It’s not that complicated to build a success startup.  Just build a profitable business while spending as little as possible.  It’s not complicated, but it’s hard.

I recently saw the news that Yahoo! had bought Xobni.  Xobni was a noble attempt to tackle the email overload problem (xobni = inbox backwards).  According to the stories I read, Xobni was bought for anywhere from $30 to $60 million.

Whenever such news comes out, I have a couple of friends who write to me, asking me if this represented a good outcome or a bad one.

My general response is that any outcome beats going to zero, but I follow that up by analyzing the financing history of the company.  Here’s my analysis of Xobni:

Judging from Xobni’s Crunchbase entry, the company raised $42 million dollars in four rounds of funding.  It looks like none of the rounds were down rounds, which means there was no recap.

Therefore, the $42 million has to be paid back to investors first, assuming a simple 1X liquidation preference.

Best case scenario, the company sold for $60 million, which means there’s $18 million to divvy up*.  After 4 rounds of funding, assume the founders ended up with 20% of shares fully diluted, and thus split $3.6 million amongst everyone who was there at the beginning.  If there were four founders, none of them would make even $1 million off the sale, and that’s before accounting for taxes, the time value of money, and so on.

This is why raising a ton of money can be hazardous to your health.  Bootstrapped, they’d just be splitting $60 million.  Even a $5 million exit bootstrapping would be better financially.

The venture capital process rewards capital efficiency; the less you raise, the better off your outcome, especially in “smaller” (e.g. sub-$100 million) exits.

* It is possible that there was a carve out for management, but it still wouldn’t represent a big windfall.