Welcome to the latest installment of our Software Business Crash Course. Today, the emphasis is on the "crash." Sigh.
I have never had a lot of respect for the venture capital industry. I've worked in a venture-funded startup. I've been through the funding process. And I know scores of entrepreneurs who have lived through the venture process and been spit out the other end.
For all the hoops founders are put through, and all the unfair term sheets many founders are stuck with, the VC community often seems to be just a bunch of greedy rich folks blindly following the herd and investing in the latest fad. Case in point: apps.
One such move is the subject of my attention today. Watch the following video. It's a short YouTube demo of an Android launcher app called EverythingMe. I know it's a little boring, but it's only about a minute long. Consider the minute you're about to spend tuition in a form of Earth School that might save you and your friends, oh, about $35 million.
Now watch it.
Yeah. It's a launcher. It's not ugly. It even has some nice features. But here's where things start to get very, very... stupid. Apparently venture capitalists put $35 million into this thing.
Yeah, I know. You're looking at about enough to take three or four people about six months to write. If you had to pay programmers to write this (and you shouldn't, because that's what founders are for), you're talking maybe a quarter of a million bucks. At max.
And somehow, supposedly seasoned investors (Telefónica, Mozilla, Draper Fisher Jurvetson, Horizons Ventures and SingTel Innov8) ... wait, what? Mozilla? Mozilla was part of a funding round for this Google Now wannabe launcher?
They had 36 employees! What in the heck did they need with 36 employees?
A visit into the company's Web site (while it still exists, I guess), shows employees characterized by Android, Design, Backend, Infrastructure, AQ, Analytics, Growth, Web, Test-Automation, Project Management, Product, Marketing, and Content.
Did I mention this is a little launcher app?
Although there were millions of downloads (there were at least 10 million), there are no in-app purchases. So where is the business model? Advertising? Some sort of linkage for selling other apps? Predictive recommendations to local restaurants or gas stations?
As it turns out, according to an article in tech.eu, business model turned out to be the problem. Apparently, somehow, after funding this thing for $35 million (and apparently, hiring an employee for every million in funding), the company is shutting down due to a severe lack of a business model. In other words, they knew how to spend money, but had no idea how they were going to make it. Except, you know, apps!
If you take away one lesson from this idiotic funding story, let it be this: if you build it, they may come. But they may not spend anything.
Let's temper that with a more constructive lesson. Investing in software is often a great idea, but you need to balance that investment with common sense. A new launcher is an entry into a crowded market dominated by Google. Even so, if you have a good idea, go for it. But the idea that this company somehow managed to hire 36 people and pull in $35 million in funding, is ludicrous. It's a half a million dollar project -- at most.
I know why it happened. VCs generally don't like small deals with less than a unicorn's worth of promised payout (that's a billion big ones). So founders overpromise and overfund in order to be allowed to play the game. It's a recipe for total failure, but that's the system.
And we wonder why we have bubbles that burst. Sadly, there are probably hundreds of more Everything.mes out there, all getting ready to burst in the aftermath of a feeding frenzy of app greediness. Yep, I smell bubble.