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

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

#21

Post by matthias »

inerte wrote: post #8

10 people making 80k per year, that's a million dollars already. Now add taxes. If you think VCs are interested in companies that won't need 10 people to run their business, ever... you're thinking to small :) And not only there are your employees, but imagine hiring accountants, lawyers, cleaning staff... the list, only with actual human beings, is already huge! Now add costs like transportation, hotels, food, all t…

That outlay is fine if you're a year into trading and are showing signs of being top 1% successful. However, many of these huge sums that are raised pre-launch or pre-build just seem like madness and I can't see it continuing.

The yc vision seems more sustainable: $5k+$5kpf = you build something. If it's good you get to raise a couple hundred k to turn it into a company. If at that point it looks like you might be google, then raise the millions that you need.

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

#22

Post by zepolen »

jfornear wrote: post #19
justin wrote: post #5

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 thi…

Exactly... startups aren't aiming to maximize profits (where marginal cost is equal to marginal revenue). When marginal cost is greater than marginal revenue a startup can either a) find more vc funding to raise marginal revenue, or b) cut expenses to lower marginal cost. Startups will press a) until the button breaks leaving b) the only option.

I took an economics class at school and while I don't give much merit to theory vs practice, one lesson that was taught was that if MR Now when investing it's a different matter, but the point stands, and so the after b) the only real option is actually c) liquidation

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

#24

Post by staunch »

ltbarcly2 wrote: post #20
staunch wrote: post #17

Earlier quoted context omitted.

These are just different stages and kinds of companies. There are many angel or self-funded companies that operate exactly as you describe. There's nothing novel about it. The question from the submission was how startups typically spend VC money.

You said 'spend' when I think you meant 'squander and waste'.

Even the "real" Lt. Barclay has better social skills than you :-)

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

#25

Post by jfornear »

zepolen wrote: post #22
jfornear wrote: post #19

Earlier quoted context omitted.

Exactly... startups aren't aiming to maximize profits (where marginal cost is equal to marginal revenue). When marginal cost is greater than marginal revenue a startup can either a) find more vc funding to raise marginal revenue, or b) cut expenses to lower marginal cost. Startups will press a) until the button breaks leaving b) the only option.

I took an economics class at school and while I don't give much merit to theory vs practice, one lesson that was taught was that if MR Now when investing it's a different matter, but the point stands, and so the after b) the only real option is actually c) liquidation

Before closing, you would want to first look at short run vs. long run.

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

#27

Post by ojbyrne »

zepolen wrote: post #13
justin wrote: post #5

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 thi…

Thanks for your first hand experience input. Your first two points I can agree with, but it's the 3rd that troubles me. Shouldn't a company that means to stay in business want to have slow but steady growth, a gradual climb, giving the them time to adapt. Doesn't a company want to put its money making plan in action before it goes big time? I know justin.tv has major bandwidth requirements, and from what I can see th…

If you want a "slow but steady growth, a gradual climb, giving them time to adapt" then you shouldn't be financing with VC money. That's not what they do.

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

#28

Post by fallentimes »

ltbarcly2 wrote: post #18
rms wrote: post #16

Earlier quoted context omitted.

http://news.ycombinator.com/item?id=430795

If you read the article in question, and think it isn't retarded, then you are probably some kind of Down's Syndrome sufferer and I don't respect your opinion anyway.

What's your problem? You seem smart, but there's so much anger.

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

#29

Post by shaunxcode »

ltbarcly2 wrote: post #15
staunch wrote: post #7

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…

(note: my other account posts stuff marked [DEAD], no doubt because I called one of PG's articles retarded. It was the one where he said the history of unions could completely understood by looking at web startups. It was retarded.) 15 people for 100k/month would mean you are paying an average of 74k/year. Who would willingly work for a startup for that, without lots and lots of equity (answer: the exact people that…

I have a feeling constantly saying "retarded" is not helping your karma out that much. You would definitely benefit with expounding upon what you mean every time you fall back on just saying "retarded".

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

#30

Post by inerte »

matthias wrote: post #21
inerte wrote: post #8

10 people making 80k per year, that's a million dollars already. Now add taxes. If you think VCs are interested in companies that won't need 10 people to run their business, ever... you're thinking to small :) And not only there are your employees, but imagine hiring accountants, lawyers, cleaning staff... the list, only with actual human beings, is already huge! Now add costs like transportation, hotels, food, all t…

That outlay is fine if you're a year into trading and are showing signs of being top 1% successful. However, many of these huge sums that are raised pre-launch or pre-build just seem like madness and I can't see it continuing. The yc vision seems more sustainable: $5k+$5kpf = you build something. If it's good you get to raise a couple hundred k to turn it into a company. If at that point it looks like you might be go…

I can't figure out if you're agreeing or disagreeing with me :)

The OP asked why VC funded companies need millions, and you've said yourself, they do need.

You don't need to be on the top 1% to have 10 employees. If you do have ~10 people working, then your operating expenses are in the million range.

But let's use your Google example. We know that the search market is dominated by Google, followed by Yahoo and MSN. Who are the others? I've searched and all I could come up in 10 seconds in this:

http://marketshare.hitslink.com/report.aspx?qprid=4

Let's go with Lycos. 0.01% market share. They have 500-1000 employees. Huge costs there. I am ignoring Terra, and Daum.

I guess what I am trying to say is that even a 0.01% market share can make you profitable, or attractive enough to get bought. And depending on the market (I did "cheat" a little by picking the largest internet market possible, search), even a 0.01% share might cost you millions to get there.

These huge sums are raised pre-launch/build because they're essentially, bets. Educated bets at best, but still, bets. The thing is that the payoff (for the VCs) can be huge, so they gamble on dozens hoping that 3 or 4 will provide return.

It's not my cup of tea, btw. I am currently building my Micro-ISV and I am quite happy, aspiring at most a nice boat, perhaps a bigger house. But the VC world is a reality :)

It's like complaining about software patents. They SUCK. But the system is set up in a way that you need them. It's part of the rules. You can complain about it, but they're there. So what makes most sense in the business sense of things is to get them. Just like VCs when you're trying to dominate a market.

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