The point grapsfan is making is that 30% is the gross margin and 5% is the net margin. Or in more lay terms:
It costs $100 to make the widget It sells for $130 25 bucks of the 30 dollar gross profit feeds the burn rate of the company. Leaving a mere 5 bucks as net profit.
Am I right graps ?
OR in even more lay terms...THERE SEEMS TO BE NO WAY FOR BOX STARTUPS TO CONDUCT VIABLE BUSINESS IN THE POST-BUBBLE ERA. OR IS THERE ?
re: Metro-Optix Pulls the PlugMetro-Optix had a design centre in Santa Clara, California. The company was run by a bunch of guys from India, whose past is largely unknown. Infact, this was run as a family business by two brothers, as I recall, one was CEO and other was the CFO. When the going got tough, he left the company but used to run from California. It is very unusual for a strt-up to be run like this.
Very off-topic but...
My personal favorite corrupt Indian-run company of the year is Narad. They built a higher-speed DOCSIS replacement that none of the MSOs wanted since it was proprietary. The company was a poster child for nepotism. Anybody who was anybody was related either by blood or marriage. They closed a pretty substantial B round and proceeded to blow through the entire round of money in 5 months. The VCs shot the whole lot of them and are trying to restart the company with a new management team. The basic idea is so defective that any competent managers the VCs have tried to recruit have walked away from the offer. That loud crunching noise you hear is Narad train-wrecking about 12 months from now.
re: Metro-Optix Pulls the PlugMetro-Optix had a design centre in Santa Clara, California. The company was run by a bunch of guys from India, whose past is largely unknown. Infact, this was run as a family business by two brothers, as I recall, one was CEO and other was the CFO. When the going got tough, he left the company but used to run from California. It is very unusual for a strt-up to be run like this.
It was easy to raise money in 1999 and that is why the company was able to raise close to $200 million.
Metro-Optix did not viable carrier grdade products. It did not have any significant value added feture in its products. The demise of rhe coampany was almost cerrtain. I think the closure was almost certin, only question was time.
re: Metro-Optix Pulls the PlugNot wanting to sound too pedantic but,
Margin = (sell price-cost)/sell price
Therefore margin on $130 sell and $100 cost is 23%, not 30%. It's a common mistake to confuse margin with markup - 50% margin is the same as 100% markup.
re: Metro-Optix Pulls the PlugVery off-topic but...
My personal favorite corrupt Indian-run company of the year is Narad. They built a higher-speed DOCSIS replacement that none of the MSOs wanted since it was proprietary. The company was a poster child for nepotism. Anybody who was anybody was related either by blood or marriage. They closed a pretty substantial B round and proceeded to blow through the entire round of money in 5 months. The VCs shot the whole lot of them and are trying to restart the company with a new management team. The basic idea is so defective that any competent managers the VCs have tried to recruit have walked away from the offer. That loud crunching noise you hear is Narad train-wrecking about 12 months from now.
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That didn't stop them from sponsoring a boadload of Greencard applications for Indians though. I personally read the requirement they posted to defend the application. Some would say that to "compete" with the Indian being sponsored, the local US candidate needs to know ASIC design while being a Systems Test Engineer to minimize the chance of any US worker applying for that job.
re: Metro-Optix Pulls the PlugI think some have already been planning an exist strategy, Nader is starting a Sub shop...good luck Nader... ================================================
Wishful thinking. None of the executives is going to be without job or money. They probably already have jobs (albeit with a different title) at the same VCs who shut down the company. The CEO would be Entrepreneur in Residence at the VCs and the CTO is going to get paid to do due diligence. There's an article in the IEEE spectrum magazine about this underworld of VC and their executives.
Anyone hired with a VP or above title has a golden parachute clause in their job offers and the clause does not end with the closure of the company. Directors and below level (especially engineers) are the ones who get shafted.
re: Metro-Optix Pulls the PlugRoad-load, I think you are right. I know several startups that are breakeven at $30-40M. The M-O's with their Home Depot buy it all right here stupidity, are the ones that need more than $50M. But even they don't need $200M. Not even close.
I think Grapsfan was thinking in terms of a dividend or some kind of annual investor return. It might have had merit had their been a window for non-acquisition exit (IPO). But such is life...
I've said it before and will say it again. Foundry and Redback did it on less than $30M, and Cisco if I recall correctly, did it on less that $50M. Ascend Communications did it on about $50M as well. So it can be done. The problem is, investors are impatient for a return (some are). It historically took about 5-6 years on average to get the last dollar out of an equipment investment for the strong investment outfits with long track records. Ask them.
Cisco was funded in the mid-80s, Ascend was funded in the early 90s (91?), and things more way more sane but even during go-go era Redback and Foundry found a way to matter without spending tons of money. Now Redback is dead (thanks Vivek), but that's not because they didn't spend enough money. It's because they partied too hard when they should have paid more attention to the rotten, smelly signals. Oh, and the "get the red out" Cisco campaign didn't help either. Nor did Juniper's execution. Blah Blah, I digress.
There is a business case for startups, it's just been obscured by the miscalculation that if you pump $150M into a development project you'll develop enough value to yield a mult-billion dollar return.
Back to the drawing board, baby.
P.S. Long live the MSOs, IOCs and enterprises. They are buying from startups.
re: Metro-Optix Pulls the Plug> My point was that grapsfan is claiming that > they would need $400 M per year in sales to > break even which does not seem right. > > It should be $20 mill/0.30 i.e. $67 mill per > year in sales to break even. No ?
As someone pointed out before, that 30% margin number that I used defines the markup over the manufacturing cost. If I had a widget that cost $200 to make in piece parts & manufacturing labor, and I sold it for $300, I have a 50% margin (I'm making $100 on my $200 investment).
However, that $100 also has to go to pay for R&D, sales & marketing costs, infrastructure such as administration and office space, etc. In most technology companies, that tends to be about 20-25% of total costs (I've seen it as high as 35%, back in the boom times). So you subtract your 20-25%...I used 25% in the example. If you don't want the news to sound as ugly, we can use 20% (which might be closer for a lean-and-mean startup these days):
$20M / (.3 - .2) = $200M
That cuts the M-O target sales figure in half, which I'll bet my mortgage on is still nowhere close to what they were getting (and I'll also bet that they're iron planted in the field wasn't sold at 30% margin either).
So, to get to killer_app's point:
> OR in even more lay terms...THERE SEEMS TO BE > NO WAY FOR BOX STARTUPS TO CONDUCT VIABLE > BUSINESS IN THE POST-BUBBLE ERA. OR IS THERE ?
With how many companies there are, and how tight the market is, and how many products are willing to be sold at zero or even negative margins just to claim any sort of victory...my answer is a pretty solid "no". It's very similar to the auto industry 80 years ago or so. The market can probably support two or three vendors in each technical function (metro DWDM, LH/ULH, edge access, etc.). In some functions, there's 20 times that many vendors. Most of them, almost all startups, will go away.
The point grapsfan is making is that 30% is the gross margin and 5% is the net margin. Or in more lay terms:
It costs $100 to make the widget
It sells for $130
25 bucks of the 30 dollar gross profit feeds the burn rate of the company.
Leaving a mere 5 bucks as net profit.
Am I right graps ?
OR in even more lay terms...THERE SEEMS TO BE NO WAY FOR BOX STARTUPS TO CONDUCT VIABLE BUSINESS IN THE POST-BUBBLE ERA. OR IS THERE ?
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grapsfan
Not sure I follow
Are you saying that of the 30% margin, 25% could be manufacturing cost ?