A question to you entrepreneurial types.
Why does an globally established and growing company with a proven business model want to raise a billion dollar investment?
It's money they'll have to pay back with interest and I assume there would be other strings attached (like the high risk implied by the planned move that was now canceled). How is possibly better than organic growth at this point where they are probably close to market saturation (in the sense that further exponential growth is implausible)?
OnlyFans is a classic two-sided marketplace with strong network effects. The more paying customers are already on the site the more attractive it is for new performers to choose OnlyFans as their platform, and the more performers there are on OnlyFans, the stronger the value proposition is for customers. That tends to give you a winner-take-all (or at least winner-take-most) market, where if you can establish a dominant market position is becomes self-reinforcing, you become very hard to displace, and can command very large profit margins. It's exactly the dynamic that has kept eBay the primary way of doing auctions online for over two decades.
When you have a market like that, it often makes sense to pursue growth as an end in itself, well past the point of profitability, because the reward for coming in first place (a durable monopoly) is way higher than a linear projection would suggest. Reid Hoffman (founder of LinkedIn) gives an especially clear explanation of this logic in Blitzscaling: https://www.blitzscaling.com/
I wonder if there's market to be gained from people who otherwise wouldn't venture near a site with such reputation who might be converted into the main model.
It's not necessarily money they'll have to pay back, it can be investors getting a share of the company (and existing investors getting their share diluted).
Sometimes they might want to raise to grow faster than your competitors. Not sure about their market, but sometimes there is a "winner takes all" market where the winner isn't established yet. So it's a race to grow fast enough to be the first to get to that network effect.
Look at online videos for example. Youtube has a near monopoly, while Dailymotion, Vimeo and others are just getting scraps. If your market hasn't settled yet, even if you're already established and growing, getting investors money could mean the difference between becoming Youtube and becoming Dailymotion.
The devs of FloatPlane considered entering that market as soon as the exit was announced, but given the development time and the fact that most of the content creators migrated to other platforms, and therefore they would be very late.
The devs of FloatPlane considered entering that market as soon as the exit was announced, but given the development time and the fact that most of the content creators migrated to other platforms, they would be very late and therefore it is not a worthwhile endeavor.
It’s perceived trajectory. You think they can’t grow any more- they think they can grow 100x over with enough capital
Growing organically takes a long time and require a lot of luck. Capital can unlock massive growth if used in the right way.
Besides, why not? If the company gets bigger, all the execs win, if the company raises money and wastes it and collapses, the execs are rich already and just move on.
> Besides, why not? If the company gets bigger, all the execs win, if the company raises money and wastes it and collapses, the execs are rich already and just move on.
That mental equation depends on who owns the company. Who the big insider ownership stakes are held by. If you own 43% of OnlyFans as the primary founder, you're going to think twice about mass dilution unless it's absolutely necessary. If you can avoid hefty dilution and still build the company, your wealth outcome will be dramatically better in the end. That's why not.
OnlyFans isn't a zero insider ownership shell run by suits at this juncture. It's only 4-5 years old. It was founded by two brothers (that may still retain upwards of a quarter of the business), and then Leo Radvinsky from the MyFreeCams cam site purchased 3/4 of it. MyFreeCams is a money spigot, which funds Leo's venture activities, including the purchase of OnlyFans. Taking an enormous dilution hit would not be ideal for someone in that position, he would want to be very strategic about it (he already has financial resources).
Marking the value of your company to market can make you richer over night. If you have a $10/year income stream, a bank might run a calculation valuing that income stream at $50-$100. If you can instead get investors to value it at $1000 (because it is a "tech company" and deserves an insane valuation), you are a lot richer than you used to be. Even if you lose 90% of your income stream, you are still probably richer.
This comes down to the question: why do you want to own a high-value asset? So you can borrow against it to buy more assets. This is how Jeff Bezos can fly around on a $500 million jet while selling $0 of his stock.
Because it's so hard to get traditional investment, entrepreneurs in the sex industry often see that they are a lot poorer (in quality of life terms) than people who own businesses that are much less successful.
For the sake of correctness, Bezos is definitely not in a $500M jet. The only jet at that price is owned by a Saudi Prince.
Also, the idea that Bezos and people like him never sell stock is just completely wrong. This stuff is public record, you can look it up. Here’s an article that did it already [0]. Which means, yes, Bezos and all the other über rich pay taxes and don’t borrow money to avoid taxes until they die.
With the credit rating Bezos has nothing stops him from getting another loan to pay the first. Plus the stocks he holds continues to gain value which means more collateral. Worst case investors dump money through him.
First, they probably don't have to pay back with interest. Large investments, provided by upper tier firms are "cheap" atm. For loans that means very low interest. More commonly in tech world, these are equity investments. Investors get shares. Dividends are paid in theory, but not or on a strict schedule and not if the company can't afford it. Increasingly, not at all. If you can be securitized and fed into the "high finance" system, you get to exist in a much more attractive monetary system.
A more pertinent question is "why do they need investment at all?" Assuming they can operate out of revenue, most answers to this question are controversial, one way or another.
One reason is cashing out founders and early investors. OF is popular now, but it could lose popularity. Founders are currently paper millionaires and selling equity gives them an opportunity to sell shares too. Even if the company itself sells all the shares, just having cash in OF's account is a buffer to risk.
A more amorphous set of reasons is "getting in with the in crowd." An equity investment is also a valuation event. It gives shares a market value. Besides allowing founders to sell shares, it also makes it easier to compensate employees with options. The company can use shares to buy other companies. Etc. All this relies on shares having a market value, and selling shares to an institutional investor is a way of doing this.
There's also good reason to establish a relationship with a financial backer. You'd rather talk to a merchant bank when times are good, revenue is flowing and investors want in, not when the company is struggling. In the future, you might need emergency cash on a short turnaround. You might want growth finance... likely for a network that needs to scale. otherwise, you leave opportunities for the competition. You kind of need an institutional backers to help you IPO, or otherwise interact with the financial sector.
A lot of this is pretty speculative, but an OnlyFans backed by Softbank might find it easier to negotiate terms with standard payments providers. It might have an easier path to IPO, etc.
In the old days, when firms built factories and made widgets, it was always big news when a big firm signed with a big bank. This was presumed to be a long term relationship, with the merchant bank funding the company and selling its bonds, leading major investment rounds when needed. These relationships were the bedrock of capitalism. Japan's economy for example, was entirely structured around merchant banks. "Keiretsu" brands like Mitsubishi & Mitsui were basically just a bunch of companies backed by a single merchant bank.
Investors are the final customer in a bubble. Uber and WeWork were never going to be profitable. The game was to convince investors they could be. In a bubble, it feels like anything is possible and silly things like math just weigh you down.
Thanks, I guess I was wrong on that count. It makes sense.
The first part continues to baffle me. If I have a proven profit of $X/year and I have the market captured (speaking on the order of 10% or 50%, doesn't matter), how does it make sense to seek investment in the order of 100*X? What's the goal? Why not just keep milking the proven cash cow and stop growing and risking?
* If you fail to grow, the investors lose their money. But the company still exists afterwards.
* If you succeed, you still get many benefits.
You're risking __someone else__'s money. And they're not even asking for the money back, just equity. In fact, a common scheme is to take the money, pay yourself, and do nothing. (Slightly fraudulent, but its really hard to tell the difference. Ex: all the yachts that
Adam Neumann bought when he got investment money for WeWork).
As the CEO, you still get the salary, and that salary comes out of the investment money. So at a minimum, you often give yourself a raise for convincing other people to give lots of money to your company.
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There's also something to be said about cashing out. If you're tired of the grind of building a company, you can sell out and make $100s millions or $Billions with a company like this.
Ex: Notch burned out and dropped off the grid after a few years of Minecraft development. He took the $5 Billion offer from Microsoft and then largely disappeared. I don't think anyone can blame him, indie developers at heart don't want to deal with the politics of leading a 10+ million video game players.
Seeking investors is the path towards cashing out and retiring. You need to find a new owner of the company, and selling your stake / equity to them is a major step towards retirement.
I guess the risk is going from possible 50%+ ownership of a a company worth a few millions or tens of millions to much less ownership of a company worth roughly the same amount if it fails to grow. Or the risk of being forced out of control, I guess.
I think that's a good illustration of why people do it. 10% of a $20 million dollar company is still worth something and even if you lost ten or twenty million or so from theoretically doing nothing, having 10% of a multi-billion dollar company is worth a whole lot, so people like that gamble.
> I guess the risk is going from possible 50%+ ownership of a a company worth a few millions or tens of millions to much less ownership of a company worth roughly the same amount if it fails to grow. Or the risk of being forced out of control, I guess.
If the company is worth $50 million, and you sell 10% of it, the company gets $5 million bucks.
Since the company is now $5-million richer, you'd expect the company to really be worth $55 million at least (since its the same company, except now with $5 million more bucks).
It is now on the onus of the CEO to ensure that the extra cash does indeed grow the company's value. Sure, the money could be pissed away in a party yacht. But ideally, a good CEO will do something reasonable with the money. (Though the party yacht is often then used to raise more money from other rich folk, raising the value of the company again, lol)
As long as the CEO doesn't fall into the trap of just grabbing money without purpose... as long as the CEO has a plan for what to do with the investment money... its probably a good thing. IMO, where a lot of CEOs make a mistake is that they go into full-tilt money raising mode and never stop to think if they have "enough money for now". But I doubt that OnlyFans is at this stage of the game, OnlyFans probably can grow much faster with a bit more investment money.
Yeah, I just meant to show what is probably a worst case (not really, worst case would be company goes under or loses a lot of value/market share I guess), where they accept money and it's spent in an effort to help the business but just doesn't. I guess in the example you put forth that would be a $50 million company that takes $5 million, spends it on a major advertising campaign, and sees zero difference. Now they've given away equity and gotten nothing in return other than that what they tried before doesn't work. The flip side is that it helps immensely and your lower equity might be worth more overall. Any anything in between.
At least that's how I understand it. I'm not trying to pretend I know a huge amount about this. It's mostly general knowledge accumulated from normal sources and discussions here, so if you think I'm totally missing something, I'm happy to hear it.
> What's the goal? Why not just keep milking the proven cash cow and stop growing and risking?
I'm going to ignore the whole "cashing out" and "hyper growth" answers because they've been covered to death.
Rather, I'll just say that this OnlyFans situation is a great example of why you'd want to do that. OnlyFans is a great case of what you described — they have definitely captured a significant chunk of the premium adult content market, and have nice steady revenue streams from there. They could just keep milking that and improving it incrementally.
Yet, that whole revenue stream comes with a huge risk attached (a risk of 'extinction event' proportions) in the form of payment providers refusing to do business with you. Near as I can tell, this whole situation is at least somewhat due to Mastercard pressuring OnlyFans to stop offering adult content (or, at least, to offer it under much more restrictive terms), so this is not some hypothetical risk, it's an actual credible threat. Investment gives them the resources to go find ways to work around that risk somehow.
It doesn't really make sense in my opinion, so maybe I'm the wrong person to answer, but I think it's a game of statistics.
OF has captured a certain market, and is making a certain amount of money. Of companies like that, a small but not insignificant number grows to super major size, the size that can do an IPO and exit for billions.
The current owners are OF are trying to capitalize on the value investors put on that possibility, and on the reduced risk of having so much money invested. With each investment round the risk of failure goes down a little, and the risk of major success goes up a little.
A major example of this is Facebook. It was profitable and well established, why would they need extra investment or an IPO? Then out of nowhere Facebook bought Instagram, and Whatsapp, and it is clear now that without those two acquisitions Facebook could have been in serious trouble. The absolute crapton of cash they got effectively took away risk.
So it's a chance to de-risk and cash out of OF, and let the big boys play on taking OF to an IPO.
That's a different strategy - you can be shooting for a sustainable medium size company, or try to become a tech behemoth.
Both choices are valids, but investors tend to push you towards growing forever. So if your board is already controlled by investors (as opposed to founders or employees), they'll encourage you to raise more to grow more.
You need to look at it slightly differently. The founders aren't looking at the money they can make from the cash cow. Revenue is a long-term earner and requires them to keep being successful for that long term. An exit (via a sale of the business) is the real short-term earner & lets them walk away (m/b)illionaires.
Therefore the game is to optimise valuation - the higher the investment round, the higher the company valuation, and the higher the sale value.
One aspect is that it's a way for the founders get to take some money off the table. It's not prudent to have 99% of your wealth tied up in a single "cash cow" no matter how proven it is, you do want to diversify.
A bit of a tangent, but the dynamics in high-value investment is quite the opposite. You have people with lots of money (they do exist) who don't have anything to do with that money. They want to make it grow, and often are paid or otherwise incentivized to make it grow, but it's kinda hard to find a way of making 1 billion make you 100 million in a couple of years, without doing micromanagement for 1000 different 1-million businesses.
So the market is skewed the other way: if you are a company that seems to be able to productively use a lot of money, they'll be throwing investments at you. And onlyfans is currently in a very good position to do this.
Also, from what I read the consensus seems to be their decision had nothing to do with investors (if I were an investor I'd be absolutely livid to hear it), but with payment processors, especially master card.
I'm sure lots do use index funds. And I'm sure quite a few should use index funds, but waste money instead in pointless investments. But most who look for other opportunities do it for the same reason most of us don't invest in index funds even if it's the safe bet: they want more.
You don't pay investments back. They are a purchase of shares. The exchange is made and you're done.
> How is possibly better than organic growth at this point where they are probably close to market saturation (in the sense that further exponential growth is implausible)?
Moving into new markets, expanding the scope of the existing market, etc. Is OnlyFans that different from Youtube, or Patreon? Is it that different from GoFundMe?
There are plenty of adjacent markets that OF could be trying to tackle.
> You don't pay investments back. They are a purchase of shares. The exchange is made and you're done.
This is a common misunderstanding that equity funding is free. For the owner of a business, taking outside investment and issuing share in return is diluting the original owners stake in the business. If effect, you are paying for these investments forever because you are giving up some portion of the businesses future profits.
There are certainly situations where this makes sense if you are able to grow much faster with the additional capital. However, the investment is not free.
That's correct, taking venture capital is almost always a massive obligation and a very real operational liability. It's just not a liability in the financial loan/debt sense, the liability isn't on the balance sheet as debt, it's in the obligation and complexities that come with managing the new capital partners and their self-interest; self-interest which may not always align with your own or the company's best interests. The operational liability is burrowed into the cap table.
Because then OF becomes a company worth X+a billion dollars. Your stock options go up accordingly, and you can take profit and walk away before the cows come home. It's like getting ahold of a stolen credit card and maxing out the credit limits with fraudulent purchases while you can. Most business leaders who these days only have tenures of a few years do not care about outlooks past a few years. Throw the hot potato into the next persons lap and you are already working the same angle in your next gig when the old one explodes in your wake.
Because that's just what tech startups do now: as long as you have a good "story", VCs throwing around their funny money left and right are easy to find. And once you're been tainted by it, you're forever fucked, locked into either going public or being bought out all the while needing to achieve hockey-stick growth. Organically grown tech companies are very few and far between.
The "old" boomer way of going to a bank with collateral to get a $750k loan is non-existent in tech. Not to mention, the bank is probably way more scrutinizing than VCs are (or just plain don't understand and will deny you).
It's money they'll have to pay back with interest and I assume there would be other strings attached (like the high risk implied by the planned move that was now canceled). How is possibly better than organic growth at this point where they are probably close to market saturation (in the sense that further exponential growth is implausible)?