Name: Why do startups fail after MILLIONS of dollars?
Uploaded: 2020-07-15T01:22:53.000Z
Duration: 9 min 14 s
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How does your company fail after raising $50MM?

This was a real comment/question on one of our Startup Forensics videos.

For someone outside the startup ecosystem, the amounts of money these companies raise

Uber has raised $20 BILLION dollars in funding, and it's yet to turn a profit.

WeWork raised $22 BILLION dollars, and it's currently on life support (which is funny

because our New York office is in WeWork, which makes it... weird).

Even smaller companies deal with rounds in the millions of dollars, and valuations in

So why do investors pour so much money into these tech startups?

Most tech companies raise money to accelerate their expansion.

There is an open market opportunity, and the company can be the first one to make it (Vivino).

The first e-commerce platform dedicated to wine. Which is a pretty huge market.

The company has a new technology that can replace an existing product or service on

a very large/established market (Uber and Taxis, or Facebook in Social Media).

The company can generate a lot of profits in the future, but the model only works if

Neither of these businesses could be what it is today if they hadn't raised the money

Who would have paid for Facebook's servers before they ran ads?

'Traditional' businesses that can't scale this fast are usually not venture-funded,

because their growth is not that capital intensive.

Companies typically raise money to expand rapidly.

Rapid expansion is capital intensive and will make the company spend more than they make

A good round of funding should be a number that lasts the company between 18 and 24 months,

a) raise another round of funding (for continued fast growth),

b) become self-sufficient/profitable (which likely translates to slower growth),

c) or go out of business (and they make it to our Startup Forensics series).

During those 18-24 months, as I said, the company will deploy its budget aggressively,

certainly spending more than they make, with the promise of maintaining or accelerating

their growth rate and increase their chances of raising more money.

Raising money is not the goal, but as we saw before, companies like Uber or Amazon can

only be profitable, well, if they own the world.

As a general rule, you could take a round of funding and divide it by 24 to calculate

how much money the company is burning every month.

$3MM is more money than the majority of the world population will earn in their lifetimes,

but it seems like pennies to a tech company.

We know many of these tech companies are based in the Bay Area or New York, so let's talk

A full-stack engineer in either of those cities is likely expecting to make north of $100,000/yr,

In early company stages, they might take a below-market salary in exchange for some stock

options (go check our video on Stock Options), but the 10th or the 20th employee will want

some benefits- because everybody else is offering benefits.

That might range from Uber rides to subsidized food, computer upgrades, medical insurance,

paid vacation... and all of that adds up.

You also have to count the extra seat in your office, which is at least $800/mo on most

So you are probably looking at an overhead cost of 25% on top of every employee.

Let's round that to $200K/yr per full-stack engineer.

Five engineers in these cities translate easily into $1MM per year.

If you are building a tech product, you need quite a few of those.

There's a delicate balance of how many people you need to build a product as fast as possible.

Doubling your staff doesn't translate into 2x productivity!

Companies have other expenses, of course- accountants, lawyers, servers.

To give you an idea, a company like us, Slidebean, spends about $20,000/mo in web services alone-

that is, server costs to AWS and SaaS fees to the many platforms we use in our day to

The first time we spent more than $1MM in a year, it blew my mind how I held $1MM in

A Series A, $7MM in February 2011 and finally a $50MM Series B round in April 2012.

At that point, the company was valued at $500MM.

The valuation determines how much stock in the company investors get.

For 1B dollars in a combination of cash and FB stock.

At the time, Instagram had 27 million registered users and 13 employees.

This means that the investors that had wired the money only weeks prior, made a 2x return.

So the last investors just doubled their money in a matter of weeks.

Previous investors probably made upwards of 100x their original investment.

This transaction is what every single angel investor and venture capital

Now, if you've watched 'The Social Network' you probably remember how much Mark Zuckerberg

The script is based on true events and indeed, 'ads aren't cool'.

The date the press release came out on Facebook ads, the company had already raised about

Why did they get $300MM for a business that makes no money?

Simple math tells us this operation costs at least $100MM per year.

The page was seen by 40 million people per month and people spent upwards of 4 hours

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