It’s not that complicated to build a success startup. Just build a profitable business while spending as little as possible. It’s not complicated, but it’s hard.
I recently saw the news that Yahoo! had bought Xobni. Xobni was a noble attempt to tackle the email overload problem (xobni = inbox backwards). According to the stories I read, Xobni was bought for anywhere from $30 to $60 million.
Whenever such news comes out, I have a couple of friends who write to me, asking me if this represented a good outcome or a bad one.
My general response is that any outcome beats going to zero, but I follow that up by analyzing the financing history of the company. Here’s my analysis of Xobni:
Judging from Xobni’s Crunchbase entry, the company raised $42 million dollars in four rounds of funding. It looks like none of the rounds were down rounds, which means there was no recap.
Therefore, the $42 million has to be paid back to investors first, assuming a simple 1X liquidation preference.
Best case scenario, the company sold for $60 million, which means there’s $18 million to divvy up*. After 4 rounds of funding, assume the founders ended up with 20% of shares fully diluted, and thus split $3.6 million amongst everyone who was there at the beginning. If there were four founders, none of them would make even $1 million off the sale, and that’s before accounting for taxes, the time value of money, and so on.
This is why raising a ton of money can be hazardous to your health. Bootstrapped, they’d just be splitting $60 million. Even a $5 million exit bootstrapping would be better financially.
The venture capital process rewards capital efficiency; the less you raise, the better off your outcome, especially in “smaller” (e.g. sub-$100 million) exits.
* It is possible that there was a carve out for management, but it still wouldn’t represent a big windfall.
(Cross-posted @ Adventures in Capitalism)
