Everpix VC Feedback

https://github.com/everpix/Everpix-Intelligence/blob/master/Anonymized%20VC%20Feedback.md

by jhull • 13 years ago

115 36 13 years ago

github.com

ivanplenty3• 13 years ago

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.

jmduke• 13 years 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_noob2• 13 years 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.

barrkel2• 13 years 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• 13 years 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.

swisspol• 13 years 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.

ivanplenty3• 13 years 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• 13 years ago

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

dcohenp2• 13 years 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

tlb• 13 years ago

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.

sandis3• 13 years ago

Unlike.. say, Snapchat?

jfarmer2• 13 years ago

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>

not_that_noob2• 13 years ago

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.

dcohenp2• 13 years ago

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?)

slykat• 13 years ago

"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.

username223• 13 years ago

Yes. If you're not a Ponzi... um, 10x founder, you're shit to VCs.

bayesianhorse2• 13 years ago

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.

wellboy• 13 years ago

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.

WhitneyLand• 13 years ago

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.

viach• 13 years ago

Good point, just thought the same thing (example: http://www.kickstarter.com/projects/jmathai/openphoto-a-phot...).

andyl• 13 years ago

"You guys are awesome and we wish you all the best."

Fundraising is such a giant waste of time. (I've been there)

danabramov• 13 years ago

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?

esharef• 13 years ago

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.

bayesianhorse2• 13 years ago

The founders ran out of Ketracel-White to give to their troops...

shopinterest• 13 years ago

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.

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