Evan Spiegel Snapchat CEO, Money Is Everything
No doubt you’ll remember last year when, Evan Spiegel Snapchat’s CEO found himself in the midst of a PR debacle when emails from his university days were made public. As Andrea Chang notes for the LA Times:
In the emails, Evan Spiegel wrote about shopping for cocaine and marijuana and making 300 Jell-O shots to get sorority girls drunk.
We all probably said dumb stuff in college, most of it we’d probably like to forget. Yet, it’s the emails that have just leaked from the recent Sony hacks that present Evan Spiegel in a much more favourable light…it turns out that this frat bro is actually a lot more mature than most had him pinned for, and very insightful when it comes to business.
When it comes to startups, a lot of young businesses seem to be of the philosophy that product growth and building a reputation are more important than making money. In other words, the idea is that you need to build your brand before you build your bank account.
Evan Spiegel disagrees. In his view, it’s better to start making money now and worry about the valuation of your company later.
You have to make money to survive; otherwise you’re like a car without gas. It doesn’t matter how nice the car is, it needs the resources to keep going.
This is precisely why Evan Spiegel wrote the following email to Snapchat board member Mitch Lasky. It discusses his thoughts on raising money:
I 100% understand your perspective on the raise. That said, I would prefer to keep the valuation of the co at $800mm going into a potentially turbulent time in the market. We have 13 months runway, and with a minimally successful monetization scheme we will be able to comfortably extend that.
I don’t think that monetizing the business will affect our ability to raise at high valuations — Facebook was bringing in money in the very early days and didn’t have any problem attracting high valuations.
If anything, we need to monetize the business in order to create leverage for future financings as needed. In the next two weeks I want to focus on the monetization product rather than a potential financing. It’s almost there and it’s really awesome.
If we have a business that is sustainable over the next 2-3 years we will be in a much stronger position. I think 409(a) issues are overstated and that we will benefit from having lower strike price as we hire over next few years. Especially if that price becomes based on revenue rather than VC valuations. I don’t think $3bn valuation for fundraising is going to go away – esp because TC and others are already pricing in market volatility.
You’ve seen the data – we have high engagement and high retention product with tremendous growth ahead of us. Monetizing the business now only makes a stronger case for the permanence of our product. I think most important thing I want to communicate to you is that this is not an emotional decision and is not about “proving it” – this business needs to make money.
The argument of grow now, monetize later doesn’t make sense because we have reached abnormal levels of growth and our monetization product is value-added. I’d rather not burn another $100mm of OPM before we find out whether or not we have a business.
If we can build profitable biz w Twitter-scale, 30-person headcount, and major growth ahead we are not going to have a problem attracting additional capital. (This does not preclude necessity of building a much larger team).
According to Evan Spiegel Money Is Like Food, You Can’t Survive Without It
A lot of business experts agree with Spiegel on this. Many startups, even if they gain notoriety, end up failing because they aren’t actually making money.
A startup could have a huge valuation, and absolutely no revenue. If this is the case, you can probably bet on it failing.
In truth, around nine out of 10 startups are destined to fail. Most of the time, startups fail because they’ve designed a product that nobody wants. Yet, it’s also due to the fact that they become manipulated by the idea that they need to build a large audience or customer base before they actually worry about money. As Evan Spiegel revealed in his email, this isn’t always the best strategy. Even if you have a great idea that people like, you need cash to keep it going.
George Deeb of Forbes contends:
I understand many startups may not have a revenue model day one, trying to quickly build up a large audience and monetizing it later. But, there better be a clearly communicated revenue plan for when that day happens down the road.
Make sure you are raising enough money out of the gate. That means raising enough to build your product and to acheive your proof of concept. And, preferably, that amount is large enough to at least carry you 12-18 months.
There are many factors to consider in terms of building and perpetuating the success of a startup. Yet, without money, none of them matter. In business, money is oxygen.