Everpix, a photo startup in San Francisco shut down recently and published a post mortem on The Verge. Andrew Chen responded to that with a thoughtful post about how the ‘funding goalposts continue to move’. Here’s the money quote:
It’s been widely noted that investing milestones have evolved quickly over time:
- In 1998, you’d raise $5M Series A with an idea and not much else. The capital would be spent to build the product, and hopefully you’d have some customers at the end of it, but it wasn’t required. You had to do crazy stuff like put machines into a datacenter, at this point. Then you’d raise a Series B to scale the marketing. The qualitative bar for the team, idea, and market was high.
- In 2004, you’d raise $500k with just an idea. Then you’d build the product and spend $5M to market it. At this point, you could use a free Open Source stack which would accelerate development. You didn’t need to build a datacenter either.
- In 2013, these days, you are expected to have a product coded up and ready before you raise your first substantial angel round. Maybe the product won’t be launched, but people will want to play with a demo at least. Then you raise $1-2M to get traction on your product. Then if you have millions of signups, then you get to raise your Series A of $5-10M.
In fact, it’s been famously written by Chris Dixon, now a partner at Andreessen Horowitz, that 10 million users is the new 1 million users.
The primary driver of this evolution in investment milestones is that startups have become much more capital efficient. Investors have always looked for the trifecta of great team, great product, great market, but now that startups do more with less investors of waiting to see whether the team can execute and the product works before they make a meaningful investment.
The challenge has now become judging whether the product works. The first level of assessment is how it looks and feels, but the second is how much people are buying it or using it – i.e. growth. One read on where the Everpix guys went wrong is that they paid too much attention to look and feel but not enough to growth (the other is that the photo market has too many free competitors). Similarly, when Chris Dixon says that 10m users is the new 1m users it’s partly a comment about growth – i.e. growth is now so much more important that getting to 10m is now the bar (the other part is that with increased internet penetration and increasingly efficient distribution channels getting to 1m is much easier than it used to be).
To my mind growth, sometimes called momentum, is now right up there with team, product, and market as a filter for judging investments.