"Maybe I'm being naïve here, but isn't it kind of crazy to raise 3.5M in funds for a business that has no plan but to be acquired by someone else?"

That's a sane question. IMO it's the current financial environment that encourages such "leap without looking" strategies.

Fear of missing out is huge right now.

I know of a startup that received a multi-million valuation and many more million in funding. They don't even have a prototype!

This is very real. A friend of mine started a company with over a million in seed funding with what basically amounts to just an idea. Years later, the company isn't doing that well in terms of sales/revenue, but they still manage to raise money because they have a couple obvious acquisition targets. It seems crazy to me to throw millions of dollars at a company with the hopes that one of maybe three or four megacorps in the industry will acquire them, but investors buy into that, and that's all that matters.

Seed and Series A is investment in the people always. They assume if the product doesn't work the team will pivot until they find something that does. It sounds to me like your friend failed to pivot when needed.

Not even. I'm seeing seed and series As/Bs on unproven teams of recent graduates with no experience in the field where the "start up" operates. No business plan, no prototype, huge regulatory walls to climb.

It is worst than tulip mania.

Funds make money on failed investments too. I'd be happy to throw away someone else's money, if I got to keep 20% as a management fee - and a slice of the profits in case one of my lottery tickets is a winner.

Typically they'd get 2% of assets under management, not 20%.

2% a year for 10 years..

Which is about 18% of the original investment, not 20, assuming no gains or losses.

Dude. Conflating seed (median $2.1m 18q4) rounds with B (probably 10x that) rounds is... not serious.

Look closer at the news, it’s not uncommon to see 10M+ rounds for companies that haven’t put out a single ounce of product.

I'm sure you've got a list of 50 or 100 examples handy?

Where? Can you give an example?

FOMO has always been present.

What's changed is that debt is almost free. That allows VCs to take (very!) speculative bets for relatively low risk. They know that if each of their portfolio companies has a 10% chance to reach 30x returns, investing in 10 companies should pay off.

I know this might sound stupid but if you can get that much for something that wow's people, can you get like 100k for a "meh" idea?

Like if you wanted to open a dry cleaners.

Well, yes, but not in the way you mean. If you want $100K for a dry cleaners you get a bank loan, the same way people have been doing it for a century.

Equity capital is solely interested in business models that either wow people or fail outright. The reason has to do with risk: most such business ideas have various things that can go wrong, and those risks are generally manageable but not really quantifiable. Basically a VC wants to see "These are the assumptions in our model, and if we build this it will revolutionize X industry, which is currently worth $50B but could be worth a lot more with our product, and that will give you a 50% annualized return on your fund." And they're giving you money to prove out whether those assumptions are actually true, with the expectations that for a good number of startups they won't be and their whole investment will be wasted.

Yes you can. It's called a small business loan. See https://www.sba.gov/funding-programs/loans and https://www.bankofamerica.com/smallbusiness/business-financi....

You'd finance your dry cleaners with debt rather than equity because (unless you are starting a chain) you are not shooting for the massive, near-zero marginal cost scaling that the venture capital model focuses on. Instead, the bank looks for a modest, predictable return through interest payments.

Yah, but re:wework, throw in a dry cleaning app that schedules a dirty laundry pickup and suddenly the valuation goes from marginal to billions. Especially if you get some machine learning in there to detect spots (or something).

If you put the sarcasm aside (it does make a good joke), a laundry pickup app has in fact orders of magnitude more potential to scale and make money, as dumb as it sounds.

The economics of on-demand are totally different:

First, there's a delivery part. Delivery companies often become very big and make a lot of money.

Second, centralizing many small dry cleaning places into one has Significant economic advantages.

Third, they probably use an asset-lite model like Uber.

Fourth, all those make them somewhat similar to some sucsesfull, high growth companies , so it's possible they'll grow big.

Does centralizing many small dry cleaning places have significant economic advantages assuming that each location has to negotiate independently for it's space and (to parallel wework) items like cleaning supplies and staff management necessarily vary from location to location due to local regulations?

WeWork is sort of the golden example of a business being sold as something that works at scale... except the business doesn't actually work at scale.

It seems in a lot of places (where I live, Austin TX) all the little mom/pop dry cleaning shops are actually shipping the dry cleaning off to a central location. The EPA/etc regulations apparently have forced that part of the cycle to converge.

That is part of why it costs more/takes longer than simple laundry which is frequently still done at the mom and pop location. Although, I think the larger chains (Jack Brown) are entirely just storefronts sending the laundry and dry cleaning off to some centralized location.

So, I doubt there is much advantage to further centralization that hasn't already happened.

Also, I'm not even sure about the hotel bits, most hotel's I've stayed in recently _DO_ their own laundry. They have a couple giant commercial machines sitting in the basement for the sheets/towels. I know this because I always take the stairs and often take a wrong turn and end up in the basement/etc.

The advantage could be in eliminating the jobs of the mom & pop drycleaners and the rent they pay for the space. That's surplus that could be captured by a dry-cleaning app delivery service, assuming that the cost of transportation isn't greater than the cost of rent. In dense urban areas, where rent is expensive but you could hit up several customers on one trip, that might be a valid assumption. Particularly if you have someone good at logistics programming the app's backend, and a pool of inexpensive labor for drivers.

That's a great business plan and differs from WeWork's because WeWork's business plan assumes that the cost of leasing office space in high rent areas is never going to be removable.

When looking at a potential business as something that can be economically scaled you always need to find the saving factor, for WeWork the saving factors are Administration efficiency (to administer 10 properties individually you need 10 administrator labour units, maybe for grouped properties you can get away with 6), rent leverage (being well established might lower the apparent risk of your lease being canceled early, so you may have some savings there) and maintenance (this is a significant one, I bet you could really scale down the expense of janitors and the like if you have multiple properties in a dense area). But none of the costs I listed above are seriously impacting your cost per sale, they're all quite marginal savings, so you'd really need high volume to reap that benefit and it's likely that the cost of marketing, building an app, having a crazy CEO etc... will outweigh the savings you could eek out.

No, because the mania for throwing money at tech startups is specifically because of tech's unique promise of both worldwide scale and zero marginal costs after the initial Big Spend on capex, and hence potentially gigantic returns for investors.

Now, how well the current crop of startups is delivering on that promise is an exercise left to the reader, but it's there in theory. A dry cleaner has marginal costs and no economy of scale, and so can't attract unicorn valuations.

> tech startups is specifically because of tech's unique promise of both worldwide scale and zero marginal costs

This theory fails to adequately explain WeWork.

I mean, I think you should be right, but in principle I do not see why WeDryClean should not work while WeWork does.

much like wework - all you gotta do is convince 1 person who controls vast sums of money that it will work. I'm very convinced by your WeDryClean idea! (Sadly no vast sums of money, though)

Zero marginal cost in theory. In reality, you often find enormous cloud costs combined with huge marketing spend.

As long as your product is perfectly scalable and generates a profit for money spent that way, it makes perfect sense to take a loan, spend a fortune, make a fortune, then pay off the loan and take in profits. Then turn around and do it again.

It isn't the absolute size of the numbers that matters. It is the ability to rapidly scale the business once you have the right business model and product.

And in particular, if you sell low churn saas (like we do), you can comfortably spend the first year's annual contract value on customer acquisition and have an extremely profitable business. Just huge initial marketing costs.

And quite possibly huge ongoing marketing costs! But if churn is low, or even negative, you can assume something like 10 year customer lifetimes, with a comfortable 5-ish percent cost increase per year, on sale for the first year's contract value. If you have cheap-ish money available, you should buy as many of those as the world is willing to sell.

"As long as your product is perfectly scalable..." I agree. Usually it's not, and more difficult to get there than people think.

As parodied some 5 years ago: https://medium.com/signal-v-noise/press-release-basecamp-val...

Once you make money, it's much harder to come up with outlandish numbers. A dry cleaners has a well-established range for revenue and profit, so it's hard to justify why it would be worth $100 billion.

>Once you make money, it's much harder to come up with outlandish numbers. A dry cleaners has a well-established range for revenue and profit, so it's hard to justify why it would be worth $100 billion.

If you want a cleaning company worth hundreds of millions, try ZZZZ Best https://www.investopedia.com/terms/z/zzzzbest.asp

Actually 10 years ago. Here's the original: https://signalvnoise.com/posts/1941-press-release-37signals-...

The Medium version did update the terminology a bit (since RSS and 3G weren't as exciting in 2015 as they were in 2009, hah)

Well, not everyone does that. I applied to YC with my side project [1] and got rejected. I didn't expect to get in, but if I would have, then I would be full-time on it.

Now I can't, which is a shame. So in that sense, I wish someone would fund me. I have a lot of "doodling the internet" type of ideas. I use digital note taking extensively myself, so I know what's missing.

[1] doodledocs.com

I'll give you a hint. You should pivot to a collaborative design app. There are a couple around, but very few that have that "doodle feeling". You should be able to pick up a pen, sketch something quickly and then have someone else be able to modify/review it.

I'll give you another hint. Add shape recognition and move from capturing and storing pen strokes and generating bitmaps to capturing pen strokes and generating shapes. Add rudimentary grouping and ungrouping functionality, ability to move, stretch, rotate, etc. Allow pasting clip art and letting it grow/shrink/rotate when grouped with other objects, but just with a rough scaling, etc -- it doesn't have to look pretty. It's just for sketching things out.

Practically every software/design team needs an application like this and there will be money to pay for it.

P.S. I was on a team that built this as a windows application about 20 years ago, but we were ahead of our time. A SaaS webapp would be the bomb here.

What differentiates you from drawing apps?

Indeed. The flip-side to this is that speculative investment on unprofitable moonshots seems to be where ALL the equity-finance money is.

My company reliably earns low-7-figures on high-7-figures revenue, with respectable but not amazing growth, but the only capital "market" open to us is bank loans and merchant financing.

Nobody cares about boring profitability.

Why is that a bad thing? If you are profitable, why would you want to give up equity and control?

Serious question -- why would you want something besides a bank loan? Because a loan at a couple of percent is way cheaper than VC, who will typically want at least 20% of your company?

> Maybe I'm being naïve here, but isn't it kind of crazy to raise 3.5M in funds for a business that has no plan but to be acquired by someone else?

That's pretty common, and is basically what seed funding is. The paradox behind markets and investment is that logically speaking, if a potential company has a profitable business model, that company should already exist. After all, with millions of potential entrepreneurs across the globe and trillions in funding chasing them, the chance that an obviously profitable business model hasn't already been dreamed up and implemented by an entrepreneur is basically nil.

So what investors and entrepreneurs do is they agree to take on risk with their capital, for the potential of great reward if it turns out they can come up with a better way of doing things that isn't already being done. The only way to do this is to explore virgin territory: do things that seem plausible but haven't currently been tried by existing companies, and then see if you can create a profitable business model with the results. There's a good chance that you can't, in which case okay, it was an experiment, you spent $3.5M to learn something that had the shot of being worth billions.

"After all, with millions of potential entrepreneurs across the globe and trillions in funding chasing them, the chance that an obviously profitable business model hasn't already been dreamed up and implemented by an entrepreneur is basically nil."

This basically amounts to "everything that can be invented has been invented". You sure?

No, more like you should invent a new way of selling things, otherwise the market would have found a way to sell them already.

Yes. And it's true, statistically. Most inventable things will be invented by someone else before you succeed at it. Statistically, no one wins the lottery, even though someone always does.

> Maybe I'm being naïve here, but isn't it kind of crazy to raise 3.5M in funds for a business that has no plan but to be acquired by someone else?

Not exactly. A lot of startups can function as R&D for larger tech companies: Big tech companies have lots of money but aren't great at innovation. They might spend 10s of millions of dollars just to get a lesser quality version of what they could own if they just bought the best startup in the space. This is why companies with $0.00 revenue get acquired all the time. It's a simple calculation: will it be cheaper to buy or build this tech? For many companies it's cheaper to buy.

That being said, Chicisimo is in a very tough situation. The problem with their strategy is:

1. They have to be acquired or they'll go out of business. This is a terrible negotiating position to start from. There is no walk away power. If I was an interested buyer, why wouldn't I offer an insultingly low price? How does $100k to cover legal costs and a nice signing bonus to your employees sound? Do you have a better option?

2. They need a buyer who needs their experimental technology. This is what's called a "strategic acquisition". And they are almost impossible to engineer from the startup's position. The chances of a finding company with a lot of cash with an exec who wants experimental tech enough to spend a decent amount of money on it are almost certainly zero. If they haven't attracted the attention of a buyer by now, it's unlikely that they'll become more attractive now that they're about to fail.

Having been in this situation myself, it is so helpful to have some revenue to fall back on. That way you can demonstrate that the business is worth something.

I wish them the best of luck. Hopefully they pull something out here but the chances are low.

There’s one other sub-angle: that a company may be interested in buying to prevent their competition from buying the tech. Buy and bury is a valid worst case acquisition outcome for some acquirers.

I think a lot of the time the idea of funding is:

From the startup's side: We don't actually know the business yet, so we need resources to fund our runway while we figure it out (ie. interact with the market enough to make smart pivots toward profitability).

The the funder's side: We basically don't give a shit what the business turns out to be, we want to fund talented teams that we believe can pull off profitability.

The real question is who invested, and why? Even though being an investor doesn't mean being smart at it, it's still a signal that those guys are/were onto something and needed the cash to accelerate/deploy. $3.5M for such a small remote team though... I'm not running the numbers but they were cash burning big time, for a long time.

I don't think it's that bad a cash-burn. That's less than $100k per month for a team of 8. Even full remote, salaries and overhead don't seem recklessly out of alignment.

> The real question is who invested, and why?

This always baffles me the most. Who gives money to a startup without a business model? I guess they just have funds to throw at the wall and hope something sticks.

Startups with scalable, repeatable business models are basically not startups anymore, since the whole point of a startup is to search for scalable, repeatable business model. And valuations match that: once the startup has actually found a scalable business model and is in its growth phase, expect to pay $100M or more for it, sometimes into the billions.

People aren't necessarily asking for a business. They're asking for a business model: a way, maybe untested, maybe lightly tested, that you might earn more than you spend. Just needs to be semi-plausible, doesn't need to be bulletproof.

It is not clear at all from the article that they never had a business model. Most likely they had to scratch their original plan at one point.

If you don't care about whether it's tested this startup had a plausible business model: by coming up with an algorithm to identify fashion taste, fashion e-commerce sites could show more relevant recommendations, which leads to more sales, which leads to more revenue. Then they pay this company some fraction of that additional revenue, and both win.

That's why bubbles pop I guess.

I’m no fan of the startup and HN definition of success being valuation, revenue, or market cap while ignoring (the lack of) profitability.

But from a cynical standpoint, why not take VC money if you can get it? It seems like you should take VC money if you don’t have a business model that would lead to being a profitable ongoing concern.

If I can see profitability, why would I give up equity?

You let other people take the downside risk. Why use your own money instead of other people’s money.

Yep, worst case you get lil nice wealth transfer from VCs to the people in the company, all for being an entrepreneur!

its not taking the money thats the problem. spending it is the problem because it accelerates your burn rate

> Maybe I'm being naïve here, but isn't it kind of crazy to raise 3.5M in funds for a business that has no plan but to be acquired by someone else?

I offer you 3.5M to start a business, without needing a business model, why wouldn't you take it?

The real question is, how did they were able to raise 3.5M and why haven't they made sure that they had a strong business model.

My first thought: It's could be very difficult to build a product to a stage where product-market fit can be assessed without external financial assistance. I think most products can be brought to this point in a year or two with a team of 2 or 3 people, but that's a pretty sizable chunk of living expenses and possibly salary that needs to get paid.

If the only people who can start companies are the ones that have at least a few hundred thousand dollars in the bank, that really limits the field. I think VC probably plays a beneficial role here, opening it up to people who otherwise would have no freedom to spend a year or two pursuing an idea that may or may not convert into a profitable business.

>That being said... why did you (or if anyone else can chip in) decide to chase funding when you didn't have a business model? Maybe I'm being naïve here, but isn't it kind of crazy to raise 3.5M in funds for a business that has no plan but to be acquired by someone else?

If you can raise them why would it be crazy? It's only crazy for those that give the money (and for them they could be spare change)

Google didn't have a business model when they started but they were sure they were building something useful. I don't know much about fashion and I don't know if what they have is truly useful, but I respect them a lot and will see if I have contacts I could introduce them to.

Google's initial funding, when they did not have a business model, was around 1 million dollars. By the time they got a significant chunk they had decided to use ads to try to monetize. Not all useful things make sense as income generating businesses.

Not according to In the Plex. They had raised money from Sequoia and Kleiner Perkins and John Doerr was almost losing his mind on how much cash they were burning through with no business model. Finally, in an act of desperation, they copied Overture's model. The rest is history!

$1MM in 1988 is about $2.15MM today, hardly different from what these folk raised.

Asking the real questions.

> That being said... why did you (or if anyone else can chip in) decide to chase funding when you didn't have a business model?

Biggest mistake IMHO. But is quite common these days. Everybody is chasing the unicorn dream.

It's important to consider that most businesses that start in new areas/ try re-defining the market don't have business models, as they are too small to build a model from. Sure they can bootstrap from one idea to the next until something takes hold, but unless it's a new paradigm that is on the cusp, you're many years (think 5+) from attaining a scalable model. The funding is to be able to hire people, and iterate quickly to expand the business, and find a scalable business model. Trying to build a business model with out a pre-existing business is like trying to solve for x when the right side of the equation is missing. You'll come up with answers, but they're probably wrong once tested.

Startups should not create new markets. Too risky. Do what amazon/google does, just with a twist.

You dig where the gold is.

That's sad and I disagree - category creation is amazing. Though indeed, I've observed that almost all VC's are indeed against this until it's been handed to them on a silver platter, despite what they may believe about themselves and their firms. So the tricky part is how to fund it over time :)

They're people as well, the good ones use it as a way to test the conviction of the founding team. If they can't take a few verbal licks, why would they be able to acquire enough customers to gain traction? Not a perfect test, but it has proven to be a workable process where the ones with the most conviction always get _something_. Sometimes it's too late, and sometimes it doesn't work out. That's life.

Yes, I agree -- many like to believe they are into deep tech and category creation, but even of those, most punt until a lot has been derisked. For deep tech / category creation, by the time the risk is gone, you are into growth phase. Someone like Lux Capital is on a very short list of exceptions.

So do category creation. Just be in the same categories that are being created by the big 4.

The business of selling securities is a business.

Tapping into the sentiment steered by macroeconomic trends is wise. Limiting that to the consumer product model is unwise.