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Ask HN: How do tech startups get funding before a revenue model is developed?

8 points by jtesp ↗ HN
Dailybooth just got 6M on top of a previous 1M round and I see no revenue model. There's tons of sites and companies that get funding before a clear revenue path is defined. How are they convincing people to invest? Traffic? Users? Is there a rule of thumb as to how much a user is worth or how much a certain amount of traffic is worth?

Or do they invest because they believe in the idea or see proof of a concept?

Thanks

8 comments

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petervandijck
Traction.

It is believed that, if you can get a large amount of people engaged (ie. "traction"), there will be ways to make money of that. Sometimes it turns out to be true (Craigslist), sometimes not so much (MySpace).

It is also believed that there are multiple profitable markets being created right now on the internet (coupons, q&a sites, casual games, ...) and that this will continue for years to come. Even though we don't know exactly how the winning companies will make money in these markets, if you're the winner, it is thought that you have a good shot at figuring that out.

If you are fast growing in a promising market, you have a chance to become the winner of that market. (It is also believed that many markets will have only a few winners, due to network effects (Facebook), economies of scale (Amazon) etc..) And then the investors want in.

Mostly, investors don't invest in ideas. They invest in markets and teams. Teams can prove their worth by showing a proof of concept, or better, traction.

In Dailybooth's case: traffic and engagement.

There's no calculation where X traffic = Y $, because it's not linear. Growth is promise.

jtesp
Thanks for the response, makes alot of sense. Would you say a startup consisting of only 1 person is sketchy for investors since there is no "team"? I'm in dire need for a team, but can't afford to put one together so it's a bit of cat and mouse. I'm teetering on bootstrapping vs investors and it's scary! Thanks for the advice.
humj
I think most good investors will shy away from single founders for many justified reasons. PG writes a lot about it in his essays. actually, most people in this space who write, will have written about this, so I won't spell it all out.

The 2 recurring themes are: How can you convince anyone of your product if you cant even convince 1 other person to join you? and 1 person just can't do it alone, you need multiple perspectives to dissect a problem.

There are very very very few exceptions, probably enough to count them all on your fingers. That said, I'm in the same boat as you and looking for a cofounder but I'd say don't just go and pick up any cofounder. Take your time because this relationship is something that takes a lot to build and is not like just hiring someone to help you with a task.

jtesp
Thanks, good points. I had a partner at one point but he wasn't motivated and so now it's just me. I do have a list of people who could become employees who have helped me in various aspects. Do you think that's enough?

ps: who is PG?

humj
PG: Paul Graham I can't really answer that for you since I dont know your situation so I can only speak for myself. I'd try to find someone who's more than an "employee". I'd want someone that's as invested as I am.
jtesp
Wow Paul Graham is amazing! I wish I had known about him and his essays a long time ago. Reading those is really comforting and validates that what I'm going through is normal. Thanks for the info...now back to reading some more of his essays!
jtesp
I saw your thread on microcosm of internet/humanity, but won't let me reply. Good concept. My answer about what's next is: division and then war. Power struggles (ISPs, Google, Facebook, Government) will create a divide and people will be forced to choose sides. Then no matter what, they will feel they have to defend their side even if they don't fully agree. You can already see signs of this happening.