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"Maybe I'm being naïve here, but isn't it kind of crazy to raise 3.5M in funds for a business that has no plan but to be acquired by someone else?" That's a sa

"Maybe I'm being naïve here, but isn't it kind of crazy to raise 3.5M in funds for a business that has no plan but to be acquired by someone else?" That's a sane question. IMO it's the current financial environment that encourages such "leap without looking" strategies. Fear of missing out is huge right now. I know of a startup that received a multi-million valuation and many more million in funding. They don't even have a prototype!

timClicks 7y ago
FOMO has always been present. What's changed is that debt is almost free. That allows VCs to take (very!) speculative bets for relatively low risk. They know that if each of their portfolio companies has a 10% chance to reach 30x returns, investing in 10 companies should pay off.
RussianCow 7y ago
This is very real. A friend of mine started a company with over a million in seed funding with what basically amounts to just an idea. Years later, the company isn't doing that well in terms of sales/revenue, but they still manage to raise money because they have a couple obvious acquisition targets. It seems crazy to me to throw millions of dollars at a company with the hopes that one of maybe three or four megacorps in the industry will acquire them, but investors buy into that, and that's all that matters.
- jassmith87 7y ago
  Seed and Series A is investment in the people always. They assume if the product doesn't work the team will pivot until they find something that does. It sounds to me like your friend failed to pivot when needed.
  - tenpies 7y ago
    Not even. I'm seeing seed and series As/Bs on unproven teams of recent graduates with no experience in the field where the "start up" operates. No business plan, no prototype, huge regulatory walls to climb. It is worst than tulip mania.
    - nikanj 7y ago
      Funds make money on failed investments too. I'd be happy to throw away someone else's money, if I got to keep 20% as a management fee - and a slice of the profits in case one of my lottery tickets is a winner.
      - shagbag 7y ago
        Typically they'd get 2% of assets under management, not 20%.
        zhoujianfu 7y ago
        2% a year for 10 years..
        gnaritas 7y ago
        Which is about 18% of the original investment, not 20, assuming no gains or losses.
    - streetcat1 7y ago
      Where? Can you give an example?
    - x0x0 7y ago
      Dude. Conflating seed (median $2.1m 18q4) rounds with B (probably 10x that) rounds is... not serious.
      - jiofih 7y ago
        Look closer at the news, it’s not uncommon to see 10M+ rounds for companies that haven’t put out a single ounce of product.
        x0x0 7y ago
        I'm sure you've got a list of 50 or 100 examples handy?
bobloblaw45 7y ago
I know this might sound stupid but if you can get that much for something that wow's people, can you get like 100k for a "meh" idea? Like if you wanted to open a dry cleaners.
- Analemma_ 7y ago
  No, because the mania for throwing money at tech startups is specifically because of tech's unique promise of both worldwide scale and zero marginal costs after the initial Big Spend on capex, and hence potentially gigantic returns for investors. Now, how well the current crop of startups is delivering on that promise is an exercise left to the reader, but it's there in theory. A dry cleaner has marginal costs and no economy of scale, and so can't attract unicorn valuations.
  - icedchai 7y ago
    Zero marginal cost in theory. In reality, you often find enormous cloud costs combined with huge marketing spend.
    - btilly 7y ago
      As long as your product is perfectly scalable and generates a profit for money spent that way, it makes perfect sense to take a loan, spend a fortune, make a fortune, then pay off the loan and take in profits. Then turn around and do it again. It isn't the absolute size of the numbers that matters. It is the ability to rapidly scale the business once you have the right business model and product.
      - x0x0 7y ago
        And in particular, if you sell low churn saas (like we do), you can comfortably spend the first year's annual contract value on customer acquisition and have an extremely profitable business. Just huge initial marketing costs. And quite possibly huge ongoing marketing costs! But if churn is low, or even negative, you can assume something like 10 year customer lifetimes, with a comfortable 5-ish percent cost increase per year, on sale for the first year's contract value. If you have cheap-ish money available, you should buy as many of those as the world is willing to sell.
daxorid 7y ago
Indeed. The flip-side to this is that speculative investment on unprofitable moonshots seems to be where ALL the equity-finance money is. My company reliably earns low-7-figures on high-7-figures revenue, with respectable but not amazing growth, but the only capital "market" open to us is bank loans and merchant financing. Nobody cares about boring profitability.
- scarface74 7y ago
  Why is that a bad thing? If you are profitable, why would you want to give up equity and control?
- x0x0 7y ago
  Serious question -- why would you want something besides a bank loan? Because a loan at a couple of percent is way cheaper than VC, who will typically want at least 20% of your company?
  - deleted 7y ago
    [deleted]
melvinroest 7y ago
Well, not everyone does that. I applied to YC with my side project [1] and got rejected. I didn't expect to get in, but if I would have, then I would be full-time on it. Now I can't, which is a shame. So in that sense, I wish someone would fund me. I have a lot of "doodling the internet" type of ideas. I use digital note taking extensively myself, so I know what's missing. [1] doodledocs.com
- hazz99 7y ago
  What differentiates you from drawing apps?
- mikekchar 7y ago
  I'll give you a hint. You should pivot to a collaborative design app. There are a couple around, but very few that have that "doodle feeling". You should be able to pick up a pen, sketch something quickly and then have someone else be able to modify/review it. I'll give you another hint. Add shape recognition and move from capturing and storing pen strokes and generating bitmaps to capturing pen strokes and generating shapes. Add rudimentary grouping and ungrouping functionality, ability to move, stretch, rotate, etc. Allow pasting clip art and letting it grow/shrink/rotate when grouped with other objects, but just with a rough scaling, etc -- it doesn't have to look pretty. It's just for sketching things out. Practically every software/design team needs an application like this and there will be money to pay for it. P.S. I was on a team that built this as a windows application about 20 years ago, but we were ahead of our time. A SaaS webapp would be the bomb here.
- deleted 7y ago
  [deleted]

timClicks 7y ago

FOMO has always been present. What's changed is that debt is almost free. That allows VCs to take (very!) speculative bets for relatively low risk. They know that if each of their portfolio companies has a 10% chance to reach 30x returns, investing in 10 companies should pay off.

RussianCow 7y ago

This is very real. A friend of mine started a company with over a million in seed funding with what basically amounts to just an idea. Years later, the company isn't doing that well in terms of sales/revenue, but they still manage to raise money because they have a couple obvious acquisition targets. It seems crazy to me to throw millions of dollars at a company with the hopes that one of maybe three or four megacorps in the industry will acquire them, but investors buy into that, and that's all that matters.

jassmith87 7y ago
Seed and Series A is investment in the people always. They assume if the product doesn't work the team will pivot until they find something that does. It sounds to me like your friend failed to pivot when needed.
- tenpies 7y ago
  Not even. I'm seeing seed and series As/Bs on unproven teams of recent graduates with no experience in the field where the "start up" operates. No business plan, no prototype, huge regulatory walls to climb. It is worst than tulip mania.
  - nikanj 7y ago
    Funds make money on failed investments too. I'd be happy to throw away someone else's money, if I got to keep 20% as a management fee - and a slice of the profits in case one of my lottery tickets is a winner.
    - shagbag 7y ago
      Typically they'd get 2% of assets under management, not 20%.
      - zhoujianfu 7y ago
        2% a year for 10 years..
        gnaritas 7y ago
        Which is about 18% of the original investment, not 20, assuming no gains or losses.
  - streetcat1 7y ago
    Where? Can you give an example?
  - x0x0 7y ago
    Dude. Conflating seed (median $2.1m 18q4) rounds with B (probably 10x that) rounds is... not serious.
    - jiofih 7y ago
      Look closer at the news, it’s not uncommon to see 10M+ rounds for companies that haven’t put out a single ounce of product.
      - x0x0 7y ago
        I'm sure you've got a list of 50 or 100 examples handy?

bobloblaw45 7y ago

I know this might sound stupid but if you can get that much for something that wow's people, can you get like 100k for a "meh" idea? Like if you wanted to open a dry cleaners.

Analemma_ 7y ago
No, because the mania for throwing money at tech startups is specifically because of tech's unique promise of both worldwide scale and zero marginal costs after the initial Big Spend on capex, and hence potentially gigantic returns for investors. Now, how well the current crop of startups is delivering on that promise is an exercise left to the reader, but it's there in theory. A dry cleaner has marginal costs and no economy of scale, and so can't attract unicorn valuations.
- icedchai 7y ago
  Zero marginal cost in theory. In reality, you often find enormous cloud costs combined with huge marketing spend.
  - btilly 7y ago
    As long as your product is perfectly scalable and generates a profit for money spent that way, it makes perfect sense to take a loan, spend a fortune, make a fortune, then pay off the loan and take in profits. Then turn around and do it again. It isn't the absolute size of the numbers that matters. It is the ability to rapidly scale the business once you have the right business model and product.
    - x0x0 7y ago
      And in particular, if you sell low churn saas (like we do), you can comfortably spend the first year's annual contract value on customer acquisition and have an extremely profitable business. Just huge initial marketing costs. And quite possibly huge ongoing marketing costs! But if churn is low, or even negative, you can assume something like 10 year customer lifetimes, with a comfortable 5-ish percent cost increase per year, on sale for the first year's contract value. If you have cheap-ish money available, you should buy as many of those as the world is willing to sell.

daxorid 7y ago

Indeed. The flip-side to this is that speculative investment on unprofitable moonshots seems to be where ALL the equity-finance money is. My company reliably earns low-7-figures on high-7-figures revenue, with respectable but not amazing growth, but the only capital "market" open to us is bank loans and merchant financing. Nobody cares about boring profitability.

scarface74 7y ago
Why is that a bad thing? If you are profitable, why would you want to give up equity and control?
x0x0 7y ago
Serious question -- why would you want something besides a bank loan? Because a loan at a couple of percent is way cheaper than VC, who will typically want at least 20% of your company?
- deleted 7y ago
  [deleted]

melvinroest 7y ago

Well, not everyone does that. I applied to YC with my side project [1] and got rejected. I didn't expect to get in, but if I would have, then I would be full-time on it. Now I can't, which is a shame. So in that sense, I wish someone would fund me. I have a lot of "doodling the internet" type of ideas. I use digital note taking extensively myself, so I know what's missing. [1] doodledocs.com

hazz99 7y ago
What differentiates you from drawing apps?
mikekchar 7y ago
I'll give you a hint. You should pivot to a collaborative design app. There are a couple around, but very few that have that "doodle feeling". You should be able to pick up a pen, sketch something quickly and then have someone else be able to modify/review it. I'll give you another hint. Add shape recognition and move from capturing and storing pen strokes and generating bitmaps to capturing pen strokes and generating shapes. Add rudimentary grouping and ungrouping functionality, ability to move, stretch, rotate, etc. Allow pasting clip art and letting it grow/shrink/rotate when grouped with other objects, but just with a rough scaling, etc -- it doesn't have to look pretty. It's just for sketching things out. Practically every software/design team needs an application like this and there will be money to pay for it. P.S. I was on a team that built this as a windows application about 20 years ago, but we were ahead of our time. A SaaS webapp would be the bomb here.
deleted 7y ago
[deleted]