Why Investors WANT Startups to Lose Money - Startups 101

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Equity Distribution (00:06:01)

Investors expect a large return on investment (ROI), which can be slow in traditional businesses.
Returns from dividends are often insufficient and slow, typically not satisfying venture capital (VC) requirements.
Venture capitalists are keen on liquidity and may not have significant control with small equity stakes.
Traditional businesses are usually funded with larger equity stakes for smaller investments.
Tech startups are attractive to VCs due to the potential for acquisition or IPO, offering quicker and larger returns.
Founders seeking VC must be open to an exit strategy; those wanting to retain full control are incompatible with VC interests.

Acqui-hires occur when a startup is bought for its team rather than its product or revenue.
Example of Fly Labs acquired by Google for their team to join Google Photos.
Acquisition offers mix cash for investors and stock or bonuses for the team to incentivize staying post-acquisition.
The value of an acqui-hire can be benchmarked at roughly $1M per engineer, considering the costs and risks of hiring.
Acqui-hires typically provide investors with a modest return, about 1x to 1.5x the original investment.

Strategic acquisitions focus on acquiring an established audience or removing competitors.
Hubspot's acquisition of The Hustle and Business Insider’s purchase of Morning Brew were driven by the large, engaged audiences.
Estimates suggest acquisitions may value each active user at tens of dollars.
These deals often result in both removing competition and adding talented teams to the acquiring businesses.
Strategic significance, such as Instagram's acquisition by Facebook, goes beyond mere user numbers and includes benefits like fresh ideas and avoiding competitors' acquisitions.