Everpix VC Feedback(github.com)
github.com
Everpix VC Feedback
https://github.com/everpix/Everpix-Intelligence/blob/master/Anonymized%20VC%20Feedback.md
10 comments
Thanks so much for making this public. You're putting yourself out there for our benefit and so that we can all learn (and not feel quite as shitty when we get similar emails). Thanks.
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I swear all VC's must have these email responses in Macros already. Everyone who passes on investing, even with great but not insane traction, replies to you in the exact same way. Word-by-word. The masters reply with enough wiggle room to come back if you do become hot eventually.
Thank you for releasing this and making such a valuable tribute to the community. If more companies did that, hopefully we wouldn't make the very same mistakes over and over again.
By the way, what other startups have published such detailed postmortems, if any?
By the way, what other startups have published such detailed postmortems, if any?
The founders ran out of Ketracel-White to give to their troops...
"You guys are awesome and we wish you all the best."
Fundraising is such a giant waste of time. (I've been there)
Fundraising is such a giant waste of time. (I've been there)
This morning I did a public write-up of the Everpix business model to see why it failed:
http://research.ivanplenty.com/2014-economics-everpix-shutdo...
(Submitted to HN a few hours ago as https://news.ycombinator.com/item?id=7052593)
tl;dr Everpix sold its product at a marginal loss and closed its doors after the financing ran out. Since the marginal costs always exceeded the marginal revenue we now know that Everpix should have shut its doors immediately as it never could be a viable business in either the short or long runs. There doesn't appear to be a what-if cost structure change that it could have made realistically to stay in business. Shutting down was the right decision for the business, and this evidence suggests it should have shut down a long time ago.
http://research.ivanplenty.com/2014-economics-everpix-shutdo...
(Submitted to HN a few hours ago as https://news.ycombinator.com/item?id=7052593)
tl;dr Everpix sold its product at a marginal loss and closed its doors after the financing ran out. Since the marginal costs always exceeded the marginal revenue we now know that Everpix should have shut its doors immediately as it never could be a viable business in either the short or long runs. There doesn't appear to be a what-if cost structure change that it could have made realistically to stay in business. Shutting down was the right decision for the business, and this evidence suggests it should have shut down a long time ago.
a business should supply a product if the marginal revenue is greater than the marginal cost
This isn't right. The return on capital must exceed the cost of capital, at the very least the market rate of interest. Otherwise you're not taking into account opportunity cost.
I have another issue with your analysis. It's quite blinkered, focused on immediate profits with the zeal of an accountant. Solutions to the photo problem have potential for being strategic, and I don't think it's been figured out yet.
A better focus on cost structure could have extended the lifetime of the company, but it likely would have grown too slowly for "$B". I think the founders tried hard to generate growth metrics, betting that the growth would convince investors they could hockey-stick. But they didn't get quite enough growth, and their burn rate was too high to put on the brakes[1] - and likely they weren't interested in putting on the brakes. So I don't think your analysis is particularly relevant in the end. It deals mostly with cash-flow level tactics, whereas this was a strategic play.
Don't get me wrong, I think you're a decent analyst. But I expect people use you for your specific focus, not for the big picture. I think you would have predicted YouTube to be a failure, for example.
[1] I'm relying on the burn rate being in a vehicle of some sort for this not to be a mixed metaphor...
This isn't right. The return on capital must exceed the cost of capital, at the very least the market rate of interest. Otherwise you're not taking into account opportunity cost.
I have another issue with your analysis. It's quite blinkered, focused on immediate profits with the zeal of an accountant. Solutions to the photo problem have potential for being strategic, and I don't think it's been figured out yet.
A better focus on cost structure could have extended the lifetime of the company, but it likely would have grown too slowly for "$B". I think the founders tried hard to generate growth metrics, betting that the growth would convince investors they could hockey-stick. But they didn't get quite enough growth, and their burn rate was too high to put on the brakes[1] - and likely they weren't interested in putting on the brakes. So I don't think your analysis is particularly relevant in the end. It deals mostly with cash-flow level tactics, whereas this was a strategic play.
Don't get me wrong, I think you're a decent analyst. But I expect people use you for your specific focus, not for the big picture. I think you would have predicted YouTube to be a failure, for example.
[1] I'm relying on the burn rate being in a vehicle of some sort for this not to be a mixed metaphor...
I think you're missing his point. He's focusing purely on the cost that increment per-user - that is, the costs that are directly associated with each user.
The fixed costs are allowed to be obscenely high. Growth will overcome that. If you build an obscenely expensive server farm and spend $Xmillion developing software, you can get that back if you get X paying customers eventually.
However, if each user you get means you have to fork over another $12/mo to Amazon when the user only is paying you $10? There's no way to make that work. More users would actually cost you more.
Maybe there's way they could've torn out their infrastructure and rebuilt it as self-hosted. Maybe there were some optimizations they were missing that could've cut those cloud-based costs.
But on the surface? Every dollar the user handed them got handed right off to Amazon, and Amazon's prices go up as you get more users.
The fixed costs are allowed to be obscenely high. Growth will overcome that. If you build an obscenely expensive server farm and spend $Xmillion developing software, you can get that back if you get X paying customers eventually.
However, if each user you get means you have to fork over another $12/mo to Amazon when the user only is paying you $10? There's no way to make that work. More users would actually cost you more.
Maybe there's way they could've torn out their infrastructure and rebuilt it as self-hosted. Maybe there were some optimizations they were missing that could've cut those cloud-based costs.
But on the surface? Every dollar the user handed them got handed right off to Amazon, and Amazon's prices go up as you get more users.
Amazon is a way of bootstrapping quickly. You pay a premium for not managing the physical assets yourself. But I'm not saying anything you or I don't already know.
Of course they could have stayed in the black by growing more slowly and managing costs better. I think that's obvious, and uninteresting. It seems clear to me that the guys at Everpix were making a somewhat desperate effort to get VC traction. IMO that's what led to their increased burn rate.
I don't think they didn't know they were burning their reserves, that their cost structure was unsustainable.
I feel we may be talking past one another.
Of course they could have stayed in the black by growing more slowly and managing costs better. I think that's obvious, and uninteresting. It seems clear to me that the guys at Everpix were making a somewhat desperate effort to get VC traction. IMO that's what led to their increased burn rate.
I don't think they didn't know they were burning their reserves, that their cost structure was unsustainable.
I feel we may be talking past one another.
I really appreciate yours and the GP's comments because both describe different parts of the Everpix puzzle.
You're right that capital should seek the highest returns, but one way to measure the likelihood of getting that return is by evaluating the marginal costs and revenues of a product. When a company sells each product for a loss, it is impossible for the company to provide a positive return on the capital. In those cases, like with Everpix, it becomes a question of "when" and not "if" the business will fail and the return will be zero. The only rational way to play the game that way is to hope for an acquisition.
That's why I look at detailed parts of business models like this, it helps elicit the overall picture in the same way functional a test case elicits overall product health. There is an art to ensuring proper overall coverage with multiple tests.
> I don't think they didn't know they were burning their reserves, that their cost structure was unsustainable.
This is where I disagree and why I wrote the analysis. I think the company didn't understand they were selling their product for a marginal loss:
> "Long story short, the infrastructure was paying for itself through subscription revenues." https://news.ycombinator.com/item?id=7041640
> "AWS infrastructures costs were already being covered by subscription income." https://news.ycombinator.com/item?id=6676906
From the numbers neither statement was true, and from the confidence in the tone it seems like they didn't know for a while. Subscriptions did not cover AWS costs. It looks like it might have become known internally when asked directly from others taking a look:
> "The reason we were getting closer and closer to being positive on variable costs ... is, yes, improved monetization, but more importantly AWS optimizations." https://news.ycombinator.com/item?id=7043555
You're right that capital should seek the highest returns, but one way to measure the likelihood of getting that return is by evaluating the marginal costs and revenues of a product. When a company sells each product for a loss, it is impossible for the company to provide a positive return on the capital. In those cases, like with Everpix, it becomes a question of "when" and not "if" the business will fail and the return will be zero. The only rational way to play the game that way is to hope for an acquisition.
That's why I look at detailed parts of business models like this, it helps elicit the overall picture in the same way functional a test case elicits overall product health. There is an art to ensuring proper overall coverage with multiple tests.
> I don't think they didn't know they were burning their reserves, that their cost structure was unsustainable.
This is where I disagree and why I wrote the analysis. I think the company didn't understand they were selling their product for a marginal loss:
> "Long story short, the infrastructure was paying for itself through subscription revenues." https://news.ycombinator.com/item?id=7041640
> "AWS infrastructures costs were already being covered by subscription income." https://news.ycombinator.com/item?id=6676906
From the numbers neither statement was true, and from the confidence in the tone it seems like they didn't know for a while. Subscriptions did not cover AWS costs. It looks like it might have become known internally when asked directly from others taking a look:
> "The reason we were getting closer and closer to being positive on variable costs ... is, yes, improved monetization, but more importantly AWS optimizations." https://news.ycombinator.com/item?id=7043555
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You forget: the 10$/user to Amazon halves every 18 months. The $12 stays the same.
It's a very interesting analysis, but you're applying brick-and-mortar / bootstrap business logic to a an early stage VC backed consumer business where 101 economics don't fully apply. Not a single investor, VC or advisor cared about that "marginal loss" (which is "easily" fixable through infrastructure). If that was the case, the vast majority of consumer startups wouldn't be around in the valley (let's not even talk about the ones having zero revenues resulting in an infinite marginal loss).
I provided some extra context and counter-points here: https://news.ycombinator.com/item?id=7053473.
I provided some extra context and counter-points here: https://news.ycombinator.com/item?id=7053473.
I really appreciate that you released the underlying data. It is one of the best gifts you could give to the community. I think you and I would greatly enjoy chatting at a bar about this crazy startup world.
We just have different opinions and philosophies about building businesses: For me it's important to sell products at a marginal profit generally. I don't think whether the business is VC-backed or bootstrapped makes one difference: I look at both of those are tools to finance fixed costs, not to subsidize ongoing variable operations. The underlying economic principles are the same to me. But, that's this man's humble opinion.
I'm not sure I buy that the "marginal loss" [was] "easily" fixable through infrastructure [changes]. If it were easy you would have done it that way from the beginning or sooner in 2013. I buy that the infrastructure changes required more investment or planning, but in general in software "easy" things are the things you've already done. Otherwise we'd be experts at planning and estimating :)
Best of luck in the next venture, and again thank you so much for releasing the data!
We just have different opinions and philosophies about building businesses: For me it's important to sell products at a marginal profit generally. I don't think whether the business is VC-backed or bootstrapped makes one difference: I look at both of those are tools to finance fixed costs, not to subsidize ongoing variable operations. The underlying economic principles are the same to me. But, that's this man's humble opinion.
I'm not sure I buy that the "marginal loss" [was] "easily" fixable through infrastructure [changes]. If it were easy you would have done it that way from the beginning or sooner in 2013. I buy that the infrastructure changes required more investment or planning, but in general in software "easy" things are the things you've already done. Otherwise we'd be experts at planning and estimating :)
Best of luck in the next venture, and again thank you so much for releasing the data!
This was addressed by one of the founders here [1]. Basically, his argument was that their cost structure was not fixed, and if they could have gone on for a bit longer then they would have been able to turn it into a marginal profit. If true, then maybe they just couldn't pull it off fast enough.
[1] https://news.ycombinator.com/item?id=7043555
[1] https://news.ycombinator.com/item?id=7043555
This is a great writeup.
I think comparing average revenue to average cost would be better served as a stacked area graph rather than superimposing them, since your method makes it look like average costs actually shrinks to a very small amount (when its just that the gap between the two figures is shrinking.)
I think comparing average revenue to average cost would be better served as a stacked area graph rather than superimposing them, since your method makes it look like average costs actually shrinks to a very small amount (when its just that the gap between the two figures is shrinking.)
Excellent high-quality analysis. Not having a solid grasp of marginal costs is unfortunately quite a common affliction of many startups. I would go so far as to say having a good grasp is a source of strategic advantage. That is to say, if you can deliver the same service at significantly less that your competition, then you increase the chances of owning the market. Ask Walmart.
And I completely agree with your analysis of personnel costs. It was bloated. In this day and age, with fractional cost labor, it was unforgivable.
And I completely agree with your analysis of personnel costs. It was bloated. In this day and age, with fractional cost labor, it was unforgivable.
You sound exactly like my economics professor. :D I like your report too.
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This seems to show the system working. Everpix was a reasonable idea with good execution, but nobody could see how it would be eventually profitable. That it didn't get funded is evidence that we're not in a bubble.
Unlike.. say, Snapchat?
The same rules apply to Snapchat, but keep in mind the cost per user for Snapchat are minimal. A few photos kept around for a temporary period. If they have a reasonable amount of smarts, the cost for doing that, especially at the scales they can now purchase, will be negligible. The revenues they can get from each user in terms of advertising is highly likely to sustain them, and their large user base means a large revenue base.
Thus, in their specific case, it's hard to make the case that it's a bubble. And if they are bleeding users away from Facebook, then FB will pay a premium to stop that bleeding. Thus the FB offer is not unreasonable, no matter how ridiculous it looks on the surface.
Now, if their user growth slowed for some reason, then yes they will be kicking themselves for not taking said offer. It has happened before - e.g. Friendster, etc. But those are usually self-inflicted wounds. Assuming their investors keep them from such moves, there is a good chance they can be a large sustainable company.
Thus, in their specific case, it's hard to make the case that it's a bubble. And if they are bleeding users away from Facebook, then FB will pay a premium to stop that bleeding. Thus the FB offer is not unreasonable, no matter how ridiculous it looks on the surface.
Now, if their user growth slowed for some reason, then yes they will be kicking themselves for not taking said offer. It has happened before - e.g. Friendster, etc. But those are usually self-inflicted wounds. Assuming their investors keep them from such moves, there is a good chance they can be a large sustainable company.
I actually agree with you – i'm sure Snapchat, considering their growth and userbase, can turn into goldmine if they play their cards right. It's just weird that a company with an actual revenue is mentioned as an example of us not being in a bubble, while one mobile app without any revenue simply turns down 3+ billion offer - no bubble over there.
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And you're familiar with the economics of Snapchat, how, exactly? Among other things, I'd expect Snapchat's marginal costs to be much lower than Everpix's.
<opinion rel="armchair">Just looking at the two products, I think Snapchat's #1 business priority should be getting as big as possible as fast as possible, whereas I think Everpix's #1 business priority should've been to make the unit economics work.</opinion>
<opinion rel="armchair">Just looking at the two products, I think Snapchat's #1 business priority should be getting as big as possible as fast as possible, whereas I think Everpix's #1 business priority should've been to make the unit economics work.</opinion>
I think it came down to luck.
What if some "greater fool" came in and bought Everpix for $50 million, like Yahoo, or AOL? Then we wouldn't be coming up with all these reasons why they failed, but instead would've congratulated them on their hard work, smart strategy and success (funny how these things work, huh?)
If Facebook didn't buy Instagram, they would've had the same outcome as Everpix eventually. If eBay didn't acquire Hunch, they've flunked eventually. If Google didn't acquire Blogger, they would've sunked too. I'd love to see Foursquare survive for 4 more years without an exit.
What if some "greater fool" came in and bought Everpix for $50 million, like Yahoo, or AOL? Then we wouldn't be coming up with all these reasons why they failed, but instead would've congratulated them on their hard work, smart strategy and success (funny how these things work, huh?)
If Facebook didn't buy Instagram, they would've had the same outcome as Everpix eventually. If eBay didn't acquire Hunch, they've flunked eventually. If Google didn't acquire Blogger, they would've sunked too. I'd love to see Foursquare survive for 4 more years without an exit.
While I'm absolutely certain that Snapchat's marginal costs are much lower than Everpix's, Everpix had real revenue. If we're talking about bubbles, surely that has to count for something - a product people actually are willing to pay for?
You can sell a widget for $10 when it costs you $20 to make. Million of people will buy it because it's such a great value. You will have tens of million in revenue!
That revenue may have worked against them. It puts some tighter bounds on what they would need to get to subscriber wise and the kind of conversion rate to paid accounts that could realistically be obtained.
Companies that haven't started monetizing can be more hand wavy about the potential revenue and growth.
Companies that haven't started monetizing can be more hand wavy about the potential revenue and growth.
Yes and no.
It depends on the business and product.
First, Everpix had revenue, yes, but they had negative marginal profit (http://en.wikipedia.org/wiki/Marginal_profit). Since their business is based around charging customers $X/month, their unit economics are incredibly important. If I buy candy bars for $3 and sell them for $2 I can also show "real revenue," but nevertheless this is still a terrible business.
Second, what's a better business, Google + Adwords or Google + charging $5/month/user. The latter puts a tight upper limit on the total size of your market. Google is unquestionably more profitable with the former business model rather than the latter, but it took Google years of not being profitable before they made it happen. If you look up articles about Google in the late 90s they were filled with hand-wringing about how they'll make money. The same goes for Facebook, which I think most HN users still dismiss as a fad. Nevertheless, they're very profitable and have been for many years.
VCs care mostly about the size limiting case and how likely we are to reach that limiting case. You can say this is stupid, counterproductive, etc., but for whatever reason that's the course Everpix decided to pursue. The logic of VC investing makes sense and it was Everpix's decision to take that route vs. remaining small-but-profitable, assuming the latter was actually an option.
Third, we can also contrast SnapChat and Everpix's situation from a game-theoretic perspective. Let's say SnapChat was charging, I dunno, $5 to download the app. Conservatively, let's assume that had no effect other than X% fewer people downloading the app. So, fewer people download the app, but we now have a very, very nice gross margin. In fact, let's say there were 5 similarly-sized SnapChat clones, each charging the same amount.
What would you do if you were one of those competitors? I can tell you what I'd do — I'd make my application free and build up the largest network I possibly could, knowing that the main value users get out of a communication app/network is the number of people on the network with whom they want to communicate (cf. http://en.wikipedia.org/wiki/Metcalfe's_law).
Since a player in this hypothetical SnapChat space could improve their situation by changing their strategy unilaterally, we see that the "charge for SnapChat" situation is not in a Nash equilibrium and it'd be irrational for us not to adopt this new strategy ourselves.
Of course, this only works when the new strategy is viable — in this case, the "free for users" strategy. Because their marginal costs are much lower, it is significantly more viable for Snapchat than Everpix. Indeed, for Everpix it will just make their overall situation worse.
It depends on the business and product.
First, Everpix had revenue, yes, but they had negative marginal profit (http://en.wikipedia.org/wiki/Marginal_profit). Since their business is based around charging customers $X/month, their unit economics are incredibly important. If I buy candy bars for $3 and sell them for $2 I can also show "real revenue," but nevertheless this is still a terrible business.
Second, what's a better business, Google + Adwords or Google + charging $5/month/user. The latter puts a tight upper limit on the total size of your market. Google is unquestionably more profitable with the former business model rather than the latter, but it took Google years of not being profitable before they made it happen. If you look up articles about Google in the late 90s they were filled with hand-wringing about how they'll make money. The same goes for Facebook, which I think most HN users still dismiss as a fad. Nevertheless, they're very profitable and have been for many years.
VCs care mostly about the size limiting case and how likely we are to reach that limiting case. You can say this is stupid, counterproductive, etc., but for whatever reason that's the course Everpix decided to pursue. The logic of VC investing makes sense and it was Everpix's decision to take that route vs. remaining small-but-profitable, assuming the latter was actually an option.
Third, we can also contrast SnapChat and Everpix's situation from a game-theoretic perspective. Let's say SnapChat was charging, I dunno, $5 to download the app. Conservatively, let's assume that had no effect other than X% fewer people downloading the app. So, fewer people download the app, but we now have a very, very nice gross margin. In fact, let's say there were 5 similarly-sized SnapChat clones, each charging the same amount.
What would you do if you were one of those competitors? I can tell you what I'd do — I'd make my application free and build up the largest network I possibly could, knowing that the main value users get out of a communication app/network is the number of people on the network with whom they want to communicate (cf. http://en.wikipedia.org/wiki/Metcalfe's_law).
Since a player in this hypothetical SnapChat space could improve their situation by changing their strategy unilaterally, we see that the "charge for SnapChat" situation is not in a Nash equilibrium and it'd be irrational for us not to adopt this new strategy ourselves.
Of course, this only works when the new strategy is viable — in this case, the "free for users" strategy. Because their marginal costs are much lower, it is significantly more viable for Snapchat than Everpix. Indeed, for Everpix it will just make their overall situation worse.
This is a really good answer.
HN is too obsessed with bubbles. Too many people forget that the same bubble that gave us pets.com also gave us Google
HN is too obsessed with bubbles. Too many people forget that the same bubble that gave us pets.com also gave us Google
I didn't quite read a lot of skepticism about it being "eventually profitable". Rather there was more hand-waving about "not being a $100M - $1B" business, which is something else altogether.
(Sort of depressing IMHO; does every new web business need to be Facebook-scale these days to be worthwhile?)
"does every new web business need to be Facebook-scale these days to be worthwhile?"
To a VC yes. That's the business model of their fund. I think if Everpix had attracted a different class of investors they might have been more successful fundraising.
To a VC yes. That's the business model of their fund. I think if Everpix had attracted a different class of investors they might have been more successful fundraising.
Exactly. Everybody always talks about getting VC funded, but there are plenty of good money-making businesses that a VC wouldn't touch but that could be great for a smaller investor. Usually these businesses charge for their products and have demonstrated that people are willing to pay.
Everpix decision to depend on a subscription model with a service that is surrounded by (inferior) free alternatives made sense economically, but it didn't make sense financially.
I can't say if they would have had more success with a free model. But in any case start ups are never a safe investment, and blocking adoption rates with a subscription fee certainly limits the appeal to a fund that has to see a potential for extremely high returns.
I can't say if they would have had more success with a free model. But in any case start ups are never a safe investment, and blocking adoption rates with a subscription fee certainly limits the appeal to a fund that has to see a potential for extremely high returns.
Yes. If you're not a Ponzi... um, 10x founder, you're shit to VCs.
Idea: Make a post-mortem startup website, where recently deceased startups can open-source their documents to the whole startup community.
Pivot for everpix maybe?
This somehow has the same vibe as the becoming of Mattermark to me.
Pivot for everpix maybe?
This somehow has the same vibe as the becoming of Mattermark to me.
Why not build such a service on top of a cloud storage provider platform?
Their own servers would run their code, searching/indexing, and thumbnails up to 1080p which are very small.
A user's cloud account would only be used for the originals and to generate search indexes/thumbnails as needed.
Their own servers would run their code, searching/indexing, and thumbnails up to 1080p which are very small.
A user's cloud account would only be used for the originals and to generate search indexes/thumbnails as needed.
Good point, just thought the same thing (example: http://www.kickstarter.com/projects/jmathai/openphoto-a-phot...).