For the curious, pulled their deal history from PitchBook:
Secret raised their B last July at a post valuation just over 130M (http://i.imgur.com/jNXw5PZ.png). They had some major investors backing them up, and then the hype train just... stopped.
I remember so many people being so high on it when it launched, with several friends all raving about how fun/addicting it was, then just poof it disappeared from conversation.
Hearing that the founders got some cash off the table (article from last summer - http://www.businessinsider.com/secret-founders-pocket-6-mill...). While I always thought that seems like a good thing, I can't help but let my mind wander a bit as I know if I were given a nice chunk of change like that so early, it might be kind of hard to keep focus.
Investors (and the team) were looking at the wrong numbers. In apps, it's basically all down to having meteoric growth week over week. It can't be based on spikes as this was.
Taking money off the table in a B makes sense for the founders, and I can't blame them for leveraging their situation.
Ultimately this falls on the investors for biting on hype, and not having a deeper understanding of the product (and it's potential)or the founders (and their potential).
Totally makes sense - but I also completely get why the investors would bite on hype - missing the next billion dollar company is way worse than incorrectly picking a few duds.
It's high risk for the investors. For every Uber, there are many that don't pan out. It's the nature of the game, and why they make lots of investments.
Crunchbase says they have 11-25 employees... how did they burn through all of that money? Is it possible they are pivoting or returning money to investors?
From the article it doesn't sound like they ran out of money, sounds like the growth has stalled and key talent has left. I bet the money goes back to investors, it doesn't sound like the team is still in place to pivot.
Here was the intended use of the $25M: "The funding will be used to implement two new features, a Facebook login and the ability to follow posts on a certain topic". This is what is wrong with Silicon Valley today. An afternoon project for a single developer gets $25M from investors. Please, someone give me just $10M....I've already implemented Facebook login for my apps.
That's hilarious! In Web 1.0, people raised $7 million to buy a domain name. Needing $12.5 million to implement a Facebook login ($25/2 projects) is even more ridiculous.
I'm certain that if you can build a product that generates a huge buzz and gets millions of people to sign up that you will have absolutely no trouble raising that kind of money.
Ahh, but we're not talking about building the whole product and generating buzz, etc. We're talking about the stated purpose for raising $25M: "The funding will be used to implement two new features, a Facebook login and the ability to follow posts on a certain topic".
$25M.
For TWO features.
Hell, ignore my previous offer. I'd have given them a 92% discount and done that for a cool $2MM.
Pace yourself. Be a little less eager to drop your price when you bargain. Try $24.5M first, then $24M. It's still a discount compared to the competitors.
You're already asking for a price so low you might end up barely scraping $100,000 an hour.
The purpose of the money was to grow the company. For a business < 1 year old it's impossible to predict what they'll need, so they just fill in the blank with some random sentence that no one cares about.
I am beyond certain that investors did not fork over $25M for the two features outlined. There's simply no way that's all they were spending the money for.
Yep. They probably had to buy several cases of coconut water, made some very expensive visits to the Apple store, and the founders maybe bought a Mercedes or two.
Huh. I implemented iOS and Android Facebook login for https://recent.io/ in a few days last month. (The login code itself wasn't that time-consuming but UX, debugging, etc. took longer.)
I remember so many people being so high on it when it launched, with several friends all raving about how fun/addicting it was, then just poof it disappeared from conversation.
Pure speculation, but I think trolls/frauds took it over. I say this as a Secret troll myself. I knew the odds of the data (linked to my FB account) becoming public was too high to post real secrets, so I used to just experiment with what got people liking or leaving comments instead. Which was amusing.. until I could tell a lot of people had started doing the same. So I stopped using it.
I could be wrong, but when I signed up (not early but around the time it first hit the headlines) I thought it was the only way to sign up, or at least the only useful way (since you needed friends and friends-of-friends to see secrets from).
I hope that Ping [0], a side project by the Secret team that has nothing to do with Secret itself, is going to stick around in some capacity. I loved the little knowledge bits that it sent me randomly. I just checked the app and other than a couple weather notifications, the last curated content was pushed to me 2 weeks ago :(
To be honest, the investors knew what they were signing at the time. If they didn't do their due diligence to figure out how the application was going to make any money, they deserve what they had coming for them. That's the kind of shitty "let's throw money out the window, in case we hit one successful startup" attitude that'll get us in a bubble.
Same here. I am curious as to what caused Secret to disappear so suddenly. I am not a power user of social networks but something that really struck me was the really poor UI of Secret relatively to the crystal clear interface of YikYak.
Yep agreed, same confusion here. TechCrunch seems to cite the slow response to Cyberbullying criticism as one of the reasons for Secret's downfall, but doesn't YikYak have the same problem, if not worse with college students?? What gives?
I would've never understood the appeal of these anonymous apps over something like Reddit (in which you can be as anonymous as you'd like) if I hadn't had a job on campus, where YikYak is well-frequented, and a far better source of breaking trivial news (i.e. what is all that yelling outside about?) than anything else...using YikYak periodically has made me realize again how easy it is to underestimate the appeal of less friction...including the friction of having to deal with users and their user histories. On the other hand, it's a shitshow when some topic like Greeks vs. non-Greeks or Middle East politics comes up...and having no way to filter the noise, either by user or by topic, ends up killing the enjoyment of the app. Yikyak is interesting because of its popularity on campus...but anywhere else, and it's not something I'm compelled to check at all. I imagine the same thing happened with Secret after it stopped being the gossip platform for Silicon Valley people
> I would've never understood the appeal of these anonymous apps over something like Reddit
Recently, we did some analysis (sensitivity, type, potential audience and linguistic characterists) on the content posted on anonymous social media like Whisper [0]. Most of the posts were about Confessions, Relationships, Meetup and QnA/Advice.
In Reddit, you are pseudonymous - users do convert pseudonymity to anonymity by the usage of throwaway accounts. In case of anonymous media apps, the concept of anonymity is embedded. For example, on reddit - there can be ONLY one "Barack_Obama" on Whisper there could be thousands of them because there is no unique username. In addition, you could view profile of a pseudo-identity on Reddit. On anonymous social media, there is no profile information.
The key difference between anonymous vs non-anonymous (or pseudonymous) media is lack of unique identities and/or profile information.
Well in the last few months activities in the app was similar to omegle.
People posting nude photos and stuff.
I think the curation of content was a huge challenge for them., and also not to mention the new app design was not at all intuitive with lots and lots of bugs.
But having said that, I had lot of hope in this app.
Technically, the curator of that Tumblr account created it to criticize acquihires, not shutdowns in general. From the "What is an incredible journey?" page:
> Companies go broke all the time. It’s unfortunate and it may mean a service you love will close. But some things just don’t work out. [...] This is what is galling. A company that can afford to pay millions for some new staff but not for what those staff built. The people who used the service, and invested their belief and time in uploading photos, or forming friendships, or logging data, are left to find new virtual homes while their former hosts enjoy a nice (if possibly delayed) payday.
It seems kind of crazy to me that people talk about startups and try to apply completely the same model for everything to:
1) A social app like this, which is essentially hype-based and self reinforcing. Success seems entirely down to virality and adoption, followed by monetization.
2) Some very vertical market focused SAAS offering which can be developed with minimal outside capital, own a niche, and where capital can then be applied to expand to other verticals, accelerate the sales process, etc. (Say, a scheduling application for vets)
3) A capital intensive project in a well understood field (IAAS, hardware, lab stuff, etc.)
4) Entirely new technology deployment (not discovery, which tends to be hugeco or lab, but first commercialization)
Clearly there are some commonalities, but there are a lot of areas like employee vesting periods, how you recruit, etc. which probably should be different in these different kinds of companies, but tend to be the same.
Spot on. A lot of what's very challenging for today's web startups, like hiring, is easy for startups in cleantech, since there's so few funded startups. Conversely, it feels an order of magnitude more challenging to raise the money in clean tech...
"It rode the hype to massive funding, which allowed the two founders, David Byttow and Bader-Wechseler to each take $3 million off the table. They essentially traded stock for cash, putting money in their pockets though the business wasn’t earning any."
Wow. I guess their round was oversubscribed so they were able to sell this to the vcs. This is the first case where I heard of where a startup failed recently after founders took significant money off the table. I wonder if vcs will be able to use this as an argument to combat founders wanting to do the same in the future.
I have mixed feelings about the whole affair but I have to hand it to the founders. That was really smart of them to take life changing money when they could.
"Secret will hand its remaining cash back to investors"
Minus the $6M the founders took off the table?
If they keep it.. if ever there were a case for blacklisting founders, this is it.
It is definitely NOT cool to pull a move like that. You want to cash out early a little because you've been boostrapping, ok, but if you then bail on the company and shut it down within a year, then you start to look like a fraud who knew the company was in trouble and took advantage of investors.
The whole point of taking money off the table is to keep it when the company goes bust. What you're describing is more similar to a loan where the collateral would be a slice of equity.
That is absolutely not true. The much more sensible reason is to take enough off the table to align investors and the management by (a) making sure the management isn't worrying about personal cash day to day, and (b) allowing the managers to prefer a home run swing rather than an early acquisition.
It's always controversial, and never more so in my memory than here.
What? "The point" of selling equity for cash is to get liquidity. That is the justification for allowing founders to do it early, not to reward them when their company goes bust.
In fact, when executives sell a bunch of stock right before public companies announce bad news or go bust it often warrants an insider trading investigation.
What else would you want that liquidity for? Paying off the founders lets investors worry less about them wanting to sell before the investors want to sell (the investors don't have 99% of their net worth in the startup like the founders likely do).
It would be nuts to try and claw back that money. The founders surely had remaining equity which is now worthless, everyone is taking a hair cut.
> In fact, when executives sell a bunch of stock right before public companies announce bad news or go bust it often warrants an insider trading investigation.
They didn't just do this, the last round was in July 2014. It was a flash in the pan.
The point of selling the company is to get liquidity. The point of founder cash-out rounds is to align incentives between the founders and investors. Investors have an incentive to see the company "Go big or go home", because they spread their bets across a whole portfolio of companies. Founders have an incentive to play it much safer, because their whole net worth is locked up in one company and without cash-out rounds, they have a strong incentive to take the first acquisition offer that leaves them financially independent rather than shoot for the one that maximizes the VC's financial outcomes.
I'm not close enough to Secret to know whether the system functioned as intended here. It's possible (and suspicious, given the timing of the rounds and subsequent redesign that trashed their brand) that Secret rode the hype machine, cashed out at the top of the Secret bubble, and left investors holding the bag. But it's also possible (and likely, given public statements made and their hiring behavior) that this was a good-faith investment by VCs seeking a return in a company that honestly thought they were on to the next big thing and cashed out so that their risk-tolerance would be aligned as they shot for the next big thing. In that case, the founder cash-out functioned exactly as intended, it just didn't have the outcome anyone was hoping for.
The investors got exactly the behavior they wanted. They let (encouraged? obliged?) the founders to take money off the table so that they would double down on a high-risk/high-reward go-big-or-go-bust strategy. The Founders did that, and the dice broke against them. They absolutely should not give the money back, and no one should give them a hard time about keeping it.
1. What do you mean "if they take it..."? It is their money. They gave away personal equity that was at the time worth $6M for the cash.
2. It is ridiculous to assume they pulled any move. Startups are a high risk gamble and the VCs who put money in them know it better than anyone else does. So they didn't pull a move on anyone.
3. Let's say a company raises $1M on a $3M valuation. Then in one year the valuation goes up to $300M. Would you be calling for blacklisting of those investors? Because by your logic, they should know the company was going to be so successful and should have given the founders a better deal.
I agree that there isn't necessarily anything unethical about this. The investors knew what they were doing.
However, founders who would pocket $6M from a not-even-close-to-profitable company are probably not good founders, or they don't believe in the company. Either way, their behavior doesn't inspire confidence.
I think that you are totally wrong about these founders in particular and what taking money off of the table revels about founders generally.
Most founders are extremely protective of their startup. It's their baby, and their livelihood. They'll do anything to keep it alive. Most "poor"(<$5M in the bank) would prefer a 'safe' acquisition to gambling on being a world changer. A good accusation can change a persons life forever $10M verses $100M? Who cares? Either way it's a lifetime worth of fuck-you-money. But investors what entrepreneurs to "go big." So if an investor finds a company and team that they think has a chance of making it they will give the founders fuck-you-money. It says, "ok, your safe, nothing can hurt you. Now take the chance of building a company that can change the world!"
When you see a founder take a big chunk of cash from an early round, you shouldn't think, "they don't believe in what they're doing." You should think, "These investors (who know these founders a lot better then I do) think that they are so awesome, and have such a high chance of doing something transformative, they are basically giving them enough money that they will never have to worry about money again."
Well, maybe getting an early payout caused them to lose the hustle. They turned the engine off, handed the keys back to the investors and walked. It would have been harder to shut down the company if they saw 0 upside, and all their sweat equity evaporated.
You seem to suggest that shutting the company down was definitively a worse outcome for investors vs. keeping it going. It isn't that black and white. For example, if they kept the company going and spent the remaining millions and still failed(most common outcome), it is a worse outcome than shutting it down now and returning the millions.
To clarify, the outcome of any company is unknowable, as is the future of everything. When you take a look at the guys from airbnb trying to make rent selling cereal and renting out an air mattress, that's the hustle. I am just suggesting that, hypothtically, if these guys were that hungry they would do anything to save the company. I saw Byttow's interview with Kevin Rose, he seemed passionate and intelligent, I don't want to discont their work. I just think that there are some people that won't (or financially can't) quit until the repo guys carry out their office. The people with that drive have a high correlation with success.
I have no doubt that there are people who are demotivated by fuck-you-money in the bank. I also have no doubt that there are people who have their ambition liberated by it. Hopefully a good investor can tell the difference before they write the check.
You realize companies like Secret more than likely had acquisition offers that could have been north of $6M? It is fairly common to turn down a larger acquisition offer for raising a funding round that lets you take some cash off the table. In that case, if anything, the founders may have believed a bit too much in their company(by opting to cash out only partially instead of selling outrightly.)
You're conflating valuation changes with cashing out. There's not problem, ethically, if a valuation swings rapidly either way. But cashing out ahead of a massive failure is a totally different move.
That sort of thing in the public markets would prompt an SEC investigation for insider trading (despite it being "their money"). In the startup world it comes down to, these are not folks investors should be trusting.
You mean, except for the $6M they kept for themselves.
I'm the sort of founder that thinks it's my duty to return value to shareholders. I should make money when my investors make money. I would argue that is the only perspective that survives the long term in business. Riding hype waves to enrich one's self without producing real product, that's not sustainable.
I know we're all founders here and would love to get the kind of deal the Secret guys negotiated (or Groupon, etc.). But it's not healthy for our industry. Basically the arguments in support of these guys is, well the investors knew what they were getting into. But that could be said for any scammy move by a founder. If they're trying to "do the right thing" they should return all the money to investors, minus a reasonable salary.
I'm the sort of founder that thinks it's my duty to return value to shareholders.
You can be a founder that thinks it is your duty to return value to shareholders and still take money off the table. In fact, there are situations where not taking money off the table hurts your shareholders.
Example: you're a poor founder with $400K in loans and 0 in saving, you're running a startup with good traction. You get a $20M acquisition offer and you accept it thinking it lets you clear debt and not be super poor anymore. Problem? Your investors barely get their money back so an exit you consider successful is not that successful of an exit for your investors.
Now imagine the investors let you take $1M off the table to clear debt and get a little comfortable. Now when the $20M offer comes in, it is easy for you to turn it down because you aren't in debt and you have a decent life. As a result, you end up building a $500M company. Your investors come out ahead because the equity they got for $1M cash you took off the table made them $10M, not to mention it gave you the mindset to turn down the $20M acquisition offer.
For many funds, they would rather you fail trying to make a company that is valued at $500M than be successful in building a company that is only worth $20M. Letting founders take cash off the table can help founders think as big as their investors do about the max potential of the business.
There's a difference between "not being super poor anymore" and taking a $6 million payday. Can you name a company where this hasn't resulted in disaster?
As Mark Suster put it, "Not FU money, but 'feed the family' money." What these guys got was FU money.
That's silly. Everybody involved understood why the founders would choose to do this. It has everything to do with risk and opportunity and likely nothing to do with some kind of malevolent avarice.
And bailing while returning a significant sum to investors takes courage. It's easier to sit in board meetings and pound the table and tell them how you're going to turn things around, even if you don't believe it.
> It's easier to sit in board meetings and pound the table and tell them how you're going to turn things around, even if you don't believe it.
I don't know if that's true. They have $3 million in the bank "off the table" money -- given that, it's probably easier to chill for a while and then start another company than waste time on a company you don't like anymore.
> If they keep it.. if ever there were a case for blacklisting founders, this is it.
Hell no to this horrific and toxic idea that we should blacklist anybody who sells equity and then fails.
Can you please identify yourself, so we can all be well-informed that if we go into business with you, we're going into business with somebody who believes in the public shaming and blacklisting of those who take chances and fail?
You're not cool dude. Not cool at all.
And I say that as somebody who always thought secret was disgusting and value-destroying.
Taking a chance and failing is one thing. But $6m is an absurd amount of money. That's never-work-again money (I'm not sure why they'd even mind being blacklisted). People in my neighbourhood would literally kill for less (and in a few tragic cases did).
Are you serious? After taxes that's maybe 1.8mm each. That's great, but certainly not never-work-again, especially in SF where the median one bedroom goes for 3300/month.
When doing FU calculations, you have to figure out how much you can earn from investing it, then factor in cost of living increases over the next 40 years.
Put it another way, if they invest and get 4% annually that's like earning a salary of 72k. Good luck living on that in SF with rent increases. (Starting salary for a new CS graduate at bigco in the Bay Area is like 105k).
Maybe not in SF, but if you don't have to work again there's no need to live in SF. 72k/year is well above the median national salary; it's absolutely retirement-level money.
This is not even close to never-work-again money unless you want to live Cambodia or something. There is no portfolio in the world that gives a >75% chance of a safe, comfortable lifetime of first world retirement with that amount of pretax capital. We're not even in the ballpark.
I'm assuming there was full understanding that some of the money will go to founders, with usual arguments - "brings long-term focus", "takes care of day-to-day expenses", "encourages building for the long-term instead of flipping a company", etc.
With that said, with Odeo, one thing that went down in history books is how Evan Williams graciously purchased the shares out of his personal fortune, thus making every investor even.
The irony is that if Evan Williams had not bought back the shares and had instead started Twitter out of the same corporate entity, the investors would've done a whole lot better. Instead of breaking even, they'd be sitting on a few billion.
The way the story gets told in "Hatching Twitter" is that some of those investors (SV Angel is the one called out by name) said "Cool, we'll take the money back, but this is earmarked for your next project", which still got them into early TWTR.
Here they are going home and saving some money too. Would you have the same view if Secret went on to make billions and require the Investors to pay the equity back to the founders. 6m could have been a billion there.
The only negative is if investors think the founders lacked imagination to put the money to use with a innovative Pivot.
Maybe there was no pivot in sight and then the best option is to return the rest of money and keep the 6m money the Investors gave up earlier for their big bet.
The point of letting the founders take some off the table is that the investors want to swing for the home run rather than a safer acquisition that the founders would probably take.
In fact, the investors probably let the founders take some off the table precisely to prevent the cashout. I suspect that Secret had an offer in hand from someone, but the investors wanted a bigger return.
The problem is that the little people who also had stock/stock options never got the opportunity to cash out and they would have almost certainly made the same choice as the founders.
Why did the investors allow the founders to take cash off the table? To align interests. Meaning, to swing for the fences instead of making safe, conservative decisions and building a lifestyle business that would minimize the chance of shutting down.
With the money off the table, the founders would have the freedom to try risky things, to manage the company such that the chance of failure was very high but the payoff for an unlikely success would be even higher.
The company shutting down is exactly the outcome everyone expects to be a likely outcome. The investor has a portfolio of such investments, and does not care that the founders cashed in. The one hit they get will pay for all the founders they pay out.
In fact, investors won't want to blacklist these founders. The message that would send is, "even if you get to take money off the table, you should still manage conservatively, because you will be screwed for life if you have to shut your company down."
Investors do not want founders to be terrified of shutting down.
As others have pointed out, you're obviously wrong here. The investors are big boys who knew what they were getting into when they let the founders take money off the table. If anything, the founders are being stand up guys by returning the investment money rather than "pivoting" into the ground.
I thought secret was a really, really cool idea. I downloaded the app and played with it for a few days. After the hype died down, the app was almost 100% about sexual fantasies, coming out of the closet, and having been beaten/molested as a child.
I can't be sure, but it seemed to me that the "upvote/like" mechanism boosting posts to the top (with no validity required) turned Secret into an enormous, "Who can say the most absurd clickbait thing" contest. It got tiring, and I deleted the app.
Having talked with a few other people about Secret, they said the same thing.
This was exactly my experience, even before the hype died down. 99% of the posts were from my gay friends (and friends of friends) talking about some sexual fantasy or sexual encounter.
It was simply not compelling content, so about two weeks in I deleted it.
I wonder if there was something in the marketing or the initial group of people that created some zeitgeist that eventually killed the idea? I'd be interested to know if they actively made some effort to try and get out of that rut.
I hit a speedbump pretty fast when they wanted me to give up my address book. Yik Yak never asked for that. Yik Yak is still on my phone. Both are kind of crappy ideas, but if there was a clear winner it was the people that just let me use the damn app.
From my very limited perspective from outside Silicon Valley, Secret looked almost like an exercise in Silly Valley self-parody - like an elaborate joke that went too far. Did it implode? Yeah, sure. Did it ever make sense in the first place? Not really.
pg says that great ideas often look like bad ideas. But I think it's also true that bad ideas often look like great ideas.
This has been a fascinating story to watch unfold (and experience as a user.)
When Secret came out, the addiction bug bit me hard too -- it was _extremely_ compelling. I posted. My friends posted. Everyone was checking Secret obsessively. People were "communicating" with their exes (or so they thought), people were guessing who was posting what. It was fun. It was interesting. It pulled some emotional heartstrings (I had a few interactions with "friends" who I was pretty certain I would never have spoken with in real life - i.e. bad breakups, etc.)
Then it took a nasty turn. There was gossip, there were attacks. They didn't get too bad, but the tone changed.
Then they released the Android app. More users signed up. It started to take on a high school feeling ("omg my crush winked at me"). It got more popular.
Then, at least in SF, it started being almost entirely about gay sexual fantasies. Friends in my circle started using it less, so it got less interesting to me. Eventually I stopped using it when nobody I knew was posting.
After that, I stopped following. They did some massive redesign which seemed terrible, and I didn't really pay attention after that.
In the end, it was a niche fad that had particular appeal if you were a tech person in SF. All the gossip - as taboo as it was - was interesting and compelling (I admit it!). It was a fun, exciting, interesting fad, but it succumbed to the sort of thing fads usually succumb to -- time.
The problem with these sorts of things - flash in the pan community-specific fads - is that they're _incredibly_ hard to sustain, and even harder to monetize as a business. I certainly understand the instinct of VCs to throw money at a hot app experiencing meteoric growth (and I doubly understand the response of the founders to take both the investment and the secondary $), but it was a longshot to start with.
Frankly, I admire them for giving it a shot, recognizing the reality, and returning the leftover capital. Well and rationally played all around, me thinks.
"When Secret came out, the addiction bug bit me hard too -- it was _extremely_ compelling....Then it took a nasty turn. There was gossip, there were attacks. They didn't get too bad, but the tone changed."
And all of that, from what I recall, in the course of maybe three months. It wasn't hard to predict the decline -- the Greater Internet Fuckwad Theory has been around since what, 2004?
Maybe the investors who dump money into this kind of flash-in-the-pan stuff ought to wait a few minutes before signing the term sheets. But, oh yeah...because we're in a white-hot investment market, the Fear of Missing Out (aka Fear of the Greater Fool) doesn't let you stop to think.
It seems to me that VC's take heat for investing too early, too late, too much and too little. Being too conservative or too risky. They're an easy punching bag.
I don't ordinarily care what VC's do with their money (i.e. mostly lose it), but it's disingenuous to suggest that there aren't clear trends: it's very difficult to raise a series A, but if you're the hype-driven flavor-of-the-moment, you can close a round with little to no diligence, few metrics and none of the proof traditionally required of a series A investment. We're still seeing money get shoved at companies who had a moment in the sun on ProductHunt or Reddit, with zero validation of the underlying business prospects (or even much in the way of critical thinking).
So yeah, VC's do take heat for investing too early, too late, too much and too little. It isn't a contradiction -- it's what people do when they act as a herd.
Because the best validation is people using your product. Or technically, the best validation is people paying for your product, but if they're doing that in amounts great enough for a VC to notice then you don't need to raise VC.
The herd behavior comes from everyone having more-or-less the same metrics for what constitutes success: people using your product. If that metric isn't evident, you fall back on the fundraising strategy for people who don't have traction: try lots of VCs and hope that one buys into your vision enough to invest. If the next better metric - lots of revenue - is evident, then it's too late and chances are that someone else has already invested, or they don't need investment.
Ehhh. Traction is a necessary, but insufficient condition for getting a series A. There's a "hotness" component here that's contributing to the overreaction.
You can't explain things like (for example) Meerkat raising a big round and cratering the very next week without considering the importance of hype. Meerkat and Color and Secret are walking out the door with big checks while lots of other entrepreneurs with great metrics are waiting for their fifteenth meeting...because they're not in the tech gossip rags.
Say what they will in public, I'll bet you that Meerkat's investors are wishing they'd sat on that term sheet for a couple of days.
In my area Secret had a similar story - started out being popular with people in their 20+'s, putting out some insightful/funny content (perhaps with some light local context). Content slowly started spiraling downward toward very specific sort of circle-jerked inside jokes (e.g. jokes about some high-schools, fraternities and even specific kids at larger schools).
Anyway it is a shame because there were people out there put out genuinely good content.
The experience is similar with the app 'Fling' (Send snapchat-like picture to 50 random people) 70% of the content is guys lying in bed with 'lol hi any gurls?'.
Perhaps a way to remedy this would be to cluster on 'like-mindedness'. Then have content show more according to whatever cluster you are in. Constant feedback on what you like and what you put out.
Some good ML + NLP based filtering could give the impression at least that many like-minded people are using the app and inspire people to put out content. If you don't allow users to control the content they follow (Facebook / twitter / vine / youtube / snapchat - 'supervised') you have to direct the right kind of content to users in an 'unsupervised' way.
> Then, at least in SF, it started being almost entirely about gay sexual fantasies. Friends in my circle started using it less, so it got less interesting to me. Eventually I stopped using it when nobody I knew was posting.
This happened in Boston as well. It was really odd how rapidly it changed from a mix of different types of posts to nearly all gay sex posts.
I wonder if that won't flow over to Yik Yak now that Secret has shut down?
Secret didn't have a mechanism to remove offensive posts that was as effective as Yik Yak's is.
Yaks can be raunch as all get out, but there has to be something for the average person to relate to. If you follow it closely, you'll see there are many posts made while the author has lost their mind with hormones, but they're voted off in about 120 seconds.
Yik Yak's mechanism for removing "offensive" posts is exactly why I stopped using it. The amount of mundane posts of mine that were deleted was incredible. Too many people take offense to so many things.
My office had to have a special meeting about personal and sexual harassment on this app (some people decided to discuss colleagues on secret, and not their professional capacities). It started with fun prank, but ended up being really weird and awkward, and people were really hurt by the abuse.
Needless to say, I wasn't a fan of the app afterwards.
I was also a user, and experienced many of these same things.
Makes you wonder if they didn't spread their net too wide too quickly. Perhaps "Gay Secret for the SF area" might have taken off -- and given the team the chance to tweak/nail the experience.
"Then they released the Android app. More users signed up. It started to take on a high school feeling"
when you mention the injection of android users, aren't you really talking about inner city high school kids using the app on boostmobile and metropcs phones?
I've never been more addicted to an app than when Secret first came out. It was all the rage in SF. I had to force myself to delete it after a few weeks in order to get back to productivity. I completely understand the hype. Personally, I feel this is a story about poor execution. They changed the nature of the app so significantly over time that it lost its appeal and never expanded successfully beyond the bay area. Shame.....it was so much fun and they are such a talented team.
The Bay Area is a truly unique and bizarre place. People are incredibly busy and tech-savvy, and they're willing to spend way more on minor conveniences than people elsewhere.
It seems like lots of companies raise on their explosive growth in and around the SV community. It may extend to people with similar demographics in other cities, but it's still a niche.
I'm also thinking of all those gourmet snack-delivery companies, laundry-delivery, etc. Those might make a few million in revenue some day, but they're never going to have high margins or universal appeal.
It went extremely viral in Israel about a year ago.
At first with the start-up community that's very connected to SF used it for internal gossip and anonymous whining and dissing.
Then it expanded naturally to young creative types (developers, designers, bloggers, journalists, etc) who are connected to the start-up scene, and became big in the gay community in Tel-Aviv, that highly overlaps both groups.
And then the mainstream media started raving about it, and it exploded with the masses and especially teens. At this point it just became a cesspool of online bullying for teens, and I lost interest in following its path. There was even a proposed law banning it in Israel or something (http://pando.com/2014/08/28/israel-becomes-latest-country-to...). But seeing this expansion graph over a period of 2-3 weeks last summer was fascinating.
Good, and good riddance. Anyone who invested in Secret is a fucking moron. You can't monetize anonymous messaging, and no established company would buy technology they could build in an afternoon hackathon for the cost of a couple cases of Red Bull. If you need proof, 4chan's run at a loss for over a decade. Any investor in a VC fund that invested in Secret should sue their fund for mismanagement of money.
What the op is saying that nobody has yet worked out a way to monetise anonymous messaging. I can think of a few ways that it could be done (none ethical), but the major problem is that as the barrier to entry in this market is so low it is hard to prevent your user base defecting if you try. There is little network effect and no content ownership by the users to prevent them walking away.
You can slap ads on anything. But the chance of slapping enough ads on a service to earn a multiple of a £130M valuation is pretty slim at the best of times, and when it's part of a trend of new "social" apps whose distinguishing feature is that they don't have network effects or targeting...
VCs backing startups whose primary hope of a major return is to get enough eyeballs to make Facebook nervous enough to buy them deserve to take losses more than most.
> it's part of a trend of new "social" apps whose distinguishing feature is that they don't have network effects or targeting...
May I indulge in a bit more? In these anonymous social apps, it is made explicitly clear that you are anonymous but traceable. It means that the service can identify your unique mobile device identity as it wishes to. You are ONLY anonymous in the eyes of the users of the app; in terms of the service provider there is NO difference.
I'm also curious. Please explain why YikYak will fail. Or does that not really count as anonymous messaging because it gives people better chances to reveal themselves than Secret? If so I think maybe https://yourlogicalfallacyis.com/no-true-scotsman
notahacker beat me to it, but how do you sell ads to an anonymous audience without compromizing the anonymity of the audience? You can't, unless you want to do cheap, dumb banner ads. They missed the chance to monetize up front by launching as a free app. Any investor who looked at this app and thought for more than ten seconds should have run screaming, or had security drag the founders out of the building. Or both.
252 comments
[ 2.8 ms ] story [ 264 ms ] threadSecret raised their B last July at a post valuation just over 130M (http://i.imgur.com/jNXw5PZ.png). They had some major investors backing them up, and then the hype train just... stopped.
I remember so many people being so high on it when it launched, with several friends all raving about how fun/addicting it was, then just poof it disappeared from conversation.
Hearing that the founders got some cash off the table (article from last summer - http://www.businessinsider.com/secret-founders-pocket-6-mill...). While I always thought that seems like a good thing, I can't help but let my mind wander a bit as I know if I were given a nice chunk of change like that so early, it might be kind of hard to keep focus.
Taking money off the table in a B makes sense for the founders, and I can't blame them for leveraging their situation.
Ultimately this falls on the investors for biting on hype, and not having a deeper understanding of the product (and it's potential)or the founders (and their potential).
edited for clarity.
Here was the intended use of the $25M: "The funding will be used to implement two new features, a Facebook login and the ability to follow posts on a certain topic". This is what is wrong with Silicon Valley today. An afternoon project for a single developer gets $25M from investors. Please, someone give me just $10M....I've already implemented Facebook login for my apps.
https://www.google.com/finance?q=NYSE%3ABOX&fstype=ii&ei=IQp...
So go for it!
$25M.
For TWO features.
Hell, ignore my previous offer. I'd have given them a 92% discount and done that for a cool $2MM.
You're already asking for a price so low you might end up barely scraping $100,000 an hour.
The purpose of the money was to grow the company. For a business < 1 year old it's impossible to predict what they'll need, so they just fill in the blank with some random sentence that no one cares about.
it's very easy to believe the worst of others. but it's beneath you.
Pure speculation, but I think trolls/frauds took it over. I say this as a Secret troll myself. I knew the odds of the data (linked to my FB account) becoming public was too high to post real secrets, so I used to just experiment with what got people liking or leaving comments instead. Which was amusing.. until I could tell a lot of people had started doing the same. So I stopped using it.
[0]: http://iamping.com/
Although assuming muted users continue to post controversial things, in the long run it may just lead to less reporting.
Recently, we did some analysis (sensitivity, type, potential audience and linguistic characterists) on the content posted on anonymous social media like Whisper [0]. Most of the posts were about Confessions, Relationships, Meetup and QnA/Advice.
[0] http://socialnetworks.mpi-sws.org/papers/anonymity_shades.pd...
The key difference between anonymous vs non-anonymous (or pseudonymous) media is lack of unique identities and/or profile information.
People posting nude photos and stuff.
I think the curation of content was a huge challenge for them., and also not to mention the new app design was not at all intuitive with lots and lots of bugs.
But having said that, I had lot of hope in this app.
The post also includes the phrase "incredible journey" verbatim.
> Companies go broke all the time. It’s unfortunate and it may mean a service you love will close. But some things just don’t work out. [...] This is what is galling. A company that can afford to pay millions for some new staff but not for what those staff built. The people who used the service, and invested their belief and time in uploading photos, or forming friendships, or logging data, are left to find new virtual homes while their former hosts enjoy a nice (if possibly delayed) payday.
-- http://ourincrediblejourney.tumblr.com/post/89180616013/what...
Although admittedly, from an end-user's perspective, the effects are the same no matter the reason for the shutdown.
1) A social app like this, which is essentially hype-based and self reinforcing. Success seems entirely down to virality and adoption, followed by monetization.
2) Some very vertical market focused SAAS offering which can be developed with minimal outside capital, own a niche, and where capital can then be applied to expand to other verticals, accelerate the sales process, etc. (Say, a scheduling application for vets)
3) A capital intensive project in a well understood field (IAAS, hardware, lab stuff, etc.)
4) Entirely new technology deployment (not discovery, which tends to be hugeco or lab, but first commercialization)
Clearly there are some commonalities, but there are a lot of areas like employee vesting periods, how you recruit, etc. which probably should be different in these different kinds of companies, but tend to be the same.
Wow. I guess their round was oversubscribed so they were able to sell this to the vcs. This is the first case where I heard of where a startup failed recently after founders took significant money off the table. I wonder if vcs will be able to use this as an argument to combat founders wanting to do the same in the future.
I have mixed feelings about the whole affair but I have to hand it to the founders. That was really smart of them to take life changing money when they could.
So yeah some VC's may use this argument but if the startup isn't desperate its the VC who will have to make the concession.
Minus the $6M the founders took off the table?
If they keep it.. if ever there were a case for blacklisting founders, this is it.
It is definitely NOT cool to pull a move like that. You want to cash out early a little because you've been boostrapping, ok, but if you then bail on the company and shut it down within a year, then you start to look like a fraud who knew the company was in trouble and took advantage of investors.
It's always controversial, and never more so in my memory than here.
In fact, when executives sell a bunch of stock right before public companies announce bad news or go bust it often warrants an insider trading investigation.
It would be nuts to try and claw back that money. The founders surely had remaining equity which is now worthless, everyone is taking a hair cut.
> In fact, when executives sell a bunch of stock right before public companies announce bad news or go bust it often warrants an insider trading investigation.
They didn't just do this, the last round was in July 2014. It was a flash in the pan.
Secret isn't a public company. Secret's investors are insiders themselves.
I'm not close enough to Secret to know whether the system functioned as intended here. It's possible (and suspicious, given the timing of the rounds and subsequent redesign that trashed their brand) that Secret rode the hype machine, cashed out at the top of the Secret bubble, and left investors holding the bag. But it's also possible (and likely, given public statements made and their hiring behavior) that this was a good-faith investment by VCs seeking a return in a company that honestly thought they were on to the next big thing and cashed out so that their risk-tolerance would be aligned as they shot for the next big thing. In that case, the founder cash-out functioned exactly as intended, it just didn't have the outcome anyone was hoping for.
2. It is ridiculous to assume they pulled any move. Startups are a high risk gamble and the VCs who put money in them know it better than anyone else does. So they didn't pull a move on anyone.
3. Let's say a company raises $1M on a $3M valuation. Then in one year the valuation goes up to $300M. Would you be calling for blacklisting of those investors? Because by your logic, they should know the company was going to be so successful and should have given the founders a better deal.
However, founders who would pocket $6M from a not-even-close-to-profitable company are probably not good founders, or they don't believe in the company. Either way, their behavior doesn't inspire confidence.
Most founders are extremely protective of their startup. It's their baby, and their livelihood. They'll do anything to keep it alive. Most "poor"(<$5M in the bank) would prefer a 'safe' acquisition to gambling on being a world changer. A good accusation can change a persons life forever $10M verses $100M? Who cares? Either way it's a lifetime worth of fuck-you-money. But investors what entrepreneurs to "go big." So if an investor finds a company and team that they think has a chance of making it they will give the founders fuck-you-money. It says, "ok, your safe, nothing can hurt you. Now take the chance of building a company that can change the world!"
When you see a founder take a big chunk of cash from an early round, you shouldn't think, "they don't believe in what they're doing." You should think, "These investors (who know these founders a lot better then I do) think that they are so awesome, and have such a high chance of doing something transformative, they are basically giving them enough money that they will never have to worry about money again."
That sort of thing in the public markets would prompt an SEC investigation for insider trading (despite it being "their money"). In the startup world it comes down to, these are not folks investors should be trusting.
Or "trust these guys: if they fail, they won't bullshit you and just give you the money they have remaining back."
It's all about perspective. Luckily, most investors don't think like you. Ones that do don't survive that long in the business.
I'm the sort of founder that thinks it's my duty to return value to shareholders. I should make money when my investors make money. I would argue that is the only perspective that survives the long term in business. Riding hype waves to enrich one's self without producing real product, that's not sustainable.
I know we're all founders here and would love to get the kind of deal the Secret guys negotiated (or Groupon, etc.). But it's not healthy for our industry. Basically the arguments in support of these guys is, well the investors knew what they were getting into. But that could be said for any scammy move by a founder. If they're trying to "do the right thing" they should return all the money to investors, minus a reasonable salary.
You can be a founder that thinks it is your duty to return value to shareholders and still take money off the table. In fact, there are situations where not taking money off the table hurts your shareholders.
Example: you're a poor founder with $400K in loans and 0 in saving, you're running a startup with good traction. You get a $20M acquisition offer and you accept it thinking it lets you clear debt and not be super poor anymore. Problem? Your investors barely get their money back so an exit you consider successful is not that successful of an exit for your investors.
Now imagine the investors let you take $1M off the table to clear debt and get a little comfortable. Now when the $20M offer comes in, it is easy for you to turn it down because you aren't in debt and you have a decent life. As a result, you end up building a $500M company. Your investors come out ahead because the equity they got for $1M cash you took off the table made them $10M, not to mention it gave you the mindset to turn down the $20M acquisition offer.
For many funds, they would rather you fail trying to make a company that is valued at $500M than be successful in building a company that is only worth $20M. Letting founders take cash off the table can help founders think as big as their investors do about the max potential of the business.
As Mark Suster put it, "Not FU money, but 'feed the family' money." What these guys got was FU money.
And the definition of "money off the table" is "keep it if things head south," so it's pretty hard to begrudge them for obeying the terms of the deal.
And bailing while returning a significant sum to investors takes courage. It's easier to sit in board meetings and pound the table and tell them how you're going to turn things around, even if you don't believe it.
I don't know if that's true. They have $3 million in the bank "off the table" money -- given that, it's probably easier to chill for a while and then start another company than waste time on a company you don't like anymore.
Hell no to this horrific and toxic idea that we should blacklist anybody who sells equity and then fails.
Can you please identify yourself, so we can all be well-informed that if we go into business with you, we're going into business with somebody who believes in the public shaming and blacklisting of those who take chances and fail?
You're not cool dude. Not cool at all.
And I say that as somebody who always thought secret was disgusting and value-destroying.
When doing FU calculations, you have to figure out how much you can earn from investing it, then factor in cost of living increases over the next 40 years.
Put it another way, if they invest and get 4% annually that's like earning a salary of 72k. Good luck living on that in SF with rent increases. (Starting salary for a new CS graduate at bigco in the Bay Area is like 105k).
With that said, with Odeo, one thing that went down in history books is how Evan Williams graciously purchased the shares out of his personal fortune, thus making every investor even.
...oh, right, only founders get to do this. Everyone else (who had <1% equity to begin with) gets zilch.
Here they are going home and saving some money too. Would you have the same view if Secret went on to make billions and require the Investors to pay the equity back to the founders. 6m could have been a billion there.
The only negative is if investors think the founders lacked imagination to put the money to use with a innovative Pivot.
Maybe there was no pivot in sight and then the best option is to return the rest of money and keep the 6m money the Investors gave up earlier for their big bet.
In fact, the investors probably let the founders take some off the table precisely to prevent the cashout. I suspect that Secret had an offer in hand from someone, but the investors wanted a bigger return.
The problem is that the little people who also had stock/stock options never got the opportunity to cash out and they would have almost certainly made the same choice as the founders.
Why did the investors allow the founders to take cash off the table? To align interests. Meaning, to swing for the fences instead of making safe, conservative decisions and building a lifestyle business that would minimize the chance of shutting down.
With the money off the table, the founders would have the freedom to try risky things, to manage the company such that the chance of failure was very high but the payoff for an unlikely success would be even higher.
The company shutting down is exactly the outcome everyone expects to be a likely outcome. The investor has a portfolio of such investments, and does not care that the founders cashed in. The one hit they get will pay for all the founders they pay out.
In fact, investors won't want to blacklist these founders. The message that would send is, "even if you get to take money off the table, you should still manage conservatively, because you will be screwed for life if you have to shut your company down."
Investors do not want founders to be terrified of shutting down.
I can't be sure, but it seemed to me that the "upvote/like" mechanism boosting posts to the top (with no validity required) turned Secret into an enormous, "Who can say the most absurd clickbait thing" contest. It got tiring, and I deleted the app.
Having talked with a few other people about Secret, they said the same thing.
It was simply not compelling content, so about two weeks in I deleted it.
I wonder if there was something in the marketing or the initial group of people that created some zeitgeist that eventually killed the idea? I'd be interested to know if they actively made some effort to try and get out of that rut.
Curated! #help
pg says that great ideas often look like bad ideas. But I think it's also true that bad ideas often look like great ideas.
[0] https://en.wikipedia.org/wiki/Poe's_law
It's a really, really silly thing to say.
When Secret came out, the addiction bug bit me hard too -- it was _extremely_ compelling. I posted. My friends posted. Everyone was checking Secret obsessively. People were "communicating" with their exes (or so they thought), people were guessing who was posting what. It was fun. It was interesting. It pulled some emotional heartstrings (I had a few interactions with "friends" who I was pretty certain I would never have spoken with in real life - i.e. bad breakups, etc.)
Then it took a nasty turn. There was gossip, there were attacks. They didn't get too bad, but the tone changed.
Then they released the Android app. More users signed up. It started to take on a high school feeling ("omg my crush winked at me"). It got more popular.
Then, at least in SF, it started being almost entirely about gay sexual fantasies. Friends in my circle started using it less, so it got less interesting to me. Eventually I stopped using it when nobody I knew was posting.
After that, I stopped following. They did some massive redesign which seemed terrible, and I didn't really pay attention after that.
In the end, it was a niche fad that had particular appeal if you were a tech person in SF. All the gossip - as taboo as it was - was interesting and compelling (I admit it!). It was a fun, exciting, interesting fad, but it succumbed to the sort of thing fads usually succumb to -- time.
The problem with these sorts of things - flash in the pan community-specific fads - is that they're _incredibly_ hard to sustain, and even harder to monetize as a business. I certainly understand the instinct of VCs to throw money at a hot app experiencing meteoric growth (and I doubly understand the response of the founders to take both the investment and the secondary $), but it was a longshot to start with.
Frankly, I admire them for giving it a shot, recognizing the reality, and returning the leftover capital. Well and rationally played all around, me thinks.
And all of that, from what I recall, in the course of maybe three months. It wasn't hard to predict the decline -- the Greater Internet Fuckwad Theory has been around since what, 2004?
Maybe the investors who dump money into this kind of flash-in-the-pan stuff ought to wait a few minutes before signing the term sheets. But, oh yeah...because we're in a white-hot investment market, the Fear of Missing Out (aka Fear of the Greater Fool) doesn't let you stop to think.
So yeah, VC's do take heat for investing too early, too late, too much and too little. It isn't a contradiction -- it's what people do when they act as a herd.
The herd behavior comes from everyone having more-or-less the same metrics for what constitutes success: people using your product. If that metric isn't evident, you fall back on the fundraising strategy for people who don't have traction: try lots of VCs and hope that one buys into your vision enough to invest. If the next better metric - lots of revenue - is evident, then it's too late and chances are that someone else has already invested, or they don't need investment.
You can't explain things like (for example) Meerkat raising a big round and cratering the very next week without considering the importance of hype. Meerkat and Color and Secret are walking out the door with big checks while lots of other entrepreneurs with great metrics are waiting for their fifteenth meeting...because they're not in the tech gossip rags.
Say what they will in public, I'll bet you that Meerkat's investors are wishing they'd sat on that term sheet for a couple of days.
Anyway it is a shame because there were people out there put out genuinely good content.
The experience is similar with the app 'Fling' (Send snapchat-like picture to 50 random people) 70% of the content is guys lying in bed with 'lol hi any gurls?'.
Perhaps a way to remedy this would be to cluster on 'like-mindedness'. Then have content show more according to whatever cluster you are in. Constant feedback on what you like and what you put out.
Some good ML + NLP based filtering could give the impression at least that many like-minded people are using the app and inspire people to put out content. If you don't allow users to control the content they follow (Facebook / twitter / vine / youtube / snapchat - 'supervised') you have to direct the right kind of content to users in an 'unsupervised' way.
This happened in Boston as well. It was really odd how rapidly it changed from a mix of different types of posts to nearly all gay sex posts.
I wonder if that won't flow over to Yik Yak now that Secret has shut down?
Yaks can be raunch as all get out, but there has to be something for the average person to relate to. If you follow it closely, you'll see there are many posts made while the author has lost their mind with hormones, but they're voted off in about 120 seconds.
It sounds like the moderation was working for the good of the community, even if it meant some individuals (such as yourself) suffered for it.
I think there's definitely room for this type of service and the original Secret was fairly well-executed.
Needless to say, I wasn't a fan of the app afterwards.
Makes you wonder if they didn't spread their net too wide too quickly. Perhaps "Gay Secret for the SF area" might have taken off -- and given the team the chance to tweak/nail the experience.
when you mention the injection of android users, aren't you really talking about inner city high school kids using the app on boostmobile and metropcs phones?
This seems to be something of a meme.
The Bay Area is a truly unique and bizarre place. People are incredibly busy and tech-savvy, and they're willing to spend way more on minor conveniences than people elsewhere.
It seems like lots of companies raise on their explosive growth in and around the SV community. It may extend to people with similar demographics in other cities, but it's still a niche.
I'm also thinking of all those gourmet snack-delivery companies, laundry-delivery, etc. Those might make a few million in revenue some day, but they're never going to have high margins or universal appeal.
At first with the start-up community that's very connected to SF used it for internal gossip and anonymous whining and dissing.
Then it expanded naturally to young creative types (developers, designers, bloggers, journalists, etc) who are connected to the start-up scene, and became big in the gay community in Tel-Aviv, that highly overlaps both groups.
And then the mainstream media started raving about it, and it exploded with the masses and especially teens. At this point it just became a cesspool of online bullying for teens, and I lost interest in following its path. There was even a proposed law banning it in Israel or something (http://pando.com/2014/08/28/israel-becomes-latest-country-to...). But seeing this expansion graph over a period of 2-3 weeks last summer was fascinating.
I have always been curious about this part. What are the reasons you think one can not monetize anonymous messaging?
VCs backing startups whose primary hope of a major return is to get enough eyeballs to make Facebook nervous enough to buy them deserve to take losses more than most.
May I indulge in a bit more? In these anonymous social apps, it is made explicitly clear that you are anonymous but traceable. It means that the service can identify your unique mobile device identity as it wishes to. You are ONLY anonymous in the eyes of the users of the app; in terms of the service provider there is NO difference.