DropBox -Project 2 Startup company

By Victor (Arne) & Liangyi ye

DropBox, Inc. is a relatively new company.it was founded in 2007 by Drew Houston and Arash Ferdowsi as a Y Combinator startup. It was released in September

2008. Dropbox is selling a file hosting service.

It allows the consumers to not only save but also share their files through cloud storage, file synchronization, personal cloud and client software.

It is available in 16 languages and comes in more than 8 operating systems.

It is also accessible via folder, DropBox’s official website and mobile app. 

Drew Houston was determined to find funding for his idea.  So he turned to Y Combinator.

It offers seed money, advice and connections at two three-month programs per year. Typically, the investment is between US$20,000 and US$50,000. The application process is open to anyone, but highly competitive with acceptance rates of about 3%. In exchange for its services Y Combinator usually takes an equity of about 6%. So Houston defended his idea, highlighted its great potential and finally submitted an application for funding through Y Combinator’s  within the given deadline. He wasn’t the only one; other well-known companies that received funding through Y Combinator include Reddit and Airbnb.

What is remarkable is that Houston stated that if someone were to offer him 2 million dollars for his idea, he would not decline. This is ironic given the fact that DropBox is now worth a staggering 4 billion dollars. Recently DropBox did a round of crowdfunding and raised 350 million dollars, which implies that dropbox has now far outgrown its former startup status.

 

So why was DropBox so successful and why would we recommend an accelerator as a way of funding your startup? First of all, Houston had a great idea and took all the right risks in order to bring dropbox to life. From the beginning he had a number of engineers working for him to make dropbox compatible with all computer platforms and operating systems (android, IOS, microsoft…). What was great about his funding through Y Combinator was that he was able to raise money without having to give great equity to Y Combinator. If he had turned to an Angel Investor for example, he would have been forced to share a much larger percentage of his company. Instead, he was able to build up his company with the support of an accelerator with a strong reputation. He was so successful that Steve Jobs was interested in taking over DropBox. At this point however, Houston already felt confident that he could build his own empire. He went on and kept that promise.

A second advantage of turning than accelerator is that you have to infuse less money yourself, which allows you to do more with fewer risks. On top of that Y Combinator also solved Houston’s problem of having only one initial co-founder, Arash Ferdowsi (a fellow student), which meant a small cash input given the fact that they were both students.

 

To conclude with, new startups could definitely benefit from the help of an accelerator. Y Combinator is definitely not alone. In fact[,] the number of accelerators has been skyrocketing in the past few years. They can provide a considerable cash input in exchange for a relatively small part of your company. If you can present your idea in a professional manner and you have the skills to make your startup sprout, an accelerator is likely to acknowledge your efforts. 

An accelerator, however, can do more than funding alone. Because an accelerator is usually a company that is investing in multiple startups, they have plenty of experience and information to share with you. In some cases an accelerator will even pay for your education if they think it could benefit your startup. Although we do recommend seeking the help from an accelerator when starting a business, it is always wise to consider possible downsides. First of all you should consider if the accelerator you are approaching is the right  fit for your idea since every accelerator is different. Second of all you should not give away too much equity, as that might come back to haunt you during a second or third round of funding in a later stage of your company’s development. Lastly you should keep in mind that attending an accelerator might require you to relocate your company (DropBox for example relocated to Silicon Valley).

We hope this information has been helpful and provided you with information to get started with your own round of fundraising. Good luck!

Why crowdfunding is the next big funding method

Introduction

This assignment presents reasons for why it is preferable to use crowdfunding. Furthermore, there are listed three real-world examples of US based companies who have had success by the use of crowdfunding. The assignment ends with a conclusion, where the most important parts are summed up.

Why crowdfunding?

Crowdfunding is a great method to fund a business, primarily used in the early phase of the development. Typically, crowdfunding is useful when you have an idea about a product and want to make it real, but need money before it can be realized. In cases like this, crowdfunding provides the opportunity for present the idea and show a prototype to a very big group of people. If they like the idea, they will probably invest in the company.

There are a lot of reasons why crowdfunding is a preferred way to fund a business, but due to limitations of this assignment, only selected main reasons will be presented below.

First of all, crowdfunding provides the opportunity to receive a large amount of money without giving away part of the company. When talking about funding, the traditional perception is that you have to give away ownership of the company, but that is often not the case for crowdfunding. Typically, the communities who reach the money are satisfied, if they after a product launch can get the product for free or with a discount. The Guardian has an explanation for why people are willing to donate money[1]:

“When people fund anything anywhere in the world, they do so for one of four reasons: passion, participation, perks and profit. Funders are either passionate about the idea, team or project. They want to participate in its success; or they want to get something in return, such as a perk or even a profit.“

Secondly, by making use of crowdfunding you prevent risk. The reason for this is that you are raising money that you don’t have to pay back if the project is going to fail. This is a very big difference compared to, for example, a loan from the bank, where you have to pay the money back even if the project is going to behave well or not.

Thirdly, this way of raising money is also a way to show proof of concept. The upcoming product is going to be validated in the early stage and you are therefore sure that there are big interests for the product. This is a big advantage, as you then probably know that a lot of people will like the product after the producing or development of the final version. If a lot of people are interested in donating money, you then have a confirmation of a potential customer group. That said, it makes it probably also more challenging to raise money as you then have to convince maybe a lot of million people instead of just a group of investors. On the other side, if many people are not showing interest in the product, there is then probably not a market for the product. Therefore, by making use of crowdfunding, you in an early phase have the opportunity for establish a relationship with customers for the future.

Lastly, the engagements from the users are a great opportunity to establish a dialog with them. In this way, you can get a lot of feedback to your ideas about the product and the potential customers can be a part of the development process by offering new ideas. Thereby, it is a way to innovate the product by the involvement of users and this can in the end be very valuable.

Real-world examples

Pebble

Pebble is a product smartwatch and was funded by crowdfunding[2]. It was funded through Kickstarter in 2012 and the campaign raised $10,266,845 by funding from 68,929 people[3]. At that time, it was the most funded product ever. The product was released to the market in 2013 and provides a lot of different features and design opportunities for the user. Best Buy begun sells the product in July 2013 and the product was sold out five days later.

The product has been a great success until now, but now it is interesting to see whether they can continue the successful story, as “the big players” as Apple now are producing smart watches as well.

Oculus Rift

Oculus Rift is another successful product, which as well was funded in 2012 by Kickstarter[4][5]. 9522 people donated money and they rose in total $2,437,429. The produces a virtual reality head-mounted display and it can be used to increase the pleasure of playing video games as it makes the experience more real.

The really reason why it has been a success story, is that Facebook acquired the company in July 2014 for $2,001,985,000.[6]

Jibo

The last product presented in this assignment, is going to be a personal robot called Jibo[7]. The product raised $2,287,609 on IndiGoGo and the amounts were donated by 5550 people[8]. It is the most funded technology product ever on IndiGoGo and almost 5000 products are already pre-ordered.

It is still yet too early to call the product for a real success, but it seems that it will go on to be a big success. The campaign was launched in July 2014 and the product is expected to be available for the public in the summer 2016.

Conclusion

In a short overall conclusion, it can be stated that crowdfunding can be a great way to fund a startup company. In relation to an action plan, there are a lot of guides to how to get success with your next startup and it will be too much to list all the guidelines in this conclusion. However, The Entrepreneur and Forbes provide some good advice and these can be read by following the reference notes[9][10].

Another evidence for why crowdfunding is worth considering for your next startup is that Berkeley University has made an executive program about crowdfunding[11].

It can therefore be concluded that crowdfunding can be a useful way to fund a startup, but whether it is the best funding method is a big discussion as every method have the pro and cons and it depends on the situation of the particular startup.

[1] http://www.theguardian.com/media-network/media-network-blog/2013/apr/10/crowdfunding-businesses-social-projects

[2] https://getpebble.com/

[3] https://www.kickstarter.com/projects/597507018/pebble-e-paper-watch-for-iphone-and-android

[4] http://www.oculus.com/

[5] https://www.kickstarter.com/projects/1523379957/oculus-rift-step-into-the-game

[6] http://techcrunch.com/2014/07/21/facebooks-acquisition-of-oculus-closes-now-official/

[7] https://www.myjibo.com/

[8] https://www.indiegogo.com/projects/jibo-world-s-first-family-robot-4-800-pre-sold

[9] http://www.entrepreneur.com/article/234707

[10] http://www.forbes.com/sites/amadoudiallo/2014/01/24/crowdfunding-secrets-7-tips-for-kickstarter-success/

[11] http://crowdfunding.berkeley.edu/

Venture Capital. Yes or no?

Venture capital

Starting up a company requires money to get it off the ground. There are several ways to get the funding you need: personal savings, family and friends, a bank loan, venture capital, business angels, crowd funding, etc.. Whereas the first three funding methods have limitations unless you are already a wealthy individual, venture capital offers large quantities of money to help private, young and fast-growing companies with their start-up expenses. In broad, venture capital differs from traditional financing sources in that venture capital typically:

• Focuses on young, high-growth companies,
• Invests equity capital rather than debt,
• Provides a long-term equity investment in turn for a share in your business,
• Takes higher risks in exchange for potential higher returns,
• Has a longer investment horizon than traditional financing,
• Actively monitors portfolio companies via board participation, strategic marketing, governance, and capital structure.

Venture capitalists are not the same as banks. Banks lend money to numerous entrepreneurs, whereas VCs only have a limited amount of capital to invest across a set of companies. The range of their capital typically available is around $500,000 to more than $30 million. Furthermore, VCs are effective at adding value and are dedicated to helping your company grow. They provide feedback and are willing to keep investing in your company when you’re doing well.

Another advantage of working together with VCs is that the more closely the ideas of the investor align with your ideas (when you want the same outcomes), the less you are going to have the problem of ending up in situations where you don’t want the same outcome. But it’s not always easy to convince a VC to invest in your company. VCs are very picky when it comes to allocating their capital, but in return you get their full commitment.

Venture capital can be the right funding method for young, fast-growing companies inasmuch as they provide a financial cushion. This long-term or “patient capital” gives companies the time to mature into profitable organizations. It’s an active form of financing that helps companies grow and achieve a greater return on investment.

Evidence to support this hypothesis can be found in the following three US-based start-up companies: YikYak, Uber and Airbnb

The online app YikYak was launched in November 2013 with funding of the company Atlanta Ventures. Six months after the application was released, it became the 20^th most downloaded social media app in the United States. As of April 22, 2014, YikYak announced they had raised $1.5 million in funding from various companies. This funding was intended to enhance the app, and to increase the amount of users both in the United States and overseas. On June 30, 2014, YikYak had raised over $10 million from previous investors.

Uber is a ride-sharing service based in San Francisco. The company received venture funding in late 2010 from a group of investors in Silicon Valley. In early 2011, Uber raised more than $11.5 million in Series A funding led by Benchmark Capital. In late 2011, Uber raised an additional $32 million in funding from several investors bringing their total funding amount to $49.5 million. As of September 16, 2014, the service was available in 45 countries and more than 100 cities worldwide, and was valued at more than $15 billion.

Airbnb is an online community marketplace for people to list, discover, and book accommodation around the world. It was launched in 2008 and had six rounds of funding from eighteen investors. Airbnb collected 794,8 million dollars from funding and are know worth over ten billion dollars. They have now over 500,000 listings in 33,000 cities and 192 countries.

As proved by the three real-world examples, venture capital can be used by other young, fast-growing companies to mature into profitable organizations. It offers a stable funding base when you’re performing well, this in turn encourages start-ups to keep exceeding expectations. Companies are able to expand continuously due to the fact that VC provides a longer investment horizon compared to other funding methods. Additionally, VC can help young companies grow and expand really fast, giving the owners the opportunity to sell their profitable business at a high price, because companies that are growing at a fast rate are worth more than companies that are growing at a slower pace.

Sources:

National Venture Capital Association

money.howstuffworks.com

huffingtonpost.com

sba.gov

crunchbase.com

YikYak.com

Uber.com

Airbnb.com

By Anna, Manou and Priscilla