The Bay Area is full of Venture Capitalists and Start-ups. They are like squirrels – unavoidable, fast, furry, hungry squirrels – who are all clamoring to find their big nut. I was at a party last Saturday night and there so happened to be a couple Venture Capitalists who I got to know quite well over a bottle of wine.
My main inquiry was trying to understand why start-ups would need a Venture Capitalist’s help, when all it costs is $15 a year to rent the domain name, but a gazillion hours of work to keep the lights on.
Three Main Reasons Why A Start-up Needs Venture Capitalists:
* Credibility. If you have Kleiner Perkins as your backer for example, you gain instant credibility among the investor community and your peers. After all, KPBC did fund and profit handsomely from Amazon.com, Google, AOL, Genentech and 470 other successful companies in the universe! With credibility comes the natural desire for people to want to work with you and invest in your company, thereby creating a virtuous cycle of success.
* Expertise. Venture Capitalists are jacks of all trades in their particular industry. They get pitched all day by start-ups, thereby gaining expertise in their industry from a competitive, technological, and connectivity standpoint. Good Venture Capitalists have had successful investments before and can walk a start-up through the nascent stages to help improve their percentage of succeeding.
* Expansion. As a start-up becomes more successful, more resources are needed. Expansion usually comes in the form of hiring the brightest minds to sell, market, create, and lead their organizations to the next level. In addition to providing human capital recommendations, physical property location and lease negotiations are also provided.
Back To My Main Question
The three points are perfectly logical, but back to my main question, rephrased. Why do start-ups fail? The simple answer after speaking with these Venture Capitalists is largely due to operational costs. At some point, investment capital stops coming in because revenue is no longer being generated at the pace of expectation. Meanwhile expenses, mainly salaries are fixed and unsustainable so a company first decides to fire people, and eventually decides to shutdown. It’s a vicious cycle.
I didn’t quite get why dotcom start-ups would ever shutdown until I realized it’s all about how one categorizes the organization. Yakezie.com is not a company, it’s just a great hobby. However, if we were to categorize Yakezie.com as a company, we’d have two main employees: Sam & Chris, and we would be deeply be in the red every single month of operation. How? Let’s calculate the costs based on realistic assumptions of salaries and true number of work hours:
Average amount of hours spent a week by Sam on Yakezie.com: 30
X
Average hourly salary for a start-up CEO in the Bay Area: $125/hour (~$250,000 a year)
= $17,000 in salary cost a month.
PLUS
Average mount of time spent by Chris a week. 10-15
X
Average hourly salary for a start-up engineer in the Bay Area: $40/hour (~$80,000 a year)
= $3,000 salary cost a month
Total Salary Cost = ~$20,000 a month!
* Note: Alternatively, we can just replace “management” with very cheap overseas labor which is not a bad idea!
CONCLUSION
If Yakezie.com was incorporated and we were to pay ourselves market rates, we’d essentially be losing beaucoup bucks every month so far. But, since we are doing everything literally for free, all is fine and dandy! As a company, our value proposition is to create a platform to help you create the best blog possible and have a lot of fun in the process. As you can see, it’s all about classification. You can say you are a non-profit organization and pay your management $10 million dollars a year. Or you can say you are a for-profit organization and pay your management nothing and let your shareholders earn $10 million dollars a year.
Hopefully Members & Challengers realize by now how much time Chris & I dedicate to this site and our Network for all of us to grow, for free. Hence, nothing would make us prouder if you helped support the monthly Yakezie Scholarship to help someone else in need and contribute to Yakezie.com after successfully making money through a Member ad campaign and so forth. Don’t worry, we’ll still be hemorrhaging $20,000 a month if we calculate our market salary costs, but good thing we don’t!
Coming up will be our new goal for increasing all of our online revenue. Thanks for all the support everyone!
Best,
Sam & Chris
I do appreciate and know the hard work you all put in. As soon as google updates that dagnam PR I’ll be able to contribute more as I’ll actually have some income :)
Kevin – A loooong discussion with an SEO veteran who says that pagerank is becoming irrelevant since it no longer updates and that mozRank is becoming more and more important. All SEO people know of mozRank, and it is one of their key tools. Hang in there!
Sam, having accepted venture capital before (earlier in my career) I can very easily see why you might need it and those reasons you list are all valid.
I see the ability to open doors to new relationships and sales channels to be the biggest differentiator from a bank loan.
My main word of caution is that entrepreneurs should spend time interviewing and researching VC’s to see if they are a fit and not just accept money blindly. If you line yourself up with the wrong VC or for the wrong amount of money it can ruin your business just as quickly as not taking money.
Good tip mate. Definitely good to interview them as much as they interview you. We aren’t looking for VC money as this is just a hobby and doesnt cost much to run except for a lot of our time, so no worries there. We also have to develop a hugely scaleable business model as well, which is a work in progress.
Glad to hear no VCs are coming yet. I’d hate to see what they’d try to do.
I feel you FP, I’m hard up for some google PR. I hope more people start caring about MOZ rank! But Sam, absolutely I understand how much time you and hard work you guys are putting in. I really do appreciate it. I’ve also contributed although I haven’t made any money from the opportunities (PR requirements bump me everytime, lol). But I’m in it with you guys and I’ll do my best to succeed. And once PR comes around, I should be able to make a little on the side too :D. Thanks for all that you guys do!
About the venture capital, it’s a love//hate thing, because the VCs become members of your business. Whether you agree to it or not, they’ll hold the next disbursement over your head if you don’t do what they say. Not all are like this, but any that want to actively be involved will most certainly make their voices heard. Sometimes that can be a good thing, but it also may hinder your direction. Like Car Negotiation Coach said, some of them are very insightful, but if you’re like me, then I like making my decisions.
Thanks,
Timothy
Hi hear you Timothy. I just thought this was a good topic to discuss, and to understand semantics, operations, business and so forth.
mozRank IS very important according to many SEO personnel and getting more important as Google PR doesn’t update anymore. It’s all happening, just takes time.
Absolutely. I thought this was a really neat and interesting way to tackle the subject. I think you guys did a great job with it :). I think Chris also likes your Salary targets :D
I do indeed! ;-)
30+ for yakezie and another 30+ for financialsamurai is 60+hrs/wk. don’t you get burnt out? I think it’s time for another vacation!
Agreed, that’s a whole lot of time! Thanks guys.
Maybe, +50 hours for a day job! It’s fun though, so no need for another vacay. We live 168 hours a week… so there’s still 58 hours left to go if I work 110 hours! I don’t spend 30 hours on FS a week though. Maybe just 15. Cheers.
That’s good, we definitely don’t need you getting burnt out! It sounds like “sleep when you’re dead” is one of your mantras. lol.
Puts it all in perspective. We yakeziers are thankful for your “hobby” :)
Yes, thank you very much. As much as I love this group, I don’t think I can donate $30,000 a month.
No worries mate. $30 a month would be great! :)
I can’t wait until I can make that much to donate :) I’m a very cheerful giver.
You guys are great and it would be scary to think what you would do if this was your full time gig and actually was paid $125/hr. I don’t think you would be in the red for very long.
Thanks for your hard work and dedication and as my online income grows, so will my monthly donation to yakezie cause I know you will be a large part of that….besides it feels good to be a part of something special.
Oh yeah, I just read “Delivering Happiness” by one of the Zappos CEOs. I think it should be mandatory reading for Yakezie members. Check it out when you get a chance!
Cool Freddie. Will check out the book. Once you become a full-fledged Member, you’ll see revenue potential of our network!
Perhaps we should shorten the Challenge time from 6 months to 4 months or 3 months, but I’m not sure. We’ll have to put it to a vote.
I think the Challenge time is about right. It took me about a month and a half to get my Alexa from 1.58 million to 195K as of today. This was from Oct. 4th to Nov. 23rd. So if people want to put in the time and effort, it can happen.
BTW, how do I officially request my membership?
It’s a 6 month challenge, so the Beta Class will finish their challenge end of Jan, 2011 and begin to highlight their Member Posts on Feb 1, 2010. Only a couple more months to go!
OOOOOOOOOOOOOO, that is cool. I just thought once you cracked the market you were all good. Ok, that’s cool. Looking forward to it. Let’s see how close I can get to 100K before the end of the beta challenge. It’s much more difficult to move up now that I am sub 200K. Been dropping like 1K a day now, so need to pick up my promotion and efforts.
Thanks for the heads up!
They don’t call them Vulture Capitalists for nuthin. :-)
Basically it comes down to using OPM. You are mitigating risk and at the same time giving up some ownership.
I have no issue with venture capitalists, but in reality your product or service must be somewhat unique, and be in a decent sized market that’s growing. Does Yakezie fit this? Unique yes, but size of the market? I think that is the biggest unknown (at least to me). What’s the method(s) to monetize the site? This doesn’t have to be known publicly but if you make it known to the members there might be some assistance and direction. Venture Capitalists also have a herd mentality. They will invest in what others are investing in and what’s hot right now. I don’t have to tell you Green Tech is what’s currently hot in the valley.
What’s more greentech than a money blogging network? I know, bad pun, but I couldn’t resist! :D
That’s the thing, as a hobby… what’s the risk? We don’t HAVE to do anything at all. It’s not like we depend on the site for food and diapers!
Well regardless, you’re still young so diapers are still in the far ahead future for you. Zing. :D
Come outside the bay area and those prices will drop significantly. Also, how many startups pay a CEO $125/hr? I guess once you’re significantly passed the 2 employee stage, perhaps.
I definitely appreciate all the time and effort you guys are putting into this, and I second Freddie’s statement. My blog is actually in the red so I consider my donations up till now to be personal, but I will be very much obliged to donate out of my blog revenue once it is there, too. It’s a case of win-win all around, and I think that starting the group was a great idea, Sam, because with everyone helping each other to be more successful, the group has more power to give and do good, too.
I agree, I think a bigger financial influx will occur once more people start getting their blogs out of the red. If only Google would update the PR! I’m hopefully at least a 2 now.
mozRank is going to become more and more important and help all the blogs which have launched in the last 11 months (since the last Google PR update) so not to sweat.
Also, $250,000 really in the ball park here in the Bay Area after the initial couple employees. A lot of people make much much more than $250K here, and they arent even CEOs!
I’m really glad to hear that mozRank may become the new standard. I’m definitely living in the wrong place. I’m going to have search Monster in that area! lol.
Feel free to write a post on mozRank and help popularize the ranking!
My boss makes less than half that so my salary is obviously even less, haha. The Bay Area sounds like a really sweet place to work, except for the high housing costs!
I am encouraged to hear that mozRank is starting to be taken more seriously by the community, as that’s great news for us!
Well, when the median home price is $600,000 in SF (and that buys you very little btw), you’ve got to earn A LOT! Hence, it isn’t that impressive $250,000 for a CEO, but it’s certainly not chump change either!
As far as startups go, I think the CEO salary is really a very variable thing. Most CEO’s that I have had experience at Silicon Valley startups (and generally at a startup, the CEO is the founder but not always, so if they bring in a CEO, he probably makes more than a founder/CEO might) make far less than 100k a year. Some even pay their employees more than they make if they need them to keep the business going. It also depends on the equity that the employees get. If the outlook is good, and you are in early, you might get a large chunk of equity (sometimes even as high as 1% if you are employee 1 or 2) but a very low salary.
If people are interested in the whole truth from a kick butt Cinderella startup in the valley, watch this video from the founder and CEO of Mint.com (purchased by Intuit for $170 million). Video quality is poor, but the interview goes through EVERYTHING including salary information and the whole process from start to finish.
http://vator.tv/news/2009-10-07-aaron-patzer-lays-bare-mints-numbers
Ultimately, success comes from hard work and building a great product that people want.
Thanks for sharing that, Chris. 1% would have been pretty good equity to get in on the floor of a company like Facebook or Google. I’m definitely going to check that video out later, as it seems very interesting.
Thanks for sharing that video. Wow, I didn’t know mint got sold to Intuit for $170 million- that is crazy. Maybe one day Yakezie will be sold to someone for $100 million and all you and Chris’ hard work on your hobby will be paid off :)
Thank you for being so passionate about this hobby!
[…] This post was mentioned on Twitter by Invest With Passion, Yakezie. Yakezie said: If http://t.co/Ee5fMGb Was A Start-up Company http://t.co/kWpTgtE -> Why use Venture Capitalists & how much #Yakezie costs to run! […]
I definitely appreciate all of the work that goes into Yakezie! You guys really work hard at giving us a way to come together and all grow our businesses.
I couldn’t appreciate you more! Without the Yakezie, I’m not so sure Little House would still exist. You’ve put a lot of work into this making this group so successful. Thank you, Thank you!
Hey Little House,
You and me both! This group has definitely helped get the word out and increase my readership! I look forward to the future, and it’s going to be a whole lot brighter because of the Yakezie!
Thank you! I’m trying to partly make the point that a blogger doesnt have to just shutdown and go cold turkey since it only costs $15 a YEAR to rent their domain. Sure, take a break whatever, but to pull the plug…. no, that doesn’t make sense!
I absolutely agree. It’s really too bad that so many people kill off their blogs. I suggest a break, or lowering posting frequency before killing it off!
Not only do we realize how much time and effort that you and Chris put into this, we all appreciated it very, very much.
Hopefully one day this startup venture will be extremely profitable for you and Chris. You are already well on your way to making the Yakezie network a huge success.
I agree as well. I think the Yakezie will become very profitable for us all. Some have already begun to experience it first-hand, and I’m sure dividend will pour into the scholarship fund as a result. Thanks Sam and Chris. You guys are definitely appreciated, and you will definitely be rewarded. Look at how quickly this site dropped into the top 20,000 on Alexa, that alone is amazing. I can’t wait to see what the future holds.
That would be nice, but no big deal if not. This is the beauty of the hobby, it’s for fun mainly, and not out of necessity. cheers
Sam & Chris, thank you for all your hard work! After just starting my little site, I can’t imagine how much work has been and is continually put into this site (not even including content creation, commenting, etc.!!). However, I’m glad to hear that you still enjoy it!
Sam – Considered running the Yakezie by any of your VC contacts? Just curious on the feedback received (tips, growth opportunities, etc)? Not doubting your capabilities – getting outside perspective (more eyes) can never hurt if approached with an open mind?
Definitely a good idea, but I haven’t told them either. I’m wondering if I should about what I do in my free time. Hmmmmm…. maybe!
Sam, I really only made about $50 on my site until I started getting opportunities via the Yakezie. That’s why I’m happy to contribute 10% of each ad campaign and a monthly donation to the Scholarship fund. Granted, I’m at the titanium level but hope to increase it as time passes.
Can we deduct this as a blog expense?
Good stuff! I’m glad to hear the Network has helped! October took A LOT out of me wrt to organizing all those campaigns. I can do it again, but I only have so much time. I’m missing out on some myself!
I hope that each and every one of us can organize one campaign ourselves and rock it. I’m always in if you got one!
I can’t wait until Page Rank is updated- hopefully I’ll have some so I can partake in the advertising! My income from my blog is reallllly low.
You should definitely write a mozRank post like BIFS and Investing It Wisely!
if Yakezie goes nuts and becomes a super power blogging network and goes IPO, can we all receive stock options????
That would be great!!
Hah! Sure, why not! Let’s try and make our first $1 million first shall we?
Yakezie has let me experience great blogs with great members! I’m sure my blog wouldn’t be what it is today without the support of Yakezie.com, it’s been a great trip!
Considering how young the Yakezie website is, it’s come far, in a short time. It has the potential to have rocket blast growth!!!
Just want to say thanks to you both for working so hard every week. That’s a lot of time to invest (even if it’s a hobby you love!) So thanks for doing it for everyone here. :)
Sounds good Don, Jaime, Sunil, College, Beating, Little House and everyone else who I didn’t respond to. I’ve just finished up the revenue post, so things should be good. Cheers.
I have started with a small donation per month. You guys put in a lot of work and I am sure it’s going to pay off big time in the long run, not just in cash but other ways too.
I’m not even going to work the numbers about how far in the hole my sites would be if I was making $125 an hour for the 40-50 hours of blog-related stuff I do every week, lol. I am so glad you enjoy this, Sam. As long as you are willing to put in the time on this, I am willing to do whatever possible to make it succeed. I have personal goals that the Yakezie helps and personal goals centered around the Yakezie specifically, so this site is very important to me. I look forward to seeing where all of this goes and enjoy the community spirit it provides! Woot Yakezie!
Sounds great! I love your 2013 goal too! If I don’t die beforehand, I will stay committed to this venture for at least the next 5 years!
PS I appreciate you and Chris LOTS. Without the Yakezie I don’t think youngandthrifty.ca would be here.
I think before anyone jumps into a VC deal, they should have a marketing plan and a measurable way to evaluate it. Great numbers above, but one would hope that before a VC is consulted, it has been proven with one’s own money that the company is capable of expanding. In other words, many small start-ups probably fail because they were majority leveraged. Thanks for the post and the time poured into this project.
Hello from Austria!
This is all very exciting, and I will certainly continue to contribute as my income (thanks in large part to yakezie) continues to grow. Very cool.
Sam, Of course I agree!! Again, I’d like to say that in addition to contributing to the scholarship fund, participating in Yakezie is a wo;nderful way to show Sam, Chris and the other leaders that they are valued!
[…] If Yakezie.com Was A Start-up Company (Yakezie) […]
This is a really interesting approach to looking at Yakezie.com, but definitely a sensible one. Appreciate all the time you and Chris put in here!
[…] Financial Samurai wrote about blogging for the Yakezie and how the group would lose money if he were to be paid a normal salary based on his job […]
[…] sponsors who also have a history of giving partner with us. Running the Yakezie Network is an absolute loss-making venture if we were to put a dollar value on the amount of time we spend building, testing, marketing, and […]
This was an intersting read. Can you imagine if Yakezie was a startup? I would still be happy to contribute :)
[…] in Alexa. Money has never been a motivation for me to run my site mind you. If I focused on the income generation of blogging, I know I’d get depressed because I’ve devoted countless hours writing, editing, and […]