It would seem that the founders have "won" their own GoFundMe campaign. But kudos to them for realizing that the company's growth had exceeded their personal threshold for interest/time/size, and handing over the reins early.
Heh.. every time I read one of these 30 somethings founders (as I am) striking it rich on some buy out deal etc.. I think to myself, why the f%$k am I still cranking behind this desk? Then I return to work the next day oblivious and pretty much content sigh...
Because some of us don't burn with firey passion in every cell of our being for whatever idea it is that we're grinding on at present, and that's OK. It's REALLY REALLY HARD to get to the point where your idea goes from concept to reality to buy-out and there's many, many, many sleepless nights and stressful days to get there. Some people have that burning drive, and some people don't, and neither one is better than the other. Every passionate entrepreneur needs employees, and employees need people to work for and products they want to contribute to. Some of us are entrepreneurs, and some of us are employees.
Are you of the opinion that everything is luck? I certainly see that bandied about quite a bit. As an optional follow-up, if you do believe it all comes down to luck, do you also believe that is fundamentally unfair?
> Luck Is What Happens When Preparation Meets Opportunity
I suppose this depends on the definition of luck. Unfair, no. Lebron James was born with talents ~nobody else has been born with. Was he lucky? Yes, in that he didn't have a say in the matter. Did he work hard? Yes.
You're asking a very complicated question, which as it turns out, is a very fun thought experiment.
These articles don't tell you about the 30-somethings that burned their life savings chasing an idea and not getting the same result. Ultimately, the narrative that success is directly the result of hustle isn't necessarily true.
The math is pretty clear that 75% of the time, you will fail.
> There is recent research by Harvard University’s Shikhar Ghosh that three out of every four venture-backed firms fail, which was newsworthy because the failure rate was higher than normally cited by the venture capital industry.
If you manage to get VC funding, you're still going to fail three times out of four. But, that assumes you're one of the 8.3% of companies reviewed by a VC firm that gets funding.
What percentage of nascent companies don't even get so far as a warm intro to a VC?
The worst that happens is you gain entrepreneurial skills and lose a few thousand dollars in the process. SMB's have always had these odd's for hundreds of years. It really depends on what you value: freedom or perceived security.
> The good news: Because few meaningful statistics exist about small, privately held companies, the astronomical business-failure rates that we hear quoted so often tend to be misleading. For instance, a survey done by the U.S. Commerce Dept. says that of every 10 small businesses, 7 will survive their first year, 3 will still be going after 3 years, and only 2 will remain after 5 years.
> Most of us know through experience, however, that a lot of independent businesses do indeed close their doors quickly -- with certain industries more prone to see startups fold than others. Figures compiled by the National Restaurant Assn., for example, show that 80% of independently owned eateries fail within their first two years, for instance.
It doesn't seem to be much worse/different for non-VC. Just smaller scales.
What HN and talking to entrepreneur friends has taught me is that you should start a company if your driver is creating something of your own and the fact that you'd just enjoy the work.
Doing it just for money doesn't make sense. There are easier ways to get rich.
Banking or management consulting? If you're willing to put up with insane hours and no life, it's not hard to get to the point where you're earning over $1M/yr in salary + bonus. And it's low risk. If you're smart enough and put in the time, that kind of compensation can almost be guaranteed.
This is basically it. Don't get me wrong, it can take a lot talent and hard work to hit it big, but alongside that that talent is a large series of fortunate events (luck) that helped that person achieve their goal, whether it happened to be timing, networking, etc.
I met the founders once at a StartUp-SD event hosted by Brant Cooper, back when I lived in the area. Great guys from my experience then and I'm really happy to see them get this outcome.
Interesting that it's a guy from Groupon that will take over. Even more interesting is that he wants to have an office in SF with the market this crazy...
I'm happy for these guys but is it just me or is a 5% transaction fee nuts? I know, I know, Kickstarter, Indiegogo, you name are all roughly the same, and yes, there is value in the "platform", publicity, etc. -- but you're basically just sending money from one person to another. Venmo (which is basically free) could roll out a platform like this in no time and charge 1 or 2%.
I just wonder why, in 2015, with all our technological progress and all the "innovation" in the payments space we're still tolerating really high transaction costs. /endrant
Because 5% may be way more efficient than what we have now? (If it's not, there's no point in doing this.) But then, in a year or two, Venmo or whoever can charge 1 or 2% and eat their lunch.
Did cheap auction sites eat eBay's lunch? I'm not sure a couple of percent is as important as the other features like ease of use, sharing, and promotion.
Most of the value is in the site. You don't see people fundraising for their friend's family on Kickstarter - it's known as being a hub for products.
Venmo's situation is also different, since they use ACH to move money (very cheap). GoFundMe might accept credit cards, which means there are industry standard processing fees of roughly $0.30 + 2.9%. (It's in best interest for GoFundMe, Tilt, etc. to push users towards debit card payments since the associated fees are lower.)
> In North America alone, nonprofits are a $300 billion-a-year industry. There’s a lot of fat in there. If we do our jobs well, we can remove friction as it relates to giving
I think the point is that people give to charities as a proxy for "helping people." Massive research oriented charities probably won't be displaced by something like GoFundMe, but the idea is that average people can directly fund the needy on a case by case basis (i.e. instead of paying for the administrative fees of a charity that helps sponsor scholarships, you can directly fund the recipient?)
Granted the recent revelations into the Red Cross grossly mishandling resources in Haiti and not sharing records of their financial expenditures [1] it's safe to assume Non-Profit Orgs don't have enough paper trail to safely verify what the money actually does.
More direct funding for specific projects might not be perfect, but it may simplify the process of getting real things done.
> In North America alone, nonprofits are a $300 billion-a-year industry. There’s a lot of fat in there. If we do our jobs well, we can remove friction as it relates to giving
If they take 5% of every campaign,it means that in order for the investors to make back their money, Gofundme will have to raise $12.000 million in its lifetime, assuming that their costs are 0.
I couldn't find stats for GoFundme, but Kickstarter was able to raise $529 million in 2014. [0]
I do, and if there were to be a price/fee war between the different crowdfunding platforms I expect that price to go even lower. Indiegogo just lowered their 9% fee for campaigns not fully funded to 5%.
I see lots of people on my Facebook feed asking for donations via GoFundMe. I think that might be their target market.
Because you get any money donated regardless of if you reach your goal, it's a bit different than KickStarter (?). Those same people are the people who I now write off as moochers, because it's always something to personally benefit them.
For example (and this is a sad one): someone was asking for donations to help her get her back fixed so she could live a normal life. Health insurance wasn't covering it. She claimed she was broke.
The last 6 months she's been going to every major music festival.
Oh, so she's a neo-hippie. Instead of begging on the streets for money to follow Grateful Dead around, she's doing it on the internet to follow jam bands and electronic artists around.
The more things change, the more they stay the same. :D
That's not how company valuations work. A company doesn't have to bring in $1 million in profit for investors who valued the company at $1 million to break even.
At very late stages, a company valuation is usually a multiple of EBITDA (earnings before interest, taxes, depreciation and amortization). The valuation (which is different than market cap, but we'll conflate the two for sake of explanation) in very late stage, non-growing companies, during times of slow economic growth is around 5-7x. If a company is growing quickly at the later stages (read: exponential growth curve) its P/E ratio (price/earnings ratio) could be, we'll say, 100 on the public markets (100x). That's really high, and would rarely happen unless the economy has really low interest rates (meaning less good places to put your cash, and you need to invest it somewhere anyway).
So, in other words, we give the company the benefit of the doubt and say they'll be worth 30x EBITDA. That means they'd need to bring in about 20m in one year, which is about 400m in total donations. High for sure (the buyers must really believe in them), but not completely unreasonable. If, on the off chance, they start bringing in 1B in donations, and their take is 50m, the investors will earn a great multiple on their investment. That's probably what they're hoping for.
I think Josu was actually correct and you two are talking about two different things. Josu is saying that if the purchasers cannot find another (greater?) fool to flip the company to then they will have to manage 12 billion dollars in transactions with 0 costs if they are only charging 5% in order to break even. That's just simple math, 5% of 12 billion = the 600 million dollar buy-out price. That's if nothing changes in terms of what percentage they keep and if they have 0 costs. If the purchasers are going to buy and hold they will need to handle 12 billion dollars in transactions at 0 expenses to get their buying power back to buy another company, unless they can flip the company or borrow against it.
You are saying that the purchasers have broken even on the deal so long as they have not lost money on paper in the valuation since they can probably either borrow against it or sell it off.
It comes down to are you paying for current value, or potential growth in value. Frankly, in my opinion, markets that rely upon a greater fool to bail you out to make your money rather than just getting it back the old fashioned way by providing a good or service are way too frothy.
Counter-argument is that you are betting on growth, not a greater fool bail out. In this instance the only way to get that growth while still handling less than 12 billion in transactions is by increasing their take from 5% to something higher or adding on ancillary sales. I'd bet on ancillaries, but this isn't my space.
By the way for those reading who may not know, I was referencing Greater Fool Theory, not making a pejorative statement (heh, beyond what the theory itself may make). https://en.wikipedia.org/wiki/Greater_fool_theory
Thank you for your thorough explanation, but I was just trying to use simple maths. Because if things don't add up with a very basic model, they won't either when you add complexity to it.
I actually found the numbers and Gofundme brought in $470M in 2014, which is actually a bit more than Kickstarter. So, $23.5M in revenue.
I don't know what the costs of operating a crowdfunding site are but I don't think that the valuation could have been less than 30X EBITDA.
But yeah, with $23.5M in revenue and with such a fast growing market, a $600M valuation doesn't seem as crazy as I thought. I personally don't think that the company will ever make $600M in profit, but hey, as log_n puts it, for now they can still look for a greater fool.
Assuming this is their only business model into perpetuity. If they find a way to build a strong defensive moat around their business, they can start charging monopoly rents. The 5% seems like the minimum they can charge to stay in business while they're figuring out what their real business model is.
They never took capital and now they exited to an investor syndicate led by VCs. Wow - how times have changed. Founders (of hot companies) hold all the cards. No wonder valuations are sky high.
62 comments
[ 14.2 ms ] story [ 784 ms ] threadIf HN taught me anything, it's precisely that I am not an entrepreneur. That's not to be sneezed at... it's saved me a lot of pain and headache!
(While I'm happy where I am, I could be a pretty good "very early engineering" hire.)
I suppose this depends on the definition of luck. Unfair, no. Lebron James was born with talents ~nobody else has been born with. Was he lucky? Yes, in that he didn't have a say in the matter. Did he work hard? Yes.
You're asking a very complicated question, which as it turns out, is a very fun thought experiment.
The math is pretty clear that 75% of the time, you will fail.
> There is recent research by Harvard University’s Shikhar Ghosh that three out of every four venture-backed firms fail, which was newsworthy because the failure rate was higher than normally cited by the venture capital industry.
http://www.washingtonpost.com/blogs/fact-checker/wp/2014/01/...
The math is way worse than that: http://venturebeat.com/2014/04/19/heres-a-look-inside-a-typi...
If you manage to get VC funding, you're still going to fail three times out of four. But, that assumes you're one of the 8.3% of companies reviewed by a VC firm that gets funding.
What percentage of nascent companies don't even get so far as a warm intro to a VC?
> The good news: Because few meaningful statistics exist about small, privately held companies, the astronomical business-failure rates that we hear quoted so often tend to be misleading. For instance, a survey done by the U.S. Commerce Dept. says that of every 10 small businesses, 7 will survive their first year, 3 will still be going after 3 years, and only 2 will remain after 5 years.
> Most of us know through experience, however, that a lot of independent businesses do indeed close their doors quickly -- with certain industries more prone to see startups fold than others. Figures compiled by the National Restaurant Assn., for example, show that 80% of independently owned eateries fail within their first two years, for instance.
It doesn't seem to be much worse/different for non-VC. Just smaller scales.
Doing it just for money doesn't make sense. There are easier ways to get rich.
However, it it ends up working out, I can see the model getting a lot of future consideration.
walking in to work today to find out the people you have been following have taken a check and bounced out is never a fun way to start your day.
I just wonder why, in 2015, with all our technological progress and all the "innovation" in the payments space we're still tolerating really high transaction costs. /endrant
That's really what you're paying the 5% for. Not for collecting the money.
Venmo's situation is also different, since they use ACH to move money (very cheap). GoFundMe might accept credit cards, which means there are industry standard processing fees of roughly $0.30 + 2.9%. (It's in best interest for GoFundMe, Tilt, etc. to push users towards debit card payments since the associated fees are lower.)
Well that sounds scummy as hell.
and they have no qualms about publishing the fact that they just want to skim right off the top.
More direct funding for specific projects might not be perfect, but it may simplify the process of getting real things done.
Well that sounds scummy as hell.
I couldn't find stats for GoFundme, but Kickstarter was able to raise $529 million in 2014. [0]
Personally, this buyout does not make sense.
[0] https://www.kickstarter.com/year/2014/data
Kickstarter's search volume is 2x-3x.
Because you get any money donated regardless of if you reach your goal, it's a bit different than KickStarter (?). Those same people are the people who I now write off as moochers, because it's always something to personally benefit them.
For example (and this is a sad one): someone was asking for donations to help her get her back fixed so she could live a normal life. Health insurance wasn't covering it. She claimed she was broke.
The last 6 months she's been going to every major music festival.
The more things change, the more they stay the same. :D
At very late stages, a company valuation is usually a multiple of EBITDA (earnings before interest, taxes, depreciation and amortization). The valuation (which is different than market cap, but we'll conflate the two for sake of explanation) in very late stage, non-growing companies, during times of slow economic growth is around 5-7x. If a company is growing quickly at the later stages (read: exponential growth curve) its P/E ratio (price/earnings ratio) could be, we'll say, 100 on the public markets (100x). That's really high, and would rarely happen unless the economy has really low interest rates (meaning less good places to put your cash, and you need to invest it somewhere anyway).
So, in other words, we give the company the benefit of the doubt and say they'll be worth 30x EBITDA. That means they'd need to bring in about 20m in one year, which is about 400m in total donations. High for sure (the buyers must really believe in them), but not completely unreasonable. If, on the off chance, they start bringing in 1B in donations, and their take is 50m, the investors will earn a great multiple on their investment. That's probably what they're hoping for.
You are saying that the purchasers have broken even on the deal so long as they have not lost money on paper in the valuation since they can probably either borrow against it or sell it off.
It comes down to are you paying for current value, or potential growth in value. Frankly, in my opinion, markets that rely upon a greater fool to bail you out to make your money rather than just getting it back the old fashioned way by providing a good or service are way too frothy.
Counter-argument is that you are betting on growth, not a greater fool bail out. In this instance the only way to get that growth while still handling less than 12 billion in transactions is by increasing their take from 5% to something higher or adding on ancillary sales. I'd bet on ancillaries, but this isn't my space.
By the way for those reading who may not know, I was referencing Greater Fool Theory, not making a pejorative statement (heh, beyond what the theory itself may make). https://en.wikipedia.org/wiki/Greater_fool_theory
I actually found the numbers and Gofundme brought in $470M in 2014, which is actually a bit more than Kickstarter. So, $23.5M in revenue.
I don't know what the costs of operating a crowdfunding site are but I don't think that the valuation could have been less than 30X EBITDA.
But yeah, with $23.5M in revenue and with such a fast growing market, a $600M valuation doesn't seem as crazy as I thought. I personally don't think that the company will ever make $600M in profit, but hey, as log_n puts it, for now they can still look for a greater fool.
Since they were already cashflow positive, they were free to say "no deal!" to any offer.