Ask HN: What do these startups need so much money for?

Every day there is a post about some startup getting funding, and these aren't trivial amounts either, millions of dollars are being passed around.

What could they possibly need /so/ much money for? Is it for hardware, developers, running costs, marketing?

Can someone please enlighten me?

The barrier to entry has toppled by an order of magnitude and the market is slow to adapt to such changes.

1) Salaries. Many engineers, salesmen, etc who have been out of college for a year or two don't want to go back to making basically nothing. Yes, you can find talented people who will work for you for little, but it's going to take a long time to do so. It's lovely to think that every company should be able to bootstrap off ramen indefinitely, but it turns out that often times you find that in order to do all the things that need to be done you need to expand beyond the founding team, and, so sorry, those new mouths want to get fed.

2) Capital expenditures. It's nice to run on EC2 for awhile, but it might not be the best hardware fit for your product. Similarly, it's nice to use Cisco switches and not crappy switches when you want your network to work at high volumes.

3) Marginal costs. When you have millions of people using your site all the time, bandwidth, power, free tshirts you give new signups, etc all cost more and more money.

For many companies that are pre-product/market fit, raising millions of VC might not make sense. But for many rapidly growing companies where there is a lag time between user acquisition and user monetization, something needs to fill in the gap. Guess what that is.

For a VC backed startup that's at 15-25 employees with a successful product I can make up some numbers that aren't totally unrealistic:

Advertising: $30k/mo

PR firm: $10k/mo

Rent: $12k/mo

Salaries: $100k/mo

Servers/bandwidth: $20k/mo

That's a $2 million/year run rate and I don't think this is even particularly on the high side and doesn't include upfront investments in servers, desktops, furniture, software, etc. I'm leaving out lots of stuff, really.

Taking VC means you're aiming high. Spending $2 million/year to take a shot at becoming a huge business is not that extravagant.

Making a really big website does cost money. You can't host yelp on your VPS account. On the other hand, startups that have raised money when they aren't basically failing due to inability to serve up content due to too high of demand are idiots (and the people who hand them money are double idiots).