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
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.
Average mount of time spent by Chris a week. 10-15
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!
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!
Sam & Chris