October 2014 status - a live autopsy and question

As most of you know, Microcosm is approaching the end of our runway and we are not yet revenue producing to the point of covering running costs. In fact, revenue does not cover salaries, only hosting costs plus a little bit more. Whilst the user and traction numbers are impressive they only represented a seed of growth for a future harvest and not the harvest itself.

Each month we start with a question: "Quit, pivot or persevere?". Until now, every answer has been persevere. This month it is closer to quit.

Most of September was spent running up and down avenues chasing funding. We met angels, we met early stage venture capitalists, we met anyone who might introduce us to those people. From these meetings we only ever had 1 strong lead, and this was from an investor who has always been interested in the potential of the platform but is only able to invest a figure in the region of £50k and couldn't lead a round.

We were seeking a figure above £400k, ideally in the £500k > £1m range. The reason was that we felt we had proven the core hypotheses that led us to start the business (forums as a platform with richer structured content, mobile friendly, more efficient revenue sources, at lower total costs), and that we had enough traction to justify that we persevere.

However we still have two intractable issues with where we are today:

1. We had not achieved enough market awareness for growth to happen without being extremely time-consuming and costly.
   
2. We had a good product but were not yet at the stage that we could claim that we were 10x better than our competitors, and whilst we had fans who raved about the product we hadn't yet proven that we had broad market fit outside of a few fanatical customers.
   
   

Basically: We needed a sales and marketing capability that we were lacking, and we needed to be able to move much faster on product development to help make the sales and marketing easier and fuel growth.

Our plan therefore was to hire 2-3 people to drive awareness, and to hire 2-3 people to improve the product and to differentiate our offering more. We would spend 25% of a round on awareness, 50% on product dev, and the remainder goes to various other costs over the duration of the next couple of years.

Today it is very obvious that we have failed to secure funding at the level that would allow us to expand and grow.

Additionally some news to share is that today is Matt's (co-founder, developer and @motter on here) last day with Microcosm. He has been very active in the developer community within London for the last couple of years and it was really a matter of time before he was made an offer too irresistible to refuse. So he leaves Microcosm today with a good salary awaiting and the promise of interesting work that has a solid future.

With those two pieces of reality dropping at roughly the same time, the obvious question that arises is what is the future of Microcosm?

This is a difficult question and one that is hard to answer. As it stands Microcosm can not continue without future funding even with a single salary to pay, and I personally will require a larger salary than the one I have existed on for the last two years (£9.6k gross).

It would appear that we have these options:

1. Shut down, triggering the SEIS stuff that will allow the taxman to return a portion of the invested money to investors.
   
2. Zombie, which means dropping all salaries (I go get a job elsewhere) and let the company exist on it's revenues for as long as possible and wait to see whether organic growth and revenue does lift the company.
   
3. Raise a small Seedrs round to continue in the current state, but effectively this means that funding raised is going directly on my salary and there can be almost no significant growth in the next year or so as there will be no additional resource to help support it (awareness or product dev).
   
4. Seek a buyer.
   
   

Dealing with them in reverse order, #4 seems unlikely and too time-consuming. Microcosm does not own the sites that host on us, we merely have an agreement to host them in return for the revenue. We would effectively be seeking a buyer for a technology stack when there are open source versions (phpBB, Discourse, etc) already available. It would also take significant time and would burn through the remaining cash... leading to a crunch and a very messy end.

#3 is possible, but definitely feels like it is throwing good money after bad. Microcosm always aimed to be a high growth business that would seek an exit... we wanted IPO, to be acquired, or to close. We would also accept staying private and growing privately and offering dividends... but, the one scenario we were never going to accept was to limp along without the growth and without the option of a successful exit. We could take this option, but it is not a good option for shareholder returns, for product development, for growth. It would merely be delaying the inevitable. A single member of staff cannot adequately improve the product, whilst supporting existing customers and attempting to increase awareness and grow the company. We know, we've been there with 2 people and it's almost impossible with that head count.

#2 is also possible, and certainly a viable option. However it has the downside of feeling very similar to #3, and more importantly it locks in the investments that have been made and ties those funds up. By continuing we would not be triggering the SEIS relief that would return funds to investors via the taxman, we would merely be placing the company in a kind of stasis and let it continue on an unmanned auto-pilot course out of a blind hope and some faith that organic growth would turn things around without intervention.

#1 Therefore looks like the most likely scenario today.

As a result of these options, all of which are hard to face, we have to think also about our customers and how we can offer them a path to some sort of continuity for their users. We do not wish to just turn off the platform (if we do end up with option #1) and leave the 44k users our customers have in the lurch. We had always planned that at a suitable moment in time we could open-source the whole platform to drive developer engagement and trigger growth, and we had recently (a couple of months ago) started making steps towards this. In the last two weeks whilst I have been focused on fund-raising, Matt has been accelerating this effort as it appeared to be win-win... if we raised money we had a new angle to drive engagement and growth, and if we did not raise money and had to face possibly winding-up the company then we had something we could offer our customers that would allow them to self-host the platform.

What this means is that in the very near future we will open-source the remaining part of the Microcosm platform: The API and storage layers, and provide a simple script to install the software on a standalone machine.

Coming back to our options... I would like to hear from investors in the very near future about how they would like us to proceed. Namely... are you prepared to lose all of your investment on a bet that a company on auto-pilot might achieve enough organic growth, or would you prefer the winding-up to trigger the SEIS relief and obtain a portion of your investment back?

That is the nuts and bolts of it... the product itself will continue in some form once open-sourced (even if it's only temporary, as a bridge to something else - such as Discourse)... but the company will either begin the winding-up process or the offloading of all unnecessary costs so that it can auto-pilot without being dragged down.

I'm happy to share financial projections and numbers, but in essence we make £600 > £700 per month in gross revenue, with raw hosting costs coming in at £415. Rent, salaries, accountancy, insurance, bank fees, etc cost a further £6,297 for a total monthly burn rate of £6,855. We have just above £10k in the bank, and therefore less than two months left on our current course - and if we are winding up a portion of that will be spent on accountancy fees for that process. Our financial projections (that we were using for fundraising) can be viewed at https://docs.google.com/spreadsheet/ccc?key=0AraH8Md6g1IRdGtzNzVkamx4NE1UVmFEOUo0b1NKTkE&usp=sharing and it should be noted that we are currently on the lowest case scenario of revenue and user numbers and even that scenario assumed that we had sales and marketing driving it, additionally salaries were in anticipation of raising a round and are not yet being paid anywhere near £40k per annum.

David

tl:dr

We're kinda fucked... we can choose to wind-up and trigger SEIS relief for investors, or to limp along on auto-pilot. I'd appreciate some feedback on those options from investors.

We're going to open-source the final parts to provide continuity to customers already on the platform.

It's a shame VB, but being pragmatic (and an investor) option 1 would be the preferred direction.

Take the lessons learned from this and apply to your next venture.

Also, this being a very important topic, should you not have PM'd and emailed investors?

Sad.

I am an investor but not a tax payer so SEIS has no attraction for me.

Keep going is what I want but quitting is probably sensible.

What about investing the last 10k on lottery tickets?

Also, this being a very important topic, should you not have PM'd and emailed investors?

I read through the entire subscription agreement and there is no obligation to do so, I also enquired of Seedrs three weeks ago what the process is if we need to consider this question and my obligations start when the decision has been made (in fact, it starts the instant the decision has actually been made).

I posted here to informally brief investors and users alike, so that I can factor that into the decision making before the more formal processes kick-in.

I'm looking to use this space to ask these questions and think aloud, before making the final decision next week.

I only invested a small amount so not that bothered about SEIS. Personally (selfishly) I would say carry on as there is at least some small hope that things could turn around and I could still become rich.

But it sounds like quitting and getting yourself back into a decent paying job is probably the smarter option for you.

Unfortunately your reply comes across as both defensive and pompous; it is your ethical duty to inform the valued members of this forum, who have significantly funded this experiment, of the current conditions and proposed exit strategies. Posting a thread in a less travelled cosm is not the right mechanism.

It was not my intent to be either of those things, but I am unsure it's possible to be neither given that it's such a subjective view and any response could be called "defensive" and I'm not sure how "pompous" applies given I feel quite wiped out, exhausted, down and emotional - hardly meets the definition of "boastful, overblown, exaggerated, ostentatious or self-important".

I investigated what my obligations were out of a desire to do the right thing. Which is also why I have been very honest about progress in the investor update, which all investors would have been notified about, and elsewhere (on here) so that investors and users who were part of the initial support were kept up to date.

"Ethical duty"... I'm afraid that there is none, there is only a contractual duty to have operated the business giving it the best chance it can have, and to operate in accordance with things like the subscription agreement, articles of association, etc.

I really did look to see what duties I had, and found them wanting given that I do value everyone here and those who helped support the company and project - I wanted to be open, clear, honest, and feel I have been so. I posted the above out of a personal feeling that I should do so as those who have supported the company and project are on here and that I should keep them informed that we were close to making a decision (which you should have known from the last investor update) and our current status on that (which you should have expected as we were clear that we would seek to decide conclusively soon).

As to the less travelled *cosm, all subscriptions have been brought over during the migration, and even back in 2012 I was encouraging people (investors or not) to follow this forum to receive updates.

When a final decision is made - if that turns out to be winding-up of the company - then every investor will be notified (and the SEIS relief triggered). In addition, every customer will be notified. Until then, whilst there is uncertainty for a while longer, this is open discussion to keep you informed of where we are on a very hard set of decisions that you as investors should have been well aware of given you were informed (via the investor update) and to keep the users that cared and who might be most affected (LFGSS users) information on this.

Not a criticism, and I know how you're feeling (having failed enterprises of my own), just make it a sticky in General.

As lebowski said, get back into regular paid work.

Chin up, you've done wonders with Microcosm.

Think I might teach myself some Go to work on this if it goes totally open source.

#5 1£ subscription fee per user/10£ a year

David

As investors we were aware of the risks. Do what you think is best.

^ Agreed, you know the market much better than I do, I've got half my investment back from the Taxman already.

If you ever do a startup again, let lfgss know, I've enjoyed the ride.

As always with these things its often harder to wind-up.

Seems to me the only option is #1.

I was only a (small) donor so I'm not going to give an opinion on your options but I am interested in knowing more about the open-sourcing aspect...
Do you lose rights to it once it's out there? Where does income go once Microcosm is wound up? I always thought it was designed to host everything centrally (enabling fixed costs to be spread as wide as possible), so does giving people the capability to install it themselves dilute the point?

Option 1. Do it now and release yourself.

Have there been no offers to purchase Microcosm?

It was designed to be a platform for multiple sites, but it wasn't written in a way that prevents installation in other instances... It would just require a new domain name and some rows in a database table.

Whomever installs it and sets up the affiliate relationships would get the revenue. As this instance would end when the company is wound up LFGSS would go onto a new instance and the revenue would go to LFGSS.

No, but there were offers to purchase LFGSS.

Could there be a way of selling it to fund Microcosm? We could just move to another forum then on the newly plush platform! Call it LFGSSS!

I would suggest that you should look at getting a Job and some income asap and perhaps keep it running for say 3-6 months after which time if it doesn't look to have improved then go for option #1

tldr: #2 for a while and then #1 if needs be.

David, these are just initial thoughts, that I'm throwing around in my head as I type them, I apologise for the state of them.

I've been out speaking to a few people about forums recently, taking little opportunities to market Microcosm where I could, and the feedback that I'd been getting from people was hugely positive, for a massive range of groups. These range from people that I know who are interested in single interest political groups looking for places for their members to throw ideas around, to user groups for financial software that want a place for their members to be able to talk about software enhancements that they would like and to be able to share their thoughts and ideas around. Lots of these people don't know that a forum is what they want, but when you discuss with them what they want, they do.

Maybe therefore we as investors haven't been doing our jobs well enough, and pushing the service hard enough since it launched fully.

How long would a Seedrs round take to raise? Looking at it, Neardesk look to have raised a cool million pounds in their last round there, and Microcosm had always been one of the fastest movers there (yes, partly due to people in the forum). Would this be a possible way forward? Think big, or go home. If the round is successful, great, build there, if not, open source it.

The community has ridden with you this far, let them have the chance to help you ride a bit further.