4 ms·

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-shutdown-decisio

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-shutdown-decision http://research.ivanplenty.com/2014-economics-everpix-shutdo... (Submitted to HN a few hours ago as https://news.ycombinator.com/item?id=7052593 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.

jmduke 13y ago
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.)
not_that_noob 13y ago
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.
dcohenp 13y ago
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 https://news.ycombinator.com/item?id=7043555
barrkel 13y 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...
- Pxtl 13y ago
  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.
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swisspol 13y ago
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 https://news.ycombinator.com/item?id=7053473.
- ivanplenty 13y ago
  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!
mesozoic 13y ago
You sound exactly like my economics professor. :D I like your report too.
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jmduke 13y ago

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.)

not_that_noob 13y ago

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.

dcohenp 13y ago

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 https://news.ycombinator.com/item?id=7043555

barrkel 13y 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...

Pxtl 13y ago
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.
- deleted 13y ago
  [deleted]

swisspol 13y ago

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 https://news.ycombinator.com/item?id=7053473.

ivanplenty 13y ago
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!

mesozoic 13y ago

You sound exactly like my economics professor. :D I like your report too.

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