the government has been using them against bootcamp schools:
> To achieve compliance, institutions must pay a $5,000 application fee; provide a course catalog, enrollment agreement, and performance fact sheet publicly on their websites; and submit a few other minor documents included on the application.
http://readwrite.com/2014/02/18/why-coding-bootcamps-should-...
> Over the past month, California regulators sent cease and desist letters to many of these hacker boot camps, saying they run afoul of the state’s educational laws, as first reported by Venturebeat. “They’re not properly licensed, and the law requires them to be licensed to offer an educational service like they are,” says Russ Heimerich, a spokesperson for the California Bureau for Private Postsecondary Education, or BPPE.
http://www.wired.com/2014/01/california-hacker-bootcamps/
> Further, I know of no regulation that prevents people from teaching for money.
I do, because unfortunately the government has been using them against bootcamp schools:
> To achieve compliance, institutions must pay a $5,000 application fee; provide a course catalog, enrollment agreement, and performance fact sheet publicly on their websites; and submit a few other minor documents included on the application.
http://readwrite.com/2014/02/18/why-coding-bootcamps-should-...
> Over the past month, California regulators sent cease and desist letters to many of these hacker boot camps, saying they run afoul of the state’s educational laws, as first reported by Venturebeat. “They’re not properly licensed, and the law requires them to be licensed to offer an educational service like they are,” says Russ Heimerich, a spokesperson for the California Bureau for Private Postsecondary Education, or BPPE.
http://www.wired.com/2014/01/california-hacker-bootcamps/
Apples and oranges. There's a big difference between starting an "educational institution" and sharing knowledge or otherwise teaching for pay as an individual.
And, in the case of the boot camps you mentioned, it kind of argues against your original point. That is, they apparently ran afoul of the regulations because of their attempts to make it a business that could be classified as an institution versus there being individuals who could have generated income from their labor, if not for some onerous regulation.
More relevantly, no one would have stopped any "teacher" from creating Udemy style online courses on their own domain.
That situation in CA is intresting though. I wasn't aware of that. Thanks for sharing.
And, in the case of the boot camps you mentioned, it kind of argues against your original point. That is, they apparently ran afoul of the regulations because of their attempts to make it a business that could be classified as an institution versus there being individuals who could have generated income from their labor, if not for some onerous regulation.
More relevantly, no one would have stopped any "teacher" from creating Udemy style online courses on their own domain.
That situation in CA is intresting though. I wasn't aware of that. Thanks for sharing.
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https://redditmade.com/ seems to be going with this idea as well.
Very correct. And... You're not requiring undue capital or specialty expertise. I like the idea quite a bit.
Also mobile app stores.
It's surprising to me the degree to which Teespring has become part of the affiliate marketing community. The same group of people that normally spend all their time pushing "get rich quick" schemes, MLM programs, dating site ads on social networks and fake news articles about diet pills have really embraced t-shirts for some reason. There's a whole ecosystem of products around Teespring marketing businesses -- landing page builders, ebooks, video courses, mentorship and coaching, case studies, mastermind groups, etc. There's a hundred variations of "How I made $6,123 with Teespring and Facebook ads" posts out there, usually in connection with some other product. I wonder how they made inroads with that community, and whether those marketers ever create trouble for Teespring.
I'm an affiliate marketeer. Couple of points:
1) Not sure why all the hate towards us. We can take a company from zero to millions overnight. I get that there are some shady stuff floating around but that's not 100% of the industry.
2) Facebook + Teespring is almost a perfect combination.
3) Aff. Marketeers have created some issues in FB using Custom Audiences (T-shirts that said stuff like "This was made specifically for Joe"). Those sold like hot-cakes but FB went down hard on them.
4) Everyone wants a piece of the action, that's why you see so much tutorials and stuff around it. It's also a great way to learn Aff. Marketing if you are into that.
1) Not sure why all the hate towards us. We can take a company from zero to millions overnight. I get that there are some shady stuff floating around but that's not 100% of the industry.
2) Facebook + Teespring is almost a perfect combination.
3) Aff. Marketeers have created some issues in FB using Custom Audiences (T-shirts that said stuff like "This was made specifically for Joe"). Those sold like hot-cakes but FB went down hard on them.
4) Everyone wants a piece of the action, that's why you see so much tutorials and stuff around it. It's also a great way to learn Aff. Marketing if you are into that.
As someone well versed in the affiliate space, I can say that a lot of the hate comes from the highly-visible low-quality affiliates out there.
People associate it with the most intrusive forms of online advertising including spam, toolbars, pop-ups/unders, misleading ads, annoying banners, and much scummier stuff.
It also doesn't help that is a strong association and overlap with the "get rich quick" folks.
There are definitely affiliates out there that add value, and affiliate programs in general can be a very profitable channel when managed properly. But there are MANY bad actors out there, and just as many eager newbies ready to take what they say as gospel based on promises of quick cash.
People associate it with the most intrusive forms of online advertising including spam, toolbars, pop-ups/unders, misleading ads, annoying banners, and much scummier stuff.
It also doesn't help that is a strong association and overlap with the "get rich quick" folks.
There are definitely affiliates out there that add value, and affiliate programs in general can be a very profitable channel when managed properly. But there are MANY bad actors out there, and just as many eager newbies ready to take what they say as gospel based on promises of quick cash.
we work with <leading_affiliate_marketplace> and it is really hard for us to find quality affiliates. it feels like they do whatever they can to get us trapped into browser software and coupon websites, our profits are just completely cannibalized. can you please email me at dsugarman @ zentail, we would love to work with you!
Great, I'll shoot you guys an email :)
Fabian, I'd like to chat as well. We too have had troubles finding reliable affiliate traction and have worked with companies like CJ to no success. [email protected]
Same here Fabian :) Shoot me an email - [email protected] and let's chat.
What kinds of things do you do to go from zero to millions? What is affiliate marketing if not the spammy stuff?
Affiliate marketing at its core is simply selling someone else's product for a cut of the profits.
Possibly the largest affiliate network would be Amazon Associates. You sign up for an AA account, and you share your affiliate link for products with other people. If you do it casually (e.g. just recommending to friends and family on FB), then you can get some extra pocket change. If you do it professionally (e.g. actually finding a niche, doing market research, building a website w/ a capture page, etc), then you really need to work on promoting the products, which can be a full-time job in itself.
Of course, Amazon doesn't rely on its affiliate program to be big, but that's also what's great about being an Amazon affiliate--you don't really need to "sell" since everyone knows Amazon.
I can't think of any legit affiliate websites off the top of my head, but just imagine a site about dog training (a very popular affiliate niche). It has some free content on how to effectively train your dog (which could be valid or invalid), and in the content are some affiliate links. If the content is actually valid, and it works, and it's actually good content, I don't see how putting affiliate links on the article is spammy. I always appreciate it when a blog post links to a product it mentions because it saves me from having to Google it (but I will anyway to get a best price).
Of course, you can have complete spammy people, who have fake websites with false content (or crappily outsourced content) and comment random people's blogs for link bait, and unfortunately that's a practice that some "mega affiliates" promote in their "how i became a rockstar affiliate" products, but it's not fair to judge affiliate marketing as an industry based on a few bad eggs, no matter how numerous they may be.
Possibly the largest affiliate network would be Amazon Associates. You sign up for an AA account, and you share your affiliate link for products with other people. If you do it casually (e.g. just recommending to friends and family on FB), then you can get some extra pocket change. If you do it professionally (e.g. actually finding a niche, doing market research, building a website w/ a capture page, etc), then you really need to work on promoting the products, which can be a full-time job in itself.
Of course, Amazon doesn't rely on its affiliate program to be big, but that's also what's great about being an Amazon affiliate--you don't really need to "sell" since everyone knows Amazon.
I can't think of any legit affiliate websites off the top of my head, but just imagine a site about dog training (a very popular affiliate niche). It has some free content on how to effectively train your dog (which could be valid or invalid), and in the content are some affiliate links. If the content is actually valid, and it works, and it's actually good content, I don't see how putting affiliate links on the article is spammy. I always appreciate it when a blog post links to a product it mentions because it saves me from having to Google it (but I will anyway to get a best price).
Of course, you can have complete spammy people, who have fake websites with false content (or crappily outsourced content) and comment random people's blogs for link bait, and unfortunately that's a practice that some "mega affiliates" promote in their "how i became a rockstar affiliate" products, but it's not fair to judge affiliate marketing as an industry based on a few bad eggs, no matter how numerous they may be.
We're in the space and I can say that affiliate marketing can be an unnecessarily shady industry from the top to the bottom.
It doesn't just come from the affiliate side. It can also come from the retailers and networks.
It doesn't just come from the affiliate side. It can also come from the retailers and networks.
Mind sharing any resources to affiliate marketing the right way? (non spamy)
As someone with over 14 years of experience in the industry, as an affiliate marketer and then the maintainer of the most widely used open source tracking and analytics software for affiliates, it's surprising to me how many startups choose to not leverage the affiliate marketing community as a powerful traction and growth channel.
I don't post much, but based on what I see here, many startups would be 10x more likely to succeed if they knew how to correctly leverage the affiliate channel for traction and growth.
One of many things Teespring did right was to build features into the platform that enabled affiliates/marketers to profitably test, optimize and scale their tee shirt campaigns.
For example, the ability for marketers to easily place their Facebook conversion/retargeting pixels on the Teespring site, meant that affiliates now had the visibility needed to profitably spend their own money promoting Teespring campaigns via paid acquisition channels (mainly Facebook ads).
I'll agree partly with you and say that there's a segment of the affiliate community that you want to stay away from, and I'm sure Teespring has their share of trouble affiliates. Unfortunately, the rotten apples are usually the most visible and make the whole community look bad.
Here's what I see is needed to help solve some of these problems:
1. More transparency into the affiliate marketing channel. Startups need to feel comfortable knowing that they are not working with affiliates that use unauthorized marketing methods and messaging.
2. Affiliates need to be more comfortable knowing that they are not going to be cut out once a business sees the successful methods being used by affiliates to drive sales, leads, growth etc. Teespring's model actually does a lot to protect affiliates and the designers that use their platform because the interests of both parties are closely aligned.
3. Startups need more education about the affiliate marketing community and the best ways to leverage affiliates as a traction channel. It's unfortunate, but the comment from @dsugarman is a perfect example of what can go wrong while Teespring shows what can go right. They basically turned every single person who designs a shirt on their platform into an affiliate, and gave them all the tools and support they needed to succeed.
I don't post much, but based on what I see here, many startups would be 10x more likely to succeed if they knew how to correctly leverage the affiliate channel for traction and growth.
One of many things Teespring did right was to build features into the platform that enabled affiliates/marketers to profitably test, optimize and scale their tee shirt campaigns.
For example, the ability for marketers to easily place their Facebook conversion/retargeting pixels on the Teespring site, meant that affiliates now had the visibility needed to profitably spend their own money promoting Teespring campaigns via paid acquisition channels (mainly Facebook ads).
I'll agree partly with you and say that there's a segment of the affiliate community that you want to stay away from, and I'm sure Teespring has their share of trouble affiliates. Unfortunately, the rotten apples are usually the most visible and make the whole community look bad.
Here's what I see is needed to help solve some of these problems:
1. More transparency into the affiliate marketing channel. Startups need to feel comfortable knowing that they are not working with affiliates that use unauthorized marketing methods and messaging.
2. Affiliates need to be more comfortable knowing that they are not going to be cut out once a business sees the successful methods being used by affiliates to drive sales, leads, growth etc. Teespring's model actually does a lot to protect affiliates and the designers that use their platform because the interests of both parties are closely aligned.
3. Startups need more education about the affiliate marketing community and the best ways to leverage affiliates as a traction channel. It's unfortunate, but the comment from @dsugarman is a perfect example of what can go wrong while Teespring shows what can go right. They basically turned every single person who designs a shirt on their platform into an affiliate, and gave them all the tools and support they needed to succeed.
> For example, the ability for marketers to easily place their Facebook conversion/retargeting pixels on the Teespring site, meant that affiliates now had the visibility needed to profitably spend their own money promoting Teespring campaigns via paid acquisition channels (mainly Facebook ads).
Out of pure curiosity, can someone decode this into non-marketer speak for me? Not trying to be rude, I just genuinely have no clue what it means (I'm a developer who knows nothing about marketing).
Out of pure curiosity, can someone decode this into non-marketer speak for me? Not trying to be rude, I just genuinely have no clue what it means (I'm a developer who knows nothing about marketing).
Teespring allows users to place certain devices (tracking pixels, etc) on their Teespring site. This allows individuals to know which campaigns their conversions are coming from, and therefor where they should allocate most of their marketing funds.
^^^ This is correct, but I will break it down further with the assumption you are starting from zero knowledge.
Let's say you are buying ads from FB. It's common practice to test multiple ads. (Images, Headlines, Ad copy in the body, targeting (who the ads will be shown to).
The hope and idea is that one or more of these ads will work better than the rest. It's a bit like how YC invests in a lot of startups, not all succeed, the ones that do get more money, the rest run out of cash and go out of business.
To help you see which ads are working FB cookies and tracks everyone who clicks your ads. However they don't know if a click results in a sale/lead unless you send them confirmation that a sale/lead happened.
That's where the pixels come in. The term pixel can sometimes be confusing, because these days it's usually a snippet of javascript that makes a call to FB. I haven't looked at the back end implementation, but I assume the JS loads an image.
In short, this allows FB to attribute the sale/lead to a particular ad. With enough data, you can then weed out the ads that are wasting money, and focus on the ones that work. Al lot of time you can optimize further by building out variations of the winning combination.
All this is cool, but if you don't control the conversion page, and this is the case for 99.999% of affiliates you can't place your FB pixel unless the company you are working with provides a means for you to do so. Sometimes it's manually done, other times it's automate like what Teespring did.
QUICK PRIVACY WARNING: Placing a 3rd party pixel code on a conversion page has to potential to leak private information to the 3rd party. This usually happens if your customer's info is in the url variables of the page hosting the pixel. When the page loads, all the info is passed to the 3rd party pixel in the referer info.
Let's say you are buying ads from FB. It's common practice to test multiple ads. (Images, Headlines, Ad copy in the body, targeting (who the ads will be shown to).
The hope and idea is that one or more of these ads will work better than the rest. It's a bit like how YC invests in a lot of startups, not all succeed, the ones that do get more money, the rest run out of cash and go out of business.
To help you see which ads are working FB cookies and tracks everyone who clicks your ads. However they don't know if a click results in a sale/lead unless you send them confirmation that a sale/lead happened.
That's where the pixels come in. The term pixel can sometimes be confusing, because these days it's usually a snippet of javascript that makes a call to FB. I haven't looked at the back end implementation, but I assume the JS loads an image.
In short, this allows FB to attribute the sale/lead to a particular ad. With enough data, you can then weed out the ads that are wasting money, and focus on the ones that work. Al lot of time you can optimize further by building out variations of the winning combination.
All this is cool, but if you don't control the conversion page, and this is the case for 99.999% of affiliates you can't place your FB pixel unless the company you are working with provides a means for you to do so. Sometimes it's manually done, other times it's automate like what Teespring did.
QUICK PRIVACY WARNING: Placing a 3rd party pixel code on a conversion page has to potential to leak private information to the 3rd party. This usually happens if your customer's info is in the url variables of the page hosting the pixel. When the page loads, all the info is passed to the 3rd party pixel in the referer info.
a lot of the get rich quick and work from home schemes are illegal in one way or another, pyramid schemes, black market underground parcel shipping networks, etc. seems to me like teespring has a much better business model which can help people make money making something people want.
>It's surprising to me the degree to which Teespring has become part of the affiliate marketing community.
Actually, with Teespring, the "designers" are affiliates.
Surprised that no one seems to have noticed this.
Actually, with Teespring, the "designers" are affiliates.
Surprised that no one seems to have noticed this.
You become popular enough, you will attract all kinds of people to your platform/service. Including ones you may not want to be associated with.
But this is great news for Teespring. Congrats to the team.
But this is great news for Teespring. Congrats to the team.
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"At least ten, the company says, have become millionaires from the work."
Does this mean they sold a million dollars plus worth of shirts OR that, after all expenses, they netted a million? The phrase millionaire implies the latter but that is a far higher bar to cross.
Does this mean they sold a million dollars plus worth of shirts OR that, after all expenses, they netted a million? The phrase millionaire implies the latter but that is a far higher bar to cross.
The latter. We have paid out, after expenses, millions to at least ten sellers on Teespring.
That still excludes any of their external marketing costs.
Would be interesting to know who these sellers are. Are you allowed to disclose it?
T-shirt millionaires, eh? Reminds me a bit of the Team Fortress 2 item designers who are making a living out of it:
http://www.kritzkast.com/mym-day-1-of-3
http://www.kritzkast.com/mym-day-1-of-3
How's this different than something like Big Cartel (http://bigcartel.com/)?
Not asking about business stuff specifically, but the usability or whatever-it-is that this newer stuff does that the older online t-shirt printing businesses don't? I don't really understand their story about starting because they couldn't find someone to make their t-shirts...
Not asking about business stuff specifically, but the usability or whatever-it-is that this newer stuff does that the older online t-shirt printing businesses don't? I don't really understand their story about starting because they couldn't find someone to make their t-shirts...
It's about who is taking the risk, with BigCartel you shell out money upfront to buy shirts + print (guessing how many to get in each size, how big an order you need, etc.) then try to sell them.
TeeSpring is kind of like a Kickstarter, you setup a picture of what the T-shirt would look like when printed and then no money changes hands until you hit your "funding level" of a certain number of shirts, and there's no excess inventory because they only print exactly the right number for the sizes that people ordered.
It's a really interesting model.
TeeSpring is kind of like a Kickstarter, you setup a picture of what the T-shirt would look like when printed and then no money changes hands until you hit your "funding level" of a certain number of shirts, and there's no excess inventory because they only print exactly the right number for the sizes that people ordered.
It's a really interesting model.
>TeeSpring is kind of like a Kickstarter //
TeeSpring is almost exactly like CafePress or Spreadshirt or Zazzle or Threadless or ... isn't it? Aren't Reddit just moving in to this space (perhaps white-labelling one of these services?). Fair play to them if they broke in to this market (which seems pretty crammed) and took a relatively large slice of the pie.
TeeSpring is almost exactly like CafePress or Spreadshirt or Zazzle or Threadless or ... isn't it? Aren't Reddit just moving in to this space (perhaps white-labelling one of these services?). Fair play to them if they broke in to this market (which seems pretty crammed) and took a relatively large slice of the pie.
Thanks.
I have to believe this is a bigger play than just T-shirts. If they're in the "create your own retail company" business, they're either in comp with Amazon, or an acquisition target of them. Either way, it's an interesting position.
When you look at their board, you see visionaries, not operators.
When you look at their board, you see visionaries, not operators.
Congrats to Teespring, this is huge :) Awesome to see a customer growing like this.
Honest question. If your business is doing good, why would you want to raise money?
Economics. Suppose you have a factory and a growing order book but you're running at or near full capacity; if you get any substantial increase in the number of orders, it's going to take longer and longer to fulfill them, and customers might start to go your competitors if they feel the quality of your service has dropped. This is a diseconomy of scale - you've run out of room to grow and the more business you get the lower your margins.
The obvious solution would be to set up another factory. Suppose for simplicity that this costs $25 million and allows a doubling of capacity. suppose further that TeeSpring is making a profit of $100,000 a week (a completely imaginary figure - I know nothing about their finances). Because it's near full capacity that weekly net isn't going to increase much. But saving up the money to purchase the factory outright would take 4-5 years - an organic growth strategy - is plenty of time for competitors to move against you and pull away customers.
So you have a couple of options. You could go into debt, either by getting a loan or issuing a bond that pays interest (effectively the same thing). Now some of your income goes on interest payments, but they're tax-deductible and after you've paid off the debt you'll still have the second factory. As long as the increased income resulting from the investment is greater than the cost of borrowing the capital then going into debt can be perfectly sensible - the same reason it makes good sense for governments to splurge on necessary infrastructure during periods of low interest rates, just like we're not doing now due to politics :-/
Another option is to issue equity, ie sell shares in the company to raise the money. For large firms this may not be any more attractive than debt, because shareholders will expect a dividend of some sort. For growing firms it makes a ton of sense because early investors are not so much interested in dividends as in the possibility for the shares to appreciate in value - who wouldn't have liked to invest $1 million in Google or any other large company back in the early days? This is ideal for a firm like Teespring that has a very simple and straightforward business model - manufacturing a basic consumer product like this is great from an investor's POV because it's so easy to analyze.
The obvious solution would be to set up another factory. Suppose for simplicity that this costs $25 million and allows a doubling of capacity. suppose further that TeeSpring is making a profit of $100,000 a week (a completely imaginary figure - I know nothing about their finances). Because it's near full capacity that weekly net isn't going to increase much. But saving up the money to purchase the factory outright would take 4-5 years - an organic growth strategy - is plenty of time for competitors to move against you and pull away customers.
So you have a couple of options. You could go into debt, either by getting a loan or issuing a bond that pays interest (effectively the same thing). Now some of your income goes on interest payments, but they're tax-deductible and after you've paid off the debt you'll still have the second factory. As long as the increased income resulting from the investment is greater than the cost of borrowing the capital then going into debt can be perfectly sensible - the same reason it makes good sense for governments to splurge on necessary infrastructure during periods of low interest rates, just like we're not doing now due to politics :-/
Another option is to issue equity, ie sell shares in the company to raise the money. For large firms this may not be any more attractive than debt, because shareholders will expect a dividend of some sort. For growing firms it makes a ton of sense because early investors are not so much interested in dividends as in the possibility for the shares to appreciate in value - who wouldn't have liked to invest $1 million in Google or any other large company back in the early days? This is ideal for a firm like Teespring that has a very simple and straightforward business model - manufacturing a basic consumer product like this is great from an investor's POV because it's so easy to analyze.
Excellent answer- I wonder though why more start ups don't take out loans/issue debt? Is it simply because they can't find anyone willing to lend to them at reasonable interest rates? I would think a company like the one you describe would be a pretty good bet for a lender to give a loan to build a factory.
Thanks for all the nice comments!
They do sometimes, but in recent years banks have been more reluctant to lend and issuing bonds typically involves an awful lot of legal overhead, so I think it's just easier to issue equity. Another reason is that if business doesn't go as well as you hope the debt might allow creditors to secure your secured assets/stock, whereas if you issue equity that's not an issue. Also, for early stage companies raising equity can be a good way to meet people you'd want on the board advising on the future direction of the firm.
But you know I just know about this second hand from being into economics. If you search for 'capital formation' you'll find lots of stuff and some people like grellas here at HN are specialists in that.
They do sometimes, but in recent years banks have been more reluctant to lend and issuing bonds typically involves an awful lot of legal overhead, so I think it's just easier to issue equity. Another reason is that if business doesn't go as well as you hope the debt might allow creditors to secure your secured assets/stock, whereas if you issue equity that's not an issue. Also, for early stage companies raising equity can be a good way to meet people you'd want on the board advising on the future direction of the firm.
But you know I just know about this second hand from being into economics. If you search for 'capital formation' you'll find lots of stuff and some people like grellas here at HN are specialists in that.
Thanks again for another great answer. I can see where the legal/regulatory overhead for issuing debt could be a big roadblock. It is my understanding that a lot of early stage financing is 'convertible debt', with the idea to convert it into equity at a later time. I wonder how often start-ups decide to pay off this debt from revenue rather than allowing it to convert? Would that be a big no-no?
Personal loans are a great way to bootstrap a startup and can lead to you having more equity later on. But it can be hard to get a lot of capital this way, compared to raising from investors. It can also be riskier - taking out a $5mil loan from a bank is a bit scarier than raising $5m from venture capitalists who understand that 90% of their investments fail.
They do, and there are companies setup to make those kind of loans but the parameters have to be just right.
Also things like IP, or growth curve, can usually not be used as collateral. You start to need deep analysis of those assets and people willing to bet on them which is where VCs come in.
Also things like IP, or growth curve, can usually not be used as collateral. You start to need deep analysis of those assets and people willing to bet on them which is where VCs come in.
In the case the OP described above, I would think the factory would be pretty good collateral. For a software company that just wants to hire more staff, not so much :)
If only all internet comments were as good as this. Kudos!
Thank you very much for that splendid explanation :) !
My favourite analogy is that a successful business is like a machine that takes money and then, one hour later, spits out 1.2 times whatever amount you put in.
You could start by feeding the machine $1, waiting an hour, then feeding the $1.20 back in, and so on. But you'll get richer far quicker if you persuade somebody to lend you $1M and directly dump that in to the machine.
You could start by feeding the machine $1, waiting an hour, then feeding the $1.20 back in, and so on. But you'll get richer far quicker if you persuade somebody to lend you $1M and directly dump that in to the machine.
I don't think that's a good analogy or in any way illuminating the mechanics of the situation.
To grow faster than your current cash flow allows.
When you're doing well is often the best time to raise money, as you can get more favorable terms.
As an example, a business can scale a lot faster with a $1M cash infusion than it can with just $50K in the bank.
As others said - grow faster than your current cash allows. You don't want to have scale just to support your current customers but be able to scale to support your future customers.
One example that was mentioned in the article was building a factory. Obviously that requires a huge chunk of capitol but will allow the business to grow to fill the market that they have confirmed to exist.
edit: typo
One example that was mentioned in the article was building a factory. Obviously that requires a huge chunk of capitol but will allow the business to grow to fill the market that they have confirmed to exist.
edit: typo
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Congrats Teespring!
There's lots of great businesses where people pay you for a service, but if you can create one where people make money when you do, they are heavily invested in your success.