Ask HN : Where Does VC Money Really Go?
In the last few years, we We numbers like 81 million for Box.com, 11 million for enterproid etc, 100 million for foursquare. I have no experience with startups, or operation sides, but I am curious as to where this money goes? Hardware costs for servers? Salaries/wages? Legal fees? Understandably it is different for different startups, but on average what is the breakdown look like for a software startup (web-based).
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It might differ based on the company, but the #1 cost by a fair margin for virtually every funded software startup will be the costs associated with employment: wages, benefits, and taxes. That could be 50~80%+ of expenses. (One engineer costs you about $15~20k per month.)
Companies with noteworthy other costs include Zynga/Groupon, which both spend absolutely gobsmacking amounts of money on advertising (and, depending on how you count revenue/expenses, their revenue share deals with Facebook and merchants respectively).
Server/hosting expenses tend to be heavily sensitive to what you're actually doing: Zynga and Dropbox pay a lot relative to their revenues, but at a 37Signals-esque company they're chump change.
Legal fees are typically rounding error. Ball up all administrative overhead and that's in handful of percent region.
Your physical workspace can be a fair chunk of change, depending on where you are, how you came by your space, and to what degree you optimize for having a prestigious address or office space.
Companies with noteworthy other costs include Zynga/Groupon, which both spend absolutely gobsmacking amounts of money on advertising (and, depending on how you count revenue/expenses, their revenue share deals with Facebook and merchants respectively).
Server/hosting expenses tend to be heavily sensitive to what you're actually doing: Zynga and Dropbox pay a lot relative to their revenues, but at a 37Signals-esque company they're chump change.
Legal fees are typically rounding error. Ball up all administrative overhead and that's in handful of percent region.
Your physical workspace can be a fair chunk of change, depending on where you are, how you came by your space, and to what degree you optimize for having a prestigious address or office space.
In my experience wages are at least 80% of all costs.
wouldnt it make sense to include the costs for the physical workspace into the employee costs as a employee not only needs a salary and benefits but also a place to sit, a computer to work on and maybe some coffe to drink?
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patio11 is always gold. Too bad I missed him when he came to Coloft a few weeks ago.
Based on my experiences in the UK, different start-up's get funding of 30 million etc. but the money is over X years as long as Y objectives are met. In actual fact the company is getting a fraction of that 30 mill each year therefore far less cash rich than the press release indicates.
Milestone-based fundings like this are pretty rare in the US and usually in troubled or very high risk situations. Most vc fundings that you would hear about are straight up equity deals (cash received at closing).
Definely not the case in the examples above
These are called 'tranches' and are very pro-investor. See the section 'Tranches are dumb' in this VentureHacks post:
http://venturehacks.com/articles/adam-smith
http://venturehacks.com/articles/adam-smith
In the beginning, people costs are where most of your money goes, by far. Whether you have employees or contractors, human capital will cost you the most.
For a typical $500K seed round, here is my breakdown for 12 months of expenses. Feedback welcome.
2 founders + health insurance + taxes = $10k/month
2 engineers + health insurance + taxes = $20k/month
1 p/t designer = $5k/month
...and you've burned through $420,000 of your $500,000 in 12 months.
As for the other $80K?
Legal Fees: $10K (or $800/month); Space: $30K (depending on where...around $2500/month); Accounting/Finance: $10K ($800/month); Server Costs + Hardware: $12k ($1k/month); Miscellaneous Expenses including random contractors here and there, marketing expenses, SWAG, a party if you want, some travel to a few conferences, food, etc.: $18k ($1500/month)
Hope this helps.
For a typical $500K seed round, here is my breakdown for 12 months of expenses. Feedback welcome.
2 founders + health insurance + taxes = $10k/month
2 engineers + health insurance + taxes = $20k/month
1 p/t designer = $5k/month
...and you've burned through $420,000 of your $500,000 in 12 months.
As for the other $80K?
Legal Fees: $10K (or $800/month); Space: $30K (depending on where...around $2500/month); Accounting/Finance: $10K ($800/month); Server Costs + Hardware: $12k ($1k/month); Miscellaneous Expenses including random contractors here and there, marketing expenses, SWAG, a party if you want, some travel to a few conferences, food, etc.: $18k ($1500/month)
Hope this helps.
Is ~50k/yr a typical founder salary? How much does it vary from this kind of number?
Founder salaries vary wildly depending on amount raised, whether the company is profitable or even generating revenue and the stage of the company. Some people pay themselves $1k/month and some pay themselves $15k/month. I figured $4k/month was a good benchmark based on a pre-series-A seed-financed tech startup that is generating minimal revenue and is not profitable.
While mocking up salaries with an adviser, he said that we should earmark $60k for founders "so people think you're stable."
If you're in silicon valley, and want senior/lead engineers who can make a difference, expect to pay >>$10k per month per head for salary, benefits and payroll taxes. Plus give away a chunk of equity. Competition for good people is always fierce at all times.
Once there is a valuation and there has been investment, founders should be collecting close to full salary (maybe 75-85%) because to take less means they are effectively putting money into the business and should be getting more equity, but that can dicey because it dilutes investors.
$500k can't support 4 people for 12 months (in NY or CA) unless the founders have personal savings to use. You have to include travel expenses, a "cushion" in event of unexpected growth, and expenses incurred in getting the next round of funding.
$500k can't support 4 people for 12 months (in NY or CA) unless the founders have personal savings to use. You have to include travel expenses, a "cushion" in event of unexpected growth, and expenses incurred in getting the next round of funding.
Try making a simple spreadsheet for a startup, for example for 18-36 months. Before I ever did that, I always underestimated how far the money would go. Most will be people. The examples you name have hundreds of people working for them. That really ads up.
Some of the cash in these mega-rounds never hits the balance sheet and instead goes directly to founders and early investors.
Somewhat depending on the business. Mining is different from social networks is different from clean tech :-)
For software, something like:
1. Salary/Benefits. 2. Marketing/PR/Sales. 3. Rent/Utilities/Facilities.
Everything else is likely a variable cost you can pay with customer money, aka "revenue." (Anything from direct sales to ad-based monetization) Once you can in addition pay the above three from revenues, you should probably stop taking investor money and look for liquidity.
1. Salary/Benefits. 2. Marketing/PR/Sales. 3. Rent/Utilities/Facilities.
Everything else is likely a variable cost you can pay with customer money, aka "revenue." (Anything from direct sales to ad-based monetization) Once you can in addition pay the above three from revenues, you should probably stop taking investor money and look for liquidity.
Generally employees' salaries are the biggest expense in almost every startup and at every stage. Hence the saying that "overhead walks on two feet"
For mega-rounds:
- SaaS companies like box flush it all on customer acquisition. Billboards on 101, google Adwords, telesales teams. See Jive's S1: $60m rev run rate and losing $2 for every buck of revenue.
- groupon, living social: customer acquisition also: web ads. Plus salesforce to call on local businesses
- four square plus everybody above: "secondary" I.e. into the pockets of founders, early shareholders and, once in a blue moon, employees.
- SaaS companies like box flush it all on customer acquisition. Billboards on 101, google Adwords, telesales teams. See Jive's S1: $60m rev run rate and losing $2 for every buck of revenue.
- groupon, living social: customer acquisition also: web ads. Plus salesforce to call on local businesses
- four square plus everybody above: "secondary" I.e. into the pockets of founders, early shareholders and, once in a blue moon, employees.
1) People. People are incredibly expensive.
2) Promotion. Especially in winner-take-all markets, where it's especially important to be the first player to reach scale, and in markets with high customer lifetime values.
3) Capital expense. Sometimes a business model requires huge warehouses (amazon) or massive R&D, or some other huge capital expense that serves as a meaningful investment.
4) Acquisitions. Sometimes it's spent buying other companies to help achieve goals that they might not otherwise be able to achieve in the required timeline, using only internal resources.
5) Miscellaneous. Accountants, lawyers, bankers, travel, telecom, that great domain name, hosting, internal infrastructure, SaaS products, conference attendance, catering, and other miscellanea.
2) Promotion. Especially in winner-take-all markets, where it's especially important to be the first player to reach scale, and in markets with high customer lifetime values.
3) Capital expense. Sometimes a business model requires huge warehouses (amazon) or massive R&D, or some other huge capital expense that serves as a meaningful investment.
4) Acquisitions. Sometimes it's spent buying other companies to help achieve goals that they might not otherwise be able to achieve in the required timeline, using only internal resources.
5) Miscellaneous. Accountants, lawyers, bankers, travel, telecom, that great domain name, hosting, internal infrastructure, SaaS products, conference attendance, catering, and other miscellanea.