Nov 07

Everpix, Snapchat, and The Startup Lie

At their core, Everpix and Snapchat are both well designed, super hyped software services centered around photography.

For the unfamiliar — Everpix is a freemium photo hosting service that has 6 employees and 6,800 paying users. Everpix recently announced that they’re shutting down in grand fashion, after running out of money. The final straw? Inability to pay an estimated $35,000 monthly hosting bill from Amazon AWS. (gotta store all your funny cat pix somewhere…)

Contrast that with Snapchat; the 20+ employee, zero revenue, temporary selfie app that secured a huge $60M round of funding in June, got swanky new office digs in Venice, and supposedly is in line to get…even more money!

So why is a service that people actually pay for closing, while a zero income company benefits from over-funding?

Everpix’s fatal flaw in the eyes of a VC

Well known startup blogger Andrew Chen had a few things to say about the Everpix postmortem, with this gem in particular catching my eye…

…too much focus on monetization too early can lead [to] a red flag, since it’ll mean maybe the entrepreneur is thinking small rather than focusing on winning the market.

Those of you not living in startup-bizarro-world are probably scratching your head at that one, but it explains the situation perfectly.

See, most venture capitalists swing for the fences — all the time. They don’t care about base hits, doubles, and sometimes even home runs. They want the grand slam, the big idea, The Next Facebook.

Small, profitable companies; particularly ones that don’t display pump-and-dump potential get shunned by VC’s. They even have patronizing phrases to describe such operations, like ‘lifestyle business’. (ewww)

Make money? No, don’t do that!

The phenomenon of revenue generating companies being denied funding is not a new one. These quotes come from a 2012 New York Times article — but just as easily could have been written in 2001.

Yet an even more bizarre activity in the Valley than shushing the talk of a bubble is how some start-ups are advised by investors not to make money. This concept may sound ridiculous from a business standpoint, but for investors, it fuels the get-richer-quicker mentality that exists here.

When small start-ups I’ve spoken with do make money, they often find it difficult to recruit additional investment because most venture capitalists — and often the entrepreneurs they finance — are not interested in building viable long-term businesses. Rather, they’re interested in pumping up enough hype and valuation to find a quick exit through an acquisition at an eye-popping premium.

This is exactly why Snapchat is flush with VC cash, while Everpix is paying out refunds to once happy customers.

However, I don’t buy that making money is why Everpix ultimately closed up shop. Everpix failed by believing the misconception they should be ‘the next big startup’. The fact that we’re in 2013 and acquisition is still the default goal for new software companies is demoralizing. Everpix could still be running their product as a successful business, but it’s obvious that’s not what they wanted from the beginning.

Everpix by the numbers…

Based on what we know about Everpix’s subscriber count and payment plans, it appears they had the ability to make somewhere in the range of $370,000/yr.

If you look at the numbers from this article, you’ll see Everpix was splurging on personnel costs — to the tune of over $4,934,691 $1.16M in two years. Classic VC-backed overspending. (thanks for the correction Sameer) This puts the average salary around $100k/yr - normal (some might even say low) for the Bay Area.

I’m no math whiz, but I ran some “back of the napkin” numbers anyway. It’s clear that Everpix would still be around if they simply kept costs low until they were a proven success.

How it could have worked…

1 - Pay out lower salaries

Getting a product off the ground takes sacrifice — I know, I’ve done it. Software developers in the startup community are spoiled, especially here in the Bay Area. This notion of having your cake (huge salary) and eating it too (large equity stakes) right from the start is insane. By simply paying themselves $50-60k/yr they could have gotten along reasonably well, and built a sustainable business in the process.

2 - Go to a premium-only model

Everpix should’ve dropped all free users and become a premium-only service.

Doing so would have reduced their monthly AWS bill from $35,000 to around $4,300 — and in my experience, switching from freemium to a paid-only model works wonderfully.

3 - Don’t believe the startup lie

It bears repeating that ultimately what failed Everpix was the belief that they should be The Next Facebook (or even Instagram?).

Photo storage and sharing is a huge business, big enough for multiple players to succeed. It’s been estimated that Flickr is making around $50M/yr from a combination of paying customers and advertising. Armed with this knowledge, why not aim for the $50M/yr, instead of the acquisition and early cash-out?

Final thoughts

The Everpix team built a great product, because attracting 6,800 paying customers in 2 years is no small feat — kudos to them. I wish them well with whatever challenges they take on next.

As someone who’s struggled with my own startup failures I know exactly how it feels to be in their shoes, and it’s a bummer.

If you’re an engineer readying a product launch I urge you to focus on creating a sustainable business, instead of buying into the belief that acquisition paydays and venture capital is the best way to operate.

Written by Seth Banks

Seth spends most of his days leading the design team at Green Bits and improving Cashboard. Occasionally he finds time to write about music, design, startups, and technology.

Tagged: business, startups