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#startup financial model
classybelieverpost · 4 months
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How to Update Your Startup Financial Model as Your Business Grows?
As your startup evolves, it's crucial to ensure that your financial model keeps pace with the dynamic nature of your business. Regularly updating your startup's financial model is not just a compliance task but a strategic necessity. Here's a guide on how to effectively update your startup financial model to align with the growth of your business:
1. Review and Analyze Historical Performance: Start by conducting a comprehensive review of your historical financial performance. Analyze key metrics, revenue streams, and expenses. Identify trends, successes, and areas for improvement.
2. Assess Market Changes and Industry Trends: Stay abreast of changes in your market and industry. Consider how external factors such as economic conditions, new competitors, or emerging technologies might impact your financial projections.
3. Update Revenue Projections: Revise your revenue projections based on the insights gained from historical performance and market analysis. Consider new products or services, pricing changes, and adjustments to sales strategies.
4. Evaluate and Adjust Expenses: Scrutinize your operating expenses and make necessary adjustments. Assess the efficiency of your spending, renegotiate contracts, and account for any anticipated changes in costs associated with scaling the business.
5. Incorporate New Business Initiatives: If you're launching new products, entering new markets, or implementing strategic initiatives, reflect these changes in your financial model. Include detailed projections for the impact of these initiatives on revenue and expenses.
6. Refine Cash Flow Projections: Cash flow is the lifeblood of any startup. Refine your cash flow projections to ensure you have a clear understanding of your cash position. Consider the timing of inflows and outflows, and plan for potential cash constraints.
7. Update Key Performance Indicators (KPIs): Assess and update your KPIs to reflect the current goals and objectives of your growing business. This may include customer acquisition costs, customer lifetime value, conversion rates, and other relevant metrics.
8. Scenario Planning for Growth: Conduct scenario planning to model different growth trajectories. Anticipate best-case and worst-case scenarios to prepare for uncertainties. This provides a strategic framework for decision-making in dynamic business environments.
9. Align Financial Model with Strategic Goals: Ensure that your financial model aligns with your broader strategic goals. If there are shifts in your business strategy, the financial model should reflect these changes, providing a roadmap for achieving your objectives.
10. Leverage Technology and Financial Tools: Explore the use of advanced financial tools and technologies to streamline the updating process. Integrated financial software can facilitate real-time data updates and enhance the accuracy of your projections.
11. Seek Professional Advice: Engage with financial experts or consultants to review and validate your updated financial model. Their insights can provide valuable perspectives and ensure the robustness of your financial planning.
Conclusion:
Regularly updating your startup's financial model is not just about compliance; it's a strategic imperative. By aligning your financial projections with the evolving dynamics of your business, you equip yourself with the insights needed to make informed decisions and navigate the complexities of growth. Secondly, you should also opt for professional and expert business valuation services when undergoing the process of business funding, merger and as such.
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numberly · 11 months
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Financial Projections
Financial projections are a crucial part of running a business, so you must have an easy way to create them—and even more important, that they're complete, accurate, and easy to understand. Numberly lets you create financial projections for your business and share them with investors, partners, or anyone else who needs to see them. To learn more about our services, visit us now.
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projeects · 1 year
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kapsoblog · 1 year
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freeexceldownloads · 2 years
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Startup Financial Projection
Download Startup financial projection format in Excel and Spreadsheet. This business plan template for startup helps you define expected revenue, income and expenditure for your business. About Startup Financial Projection Excel Template This financial plan projections template for start up comes as a set of pro forma templates designed to help startups. The template set includes a 12-month…
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optimfinance · 2 months
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Business Startup Financial Planner in Dubai
If you have launched your company in Dubai UAE, and need an experienced financial expert to upgrade it? So your search is over today because Optim Finance is a top-class business startup financial planner and advisor company in Dubai with almost 20 years of experience which can easily help you upgrade your business.
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khushal2822 · 7 months
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Decoding Financial Modeling: The Path of a Startup to Success
Do you want to know how to succeed as a startup? A crucial component is financial modeling. In this article, you'll uncover the secrets behind deciphering financial modeling and learn how it can pave the way to success for you.
Financial modeling can be a tricky task for startups, as it requires accurate prediction of financial situations, prospects, and growth potential. But don't worry, we're here to help you!
Through well-founded financial modeling, you can make informed decisions, optimize your financial resources, and convince investors of your long-term potential for success. Whether you're just starting out or already operating as an established startup, this article provides valuable knowledge and practical tips.
We'll take you on a journey where you'll understand the fundamentals of financial modeling, learn about its various elements, and discover how to implement them in your own business plan. Get ready to uncover the key to successful implementation of your business idea - financial modeling!
Introduction to Financial Modeling
Financial modeling is a method to analyze and predict a company's financial performance. It involves creating a model that takes into account various financial variables such as revenue, expenses, cash flow, and profit forecasts.
A well-thought-out financial model enables you to simulate different scenarios and understand the impact of certain decisions on your financial situation. It's an essential tool to support your business strategy and ensure that you make the right financial decisions.
Why Financial Modeling is Crucial for Startups
Financial modeling is crucial for startups as it helps you plan your financial future and minimize risks. It allows you to test your business strategy before making larger investments and gives you the ability to make changes to maximize your success.
A solid financial model is also essential to convince investors of your business concept. It demonstrates that you understand your financial goals and have a clear vision for your company. Investors will be more willing to invest in your startup when they see that you have a good handle on financial challenges.
Key Components of a Financial Model
A financial model consists of various components that work together to provide a comprehensive view of your financial situation. Here are the key components you should consider in your financial model:
Understanding Revenue Forecast
Revenue forecast is one of the most important variables in your financial model. It indicates how much revenue you expect to generate in a specific period. It's important to make realistic assumptions and consider various factors like market trends, competition, and potential customer base.
An accurate revenue forecast enables you to adjust your sales and marketing strategy accordingly and ensure you achieve your financial goals.
Creating an Expense Budget
An expense budget helps you control your spending and ensure efficient use of your financial resources. It covers different expense categories such as personnel, rent, marketing, and operational costs.
By creating an expense budget, you can identify and reduce unnecessary expenditures to increase your profitability. It's also a crucial tool to keep an eye on your financial situation and ensure you have enough funds to reach your business objectives.
Cash Flow Management and Forecasts
Cash flow management is a critical aspect of financial modeling. It involves monitoring and forecasting your cash flow - that is, how much money flows into and out of your company.
Having a healthy cash flow is essential to ensure you have enough funds to cover your ongoing operational expenses and make investments. Accurate cash flow forecasting helps you foresee shortages and take actions to avoid them.
Financial Ratios and Analysis
Financial ratios are important tools to assess your company's financial performance. They help you evaluate your profitability, liquidity, and creditworthiness.
Some of the key financial ratios you should consider in your financial model include profit margin, debt-to-equity ratio, return on investment, and liquidity ratios. Analyzing these ratios allows you to assess your company's financial health and identify potential problem areas.
Sensitivity Analysis and Scenario Planning
Sensitivity analysis is a method to evaluate the impact of changes in your assumptions on your financial situation. It allows you to simulate various scenarios and understand how your financial situation would change.
Scenario planning takes it a step further and involves creating different scenarios to assess the impact of external events like market fluctuations, changes in competition, or regulatory changes. By conducting scenario planning, you can be better prepared for unforeseen events and adjust your business strategy accordingly.
Tools and Software for Financial Modeling
There are various tools and software solutions that can help you create and manage your financial model. Some of the popular tools include Excel, Google Sheets, and specialized financial modeling software.
The choice of the right tool depends on your needs and level of expertise. If you're new to financial modeling, starting with simple tools like Excel can be helpful, and then you can progress to specialized software as your company grows.
Best Practices for Financial Modeling in Startups
Here are some best practices that can help you successfully implement your financial model:
Make Realistic Assumptions
It's important to make realistic assumptions when creating your financial model. Consider both optimistic and conservative scenarios to ensure you're prepared for all eventualities.
Regular Updating and Review
Your financial model should not be static; it should be regularly updated and reviewed. Monitor your actual results and compare them to your forecasts to identify discrepancies and take appropriate action.
Collaborate with Experts
If you feel uncertain or lack sufficient knowledge in financial modeling, it's advisable to collaborate with an expert. An experienced financial advisor or accountant can help you build a solid financial model and ensure you consider all relevant factors.
Hiring a Financial Modeling Expert
Hiring a financial modeling expert can be a wise investment, especially if you feel unsure or don't have the time to delve deeply into the subject. An expert can assist you in creating a tailored financial model that suits your specific needs and provide valuable insights and advice.
Conclusion
Financial modeling is an indispensable tool for startups to plan their financial future, make decisions, and convince investors of their long-term potential for success. It requires careful planning, realistic assumptions, and the right tools to be successful.
By understanding the basics of financial modeling, mastering the various components, and applying best practices, you can set your startup on the path to success. Don't hesitate to seek external support if you're uncertain and be ready to regularly review and adapt your financial model.
Start financial modeling today and lay the foundation for a successful start!
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boostrapper · 1 year
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5 Ways for Startups to Survive Recession
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Introduction
Major economic forecasting institutions and experts are predicting an economic recession as a series of complex real economic problems such as inflation, supply chain collapse and geopolitical risks have recently emerged one after another. The predicted recession is to put early stage startups at risk, directly. The less activities from VCs recently forced startups to prepare for all the scenarios.
While the current economic recession may present challenges for startups, it can also be an opportunity for them to demonstrate their resilience and adaptability. Here are some strategies that can help your startups that will not only improve your chances of survival but also to attain a healthier and sustainable future growth.
Here are five ways for a tech startup to navigate a recession:
1. Extend your cash runway
As a startup, it is essential to focus on extending your cash runway in order to ensure sustainability and success during recession. This involves making sure that you have enough cash on hand to cover your expenses and maintain operations for as long as possible. According to a survey by the National Venture Capital Association, 82% of startups that fail do so because of premature scaling, or expanding too quickly without adequate resources. By carefully managing your cash flow and taking steps to extend your cash runway, you can avoid this common pitfall and give your startup the best chance of success.
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Here are three key steps to help extend your cash runway:
Get a clear overview of your financial standing: Understanding your current cash flow, liquidity, and forecasts is essential to extending your cash runway. You can track your cash flow by looking at your income and expenses on a regular basis. Your liquidity is a measure of how easily you can access your cash and convert it into other assets. You can measure your liquidity by looking at your current assets, such as cash and accounts receivable, compared to your current liabilities, such as accounts payable and short-term debt. Finally, your forecasts are estimates of what your future financial performance might be. You can create financial forecasts by analyzing your past financial data and making assumptions about future economic conditions.
Change approach from optimistic to conservative: By being more cautious in your spending and making more conservative assumptions about your future financial performance, you can reduce your expenses and increase your cash runway. This might include reducing your marketing budget, delaying hiring new employees, or negotiating better terms with suppliers.
Identify unnecessary cost drivers: Unnecessary cost drivers are expenses that are not essential to your business and can be eliminated or reduced. Common examples include unnecessary travel, excessive entertainment expenses, and unnecessary office supplies. By identifying and eliminating unnecessary cost drivers, you can free up cash that can be used to extend your cash runway.
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2. Consider creative ways of cost cutting
To maintain financial stability and profitability, you should consider creative ways to cut costs. Although layoffs may seem like a good option at first, they should be considered as a last resort because they can negatively impact morale and productivity. In addition, layoffs come with associated costs such as severance pay and unemployment benefits, which can be both a financial and administrative nightmare. Instead, it is recommended to start with other cost-cutting measures before considering layoffs. Being creative with these strategies can help you achieve better long-term results.
Here are some of them worth considering:
Optimization: Find ways to do things more efficiently, such as streamlining processes, automating tasks, and using technology to improve productivity. By optimizing operations, businesses can reduce their costs without sacrificing quality or productivity.
Minimize operational costs: Another key strategy for cost cutting is to minimize operations costs. This includes finding ways to reduce expenses such as utilities, rent, and transportation. For example, businesses can negotiate lower rates with suppliers, adopt energy-efficient practices, and use public transportation instead of company vehicles. According to a survey by the National Small Business Association, 29% of small businesses reported that their top cost cutting strategy was reducing energy costs, and 27% said they reduced their travel expenses.
Reduce cost of goods sold (COGS): COGS refers to the direct costs associated with producing and selling products or services. By minimizing COGS, businesses can reduce their expenses and increase their profitability. This can be achieved through a variety of strategies, such as negotiating lower prices with suppliers, reducing waste, and finding more efficient production methods.
Stretch R&D projects timeframe: For businesses that rely on research and development (R&D) to innovate and stay competitive, stretching the timeline of R&D projects can be a cost-effective strategy. By taking more time to develop new products or technologies, businesses can spread out their R&D expenses over a longer period of time, which can help to reduce their overall costs.
3. Strategic Partnerships
Strategic partnerships are an important tool for growing startups. They help you to access new markets, share resources, improve competitiveness, and gain access to a wider network of industry contacts. Partnerships can help you save time and money and accelerate your growth by leveraging the resources and expertise of your partners. They can also help you differentiate yourself from competitors and gain a competitive edge in the market by leveraging the reputation and credibility of your partners. Overall, strategic partnerships can be an important part of your growth strategy and can help you succeed in the market. McKinsey & Company found that successful strategic partnerships can lead to a variety of benefits, including increased market access (cited by 74% of respondents), cost savings (cited by 67%), and access to new technologies (cited by 59%).
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Here are three ways that you could:
Communicate with your key partners about how they are handling the downturn: Effective communication is key to the success of any partnership, and it's especially important during times of economic downturn. By staying in touch with your key partners and asking how they are handling the challenges of the current environment, you can better understand their needs and find ways to support each other.
Focus on building stronger relationships: In times of uncertainty, it's important to focus on building stronger relationships with your strategic partners. This means investing time and effort into understanding their business needs and goals, and finding ways to work together more closely. By building stronger relationships, you can create a sense of trust and mutual support that can help your business weather any economic challenges.
Consider new strategic partners to combine efforts for shared results: Another way to grow your tech business through strategic partnerships is to consider new partners who can help you achieve shared results. For example, you might look for partners who can help you access new markets, leverage new technologies, or bring new skills and expertise to your business. By entering into win-win agreements with these partners, you can combine efforts and achieve shared results that benefit both parties.
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4. Pivot business model
During times of economic recession, it's important for businesses to be flexible and adaptable in order to survive and thrive. One key strategy for navigating these challenges is to pivot your business model, which involves making changes to the way your business operates in order to better meet the needs of the market.
Here are two key approaches to pivoting your business model and thriving during a recession include:
Adapt the current business model to the changing market needs: A key approach to pivoting your business model and thriving during a recession is to adapt it to the changing needs of the market. This could involve revising your product or service offerings, shifting your focus to new customer segments, or finding new ways to deliver value to your customers. Experts say, 70% of tech startups reported successfully pivoting their business model in response to the COVID-19 pandemic, resulting in increased revenue and market share. By proactively adapting your business model to the changing needs of the market, you can stay relevant and competitive in the face of economic challenges.
Identify new revenue streams: Another way to pivot your business model is to identify new revenue streams. This might involve exploring new business opportunities, such as offering new products or services, entering new markets, or finding new ways to monetize your existing offerings. According to a survey by the U.S. Census Bureau, 47% of small businesses reported introducing new products or services in response to the COVID-19 pandemic. By diversifying your revenue streams, you can reduce your reliance on any one source of income and improve the resilience of your business.
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5. Use agencies to outsource business processes
Outsourcing certain business processes to agencies and freelance contractors can be an effective way to improve profitability and increase efficiency. According to a survey by the National Association of Small Business Owners, 41% of small businesses reported outsourcing at least one business function, with the most common functions being marketing, accounting, and human resources.
Here are three key benefits that outsourcing business processes can help a business improve profitability:
Avoid administrative burden: One of the main benefits of outsourcing business processes is that it allows businesses to avoid the administrative burden of managing these functions in-house. By outsourcing tasks such as marketing, accounting, and human resources, businesses can free up time and resources to focus on their core competencies and drive growth.
Work with agencies and freelance contractors: Another key advantage of outsourcing business processes is the ability to work with agencies and freelance contractors who have expertise in specific areas. For example, a marketing agency may have specialized knowledge and experience in social media marketing, while a freelance accountant may have a strong understanding of tax laws. By outsourcing these tasks to experts, businesses can ensure that they are receiving high-quality work and maximizing their profitability.
Attain flexibility to scale up or down as per uncertain market dynamics: In addition to avoiding administrative burden and accessing expertise, outsourcing business processes can also provide businesses with flexibility to scale up or down as needed. This is particularly important in times of economic uncertainty, when market conditions can change rapidly. According to a survey by the National Small Business Association, 52% of small businesses reported being negatively impacted by the COVID-19 pandemic, and 48% said that they had experienced a decline in sales. By outsourcing certain functions, businesses can quickly adjust their operations to meet the needs of the market, which can help to improve profitability.
Conclusion
It is crucial for businesses to take proactive steps to increase their chances of survival during a recession. This can be achieved through a combination of strategies, including extending your cash runway, implementing creative cost cutting measures, forming strategic partnerships, pivoting your business model, and outsourcing certain business processes to agencies. By carefully managing your finances, accessing new markets and resources, and adapting to changing market conditions, you can weather the downturn and position your business for long-term success. Don't let a recession hold you back – take action now and set yourself up for success.
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viridianriver · 9 months
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KOKOBOT - The Airbnb-Owned Tech Startup - Data Mining Tumblr Users' Mental Health Crises for "Content"
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I got this message from a bot, and honestly? If I was a bit younger and not such a jaded bitch with a career in tech, I might have given it an honest try. I spent plenty of time in a tough situation without access to any mental health resources as a teen, and would have been sucked right in.
Chatting right from your phone, and being connected with people who can help you? Sounds nice. Especially if you believe the testimonials they spam you with (tw suicide / self harm mention in below images)
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But I was getting a weird feeling, so I went to read the legalese.
I couldn't even get through the fine-print it asked me to read and agree to, without it spamming the hell out of me. Almost like they expect people to just hit Yes? But I'm glad I stopped to read, because:
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What you say on there won't be confidential. (And for context, I tried it out and the things people were looking for help with? I didn't even feel comfortable sharing here as examples, it was all so deeply personal and painful)
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Also, what you say on there? Is now...
Koko's intellectual property - giving them the right to use it in any way they see fit, including
Publicly performing or displaying your "content" (also known as your mental health crisis) in any media format and in any media channel without limitation
Do this indefinitely after you end your account with them
Sell / share this "content" with other businesses
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Any harm you come to using Koko? That's on you.
And Koko won't take responsibility for anything someone says to you on there (which is bleak when people are using it to spread Christianity to people in crisis)
I was curious about their business model. They're a venture-capitol based tech startup, owned by Airbnb, the famous mental health professionals with a focus on ethical business practices./s They're also begging for donations despite having already been given 2.5 million dollars in research funding. (If you want a deep dive on why people throw crazy money at tech startups, see my other post here)
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They also use the data they gather from users to conduct research and publish papers. I didn't find them too interesting - other than as a good case study of "People tend to find what they are financially incentivized to find". Predictably, Koko found that Kokobot was beneficial to its users.
So yeah, being a dumbass with too much curiosity, I decided to use the Airbnb-owned Data-Mining Mental Health Chatline anyway. And if you thought it was dangerous sounding from the disclaimers? Somehow it got worse.
(trigger warning / discussions of child abuse / sexual abuse / suicide / violence below the cut - please don't read if you're not in a good place to hear about negligence around pretty horrific topics.)
I first messed around with the available options, but then I asked it about something obviously concerning, saying I had a gun and was going to shoot myself. It responded... Poorly. Imagine the vibes of trying to cancel Comcast, when you're suicidal.
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Anyway, I tried again to ask for help about something else that would be concerning enough for any responsible company to flag. School was one of their main options, which seems irresponsible - do you really think a child in crisis would read that contract?
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I told it about a teacher at school trying to "be my boyfriend", and it immediately suggested I help someone else while I wait for help. I was honestly concerned that it wasn't flagged before connecting. Especially when I realized it was connecting me to children.
I first got someone who seemed to be a child in an abusive home. (Censored for their privacy.) I declined to talk to them because despite being an adult and in an OK mental place - I knew I'm not equipped to counsel a kid through that. If my act of being another kid in crisis was real? Holy shit.
Remember- if my BS was true, that kid would be being "helped" by an actively suicidal kid who's also being groomed by a teacher. Their pipeline for "helpers" is the same group of people looking for help.
I skipped a number of messages, and they mostly seemed to be written by children and young adults with nowhere else to turn. Plus one scary one from an adult whose "problem" was worrying that they'd been inappropriate with a female student, asking her to pull her skirt down "a little" in front of the class. Koko paired this person with someone reporting that they were a child being groomed by a teacher. Extremely dangerous, and if this was an episode of Black Mirror? I'd say it was a little too on the nose to be believable.
I also didn't get the option to get help without being asked... Er... Harassed... to help others. If I declined, I'd get the next request for help, and the next. If I ignored it, I got spammed by the "We lost you there!" messages, asking if I'd like to pick up where I left off, seeing others' often triggering messages while waiting for help, including seriously homophobic shit. I was going into this as an experiment, starting from a good mental place, and being an adult with coping skills from an actual therapist, and I still felt triggered by a lot of what I read. I can't imagine the experience someone actually in crisis would be having.
My message was starting to feel mild in comparison to what some people were sharing - but despite that I was feeling very uneasy about my message being shown to children. There didn't seem to be a way to take it back either.
Then I got a reply about my issue. It was very kind and well meaning, but VERY horrifying. Because it seemed to be written by a child, or someone too young to understand that "Do have feelings for the teacher who's grooming you? If you don't, you should go talk to him." Is probably THE most dangerous advice possible.
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Not judging the author - I get the impression they're probably a child seeking help themselves and honestly feel horribly guilty my BS got sent to a young person and they wanted to reply. Because WTF. No kid should be in that position to answer my fucked up question or any of the others like it.
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Anyway, what can you do if this concerns you, or you've had a difficult experience on Koko, with no support from them or Tumblr?
To reach Tumblr, who officially partners with Koko?
Send a message to Tumblr Support describing your concerns with their partnership with Kokobot
Report kokobot to Tumblr's abuse hotline describing your experience with KokoBot, especially if you are a minor who suffered harm, as they have a legal responsibility to address that.
To get Koko's attention:
Get on their LinkedIn (https://www.linkedin.com/company/kokocares/) and comment on their posts! You may also want to tag the company's co-founders in your comments - their accounts are listed on the company page.
There's no way to reach support through chat, and commenting on a company's LinkedIn posts / tagging the people responsible is the best way to get a quick response to a sensitive issue - as their investors and research funders follow those posts, and companies take it seriously if safety issues are brought up in front of the people giving them millions of dollars.
Request support on Koko's Discord - FYI they will allow you to file a ticket privately, which the moderators say will reach the staff. But you may be muted or banned for trying to discuss concerns with Koko as a company or the safety of kokobot in the public channels, which also cuts you off from the ability to file a ticket.
To report it to the FCC for likely violating the COPPA law, regarding minors' safety and privacy online:
See Reblogs for further info & reporting instructions: Detailed description of COPPA law and Kokobot's presumed violations, plus detailed reporting instructions
But quick links: FCC reporting website and email hotline: [email protected]
Seriously, if you've taken the time to read this far, please please please take one more minute to file a report! It won't get addressed if all we do is reblog this, we need to get this in front of Tumblr Staff / The FCC / Koko's investors to get this meaningfully addressed.
Blocking and reporting the bot as spam isn't enough IMO - people have been doing that for years from the looks of the tag
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Reccomended reading in reblogs:
dropattackbear's discovery of what Koko is using the harvested data for (Machine Learning training data for automated content moderation services)
winderlylandchime (a licenced clinical psychologist's) explanation of privacy / ethics considerations around mental health services
thatsmimi's post on the dangers of letting minors act as a suicide / self-harm resource
My additions on their investors, leadership board, and their current job opening
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Legal Disclaimer since tech companies LOVE lawsuits:
The views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author's employer, organization, committee or other group or individual. This text is for entertainment purposes only, and is not meant to be referenced for legal, business, or investment purposes. This text is based on publically available information. Sources may contain factual errors. The analysis provided in this text may contain factual errors, miscalculations, or misunderstandings.
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icrestmodels · 4 months
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Empowering Growth: Infocresst's Specialized Financial Modeling for Startups and SMEs
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Unlock financial success with Infocresst's Financial Modeling for Startups and SMEs. Our tailored solutions guide businesses through strategic planning, risk analysis, and investment decisions. Leverage our expertise to create robust financial models that empower your enterprise, ensuring informed decisions and sustainable growth in today's dynamic market landscape.  Visit Here: https://infocresst.com/service/financial-modelling-for-startups-and-smes/ 
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exeggcute · 9 months
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the great reddit API meltdown of '23, or: this was always bound to happen
there's a lot of press about what's going on with reddit right now (app shutdowns, subreddit blackouts, the CEO continually putting his foot in his mouth), but I haven't seen as much stuff talking about how reddit got into this situation to begin with. so as a certified non-expert and Context Enjoyer I thought it might be helpful to lay things out as I understand them—a high-level view, surveying the whole landscape—in the wonderful world of startups, IPOs, and extremely angry users.
disclaimer that I am not a founder or VC (lmao), have yet to work at a company with a successful IPO, and am not a reddit employee or third-party reddit developer or even a subreddit moderator. I do work at a startup, know my way around an API or two, and have spent twelve regrettable years on reddit itself. which is to say that I make no promises of infallibility, but I hope you'll at least find all this interesting.
profit now or profit later
before you can really get into reddit as reddit, it helps to know a bit about startups (of which reddit is one). and before I launch into that, let me share my Three Types Of Websites framework, which is basically just a mental model about financial incentives that's helped me contextualize some of this stuff.
(1) website/software that does not exist to make money: relatively rare, for a variety of reasons, among them that it costs money to build and maintain a website in the first place. wikipedia is the evergreen example, although even wikipedia's been subject to criticism for how the wikimedia foundation pays out its employees and all that fun nonprofit stuff. what's important here is that even when making money is not the goal, money itself is still a factor, whether it's solicited via donations or it's just one guy paying out of pocket to host a hobby site. but websites in this category do, generally, offer free, no-strings-attached experiences to their users.
(I do want push back against the retrospective nostalgia of "everything on the internet used to be this way" because I don't think that was ever really true—look at AOL, the dotcom boom, the rise of banner ads. I distinctly remember that neopets had multiple corporate sponsors, including a cookie crisp-themed flash game. yahoo bought geocities for $3.6 billion; money's always been trading hands, obvious or not. it's indisputable that the internet is simply different now than it was ten or twenty years ago, and that monetization models themselves have largely changed as well (I have thoughts about this as it relates to web 1.0 vs web 2.0 and their associated costs/scale/etc.), but I think the only time people weren't trying to squeeze the internet for all the dimes it can offer was when the internet was first conceived as a tool for national defense.)
(2) website/software that exists to make money now: the type that requires the least explanation. mostly non-startup apps and services, including any random ecommerce storefront, mobile apps that cost three bucks to download, an MMO with a recurring subscription, or even a news website that runs banner ads and/or offers paid subscriptions. in most (but not all) cases, the "make money now" part is obvious, so these things don't feel free to us as users, even to the extent that they might have watered-down free versions or limited access free trials. no one's shocked when WoW offers another paid expansion packs because WoW's been around for two decades and has explicitly been trying to make money that whole time.
(3) website/software that exists to make money later: this is the fun one, and more common than you'd think. "make money later" is more or less the entire startup business model—I'll get into that in the next section—and is deployed with the expectation that you will make money at some point, but not always by means as obvious as "selling WoW expansions for forty bucks a pop."
companies in this category tend to have two closely entwined characteristics: they prioritize growth above all else, regardless of whether this growth is profitable in any way (now, or sometimes, ever), and they do this by offering users really cool and awesome shit at little to no cost (or, if not for free, then at least at a significant loss to the company).
so from a user perspective, these things either seem free or far cheaper than their competitors. but of course websites and software and apps and [blank]-as-a-service tools cost money to build and maintain, and that money has to come from somewhere, and the people supplying that money, generally, expect to get it back...
just not immediately.
startups, VCs, IPOs, and you
here's the extremely condensed "did NOT go to harvard business school" version of how a startup works:
(1) you have a cool idea.
(2) you convince some venture capitalists (also known as VCs) that your idea is cool. if they see the potential in what you're pitching, they'll give you money in exchange for partial ownership of your company—which means that if/when the company starts trading its stock publicly, these investors will own X numbers of shares that they can sell at any time. in other words, you get free money now (and you'll likely seek multiple "rounds" of investors over the years to sustain your company), but with the explicit expectations that these investors will get their payoff later, assuming you don't crash and burn before that happens.
during this phase, you want to do anything in your power to make your company appealing to investors so you can attract more of them and raise funds as needed. because you are definitely not bringing in the necessary revenue to offset operating costs by yourself.
it's also worth nothing that this is less about projecting the long-term profitability of your company than it's about its perceived profitability—i.e., VCs want to put their money behind a company that other people will also have confidence in, because that's what makes stock valuable, and VCs are in it for stock prices.
(3) there are two non-exclusive win conditions for your startup: you can get acquired, and you can have an IPO (also referred to as "going public"). these are often called "exit scenarios" and they benefit VCs and founders, as well as some employees. it's also possible for a company to get acquired, possibly even more than once, and then later go public.
acquisition: sell the whole damn thing to someone else. there are a million ways this can happen, some better than others, but in many cases this means anyone with ownership of the company (which includes both investors and employees who hold stock options) get their stock bought out by the acquiring company and end up with cash in hand. in varying amounts, of course. sometimes the founders walk away, sometimes the employees get laid off, but not always.
IPO: short for "initial public offering," this is when the company starts trading its stocks publicly, which means anyone who wants to can start buying that company's stock, which really means that VCs (and employees with stock options) can turn that hypothetical money into real money by selling their company stock to interested buyers.
drawing from that, companies don't go for an IPO until they think their stock will actually be worth something (or else what's the point?)—specifically, worth more than the amount of money that investors poured into it. The Powers That Be will speculate about a company's IPO potential way ahead of time, which is where you'll hear stuff about companies who have an estimated IPO evaluation of (to pull a completely random example) $10B. actually I lied, that was not a random example, that was reddit's valuation back in 2021 lol. but a valuation is basically just "how much will people be interested in our stock?"
as such, in the time leading up to an IPO, it's really really important to do everything you can to make your company seem like a good investment (which is how you get stock prices up), usually by making the company's numbers look good. but! if you plan on cashing out, the long-term effects of your decisions aren't top of mind here. remember, the industry lingo is "exit scenario."
if all of this seems like a good short-term strategy for companies and their VCs, but an unsustainable model for anyone who's buying those stocks during the IPO, that's because it often is.
also worth noting that it's possible for a company to be technically unprofitable as a business (meaning their costs outstrip their revenue) and still trade enormously well on the stock market; uber is the perennial example of this. to the people who make money solely off of buying and selling stock, it literally does not matter that the actual rideshare model isn't netting any income—people think the stock is valuable, so it's valuable.
this is also why, for example, elon musk is richer than god: if he were only the CEO of tesla, the money he'd make from selling mediocre cars would be (comparatively, lol) minimal. but he's also one of tesla's angel investors, which means he holds a shitload of tesla stock, and tesla's stock has performed well since their IPO a decade ago (despite recent dips)—even if tesla itself has never been a huge moneymaker, public faith in the company's eventual success has kept them trading at high levels. granted, this also means most of musk's wealth is hypothetical and not liquid; if TSLA dropped to nothing, so would the value of all the stock he holds (and his net work with it).
what's an API, anyway?
to move in an entirely different direction: we can't get into reddit's API debacle without understanding what an API itself is.
an API (short for "application programming interface," not that it really matters) is a series of code instructions that independent developers can use to plug their shit into someone else's shit. like a series of tin cans on strings between two kids' treehouses, but for sending and receiving data.
APIs work by yoinking data directly from a company's servers instead of displaying anything visually to users. so I could use reddit's API to build my own app that takes the day's top r/AITA post and transcribes it into pig latin: my app is a bunch of lines of code, and some of those lines of code fetch data from reddit (and then transcribe that data into pig latin), and then my app displays the content to anyone who wants to see it, not reddit itself. as far as reddit is concerned, no additional human beings laid eyeballs on that r/AITA post, and reddit never had a chance to serve ads alongside the pig-latinized content in my app. (put a pin in this part—it'll be relevant later.)
but at its core, an API is really a type of protocol, which encompasses a broad category of formats and business models and so on. some APIs are completely free to use, like how anyone can build a discord bot (but you still have to host it yourself). some companies offer free APIs to third-party developers can build their own plugins, and then the company and the third-party dev split the profit on those plugins. some APIs have a free tier for hobbyists and a paid tier for big professional projects (like every weather API ever, lol). some APIs are strictly paid services because the API itself is the company's core offering.
reddit's financial foundations
okay thanks for sticking with me. I promise we're almost ready to be almost ready to talk about the current backlash.
reddit has always been a startup's startup from day one: its founders created the site after attending a startup incubator (which is basically a summer camp run by VCs) with the successful goal of creating a financially successful site. backed by that delicious y combinator money, reddit got acquired by conde nast only a year or two after its creation, which netted its founders a couple million each. this was back in like, 2006 by the way. in the time since that acquisition, reddit's gone through a bunch of additional funding rounds, including from big-name investors like a16z, peter thiel (yes, that guy), sam altman (yes, also that guy), sequoia, fidelity, and tencent. crunchbase says that they've raised a total of $1.3B in investor backing.
in all this time, reddit has never been a public company, or, strictly speaking, profitable.
APIs and third-party apps
reddit has offered free API access for basically as long as it's had a public API—remember, as a "make money later" company, their primary goal is growth, which means attracting as many users as possible to the platform. so letting anyone build an app or widget is (or really, was) in line with that goal.
as such, third-party reddit apps have been around forever. by third-party apps, I mean apps that use the reddit API to display actual reddit content in an unofficial wrapper. iirc reddit didn't even have an official mobile app until semi-recently, so many of these third-party mobile apps in particular just sprung up to meet an unmet need, and they've kept a small but dedicated userbase ever since. some people also prefer the user experience of the unofficial apps, especially since they offer extra settings to customize what you're seeing and few to no ads (and any ads these apps do display are to the benefit of the third-party developers, not reddit itself.)
(let me add this preemptively: one solution I've seen proposed to the paid API backlash is that reddit should have third-party developers display reddit's ads in those third-party apps, but this isn't really possible or advisable due to boring adtech reasons I won't inflict on you here. source: just trust me bro)
in addition to mobile apps, there are also third-party tools that don’t replace the Official Reddit Viewing Experience but do offer auxiliary features like being able to mass-delete your post history, tools that make the site more accessible to people who use screen readers, and tools that help moderators of subreddits moderate more easily. not to mention a small army of reddit bots like u/AutoWikibot or u/RemindMebot (and then the bots that tally the number of people who reply to bot comments with “good bot” or “bad bot).
the number of people who use third-party apps is relatively small, but they arguably comprise some of reddit’s most dedicated users, which means that third-party apps are important to the people who keep reddit running and the people who supply reddit with high-quality content.
unpaid moderators and user-generated content
so reddit is sort of two things: reddit is a platform, but it’s also a community.
the platform is all the unsexy (or, if you like python, sexy) stuff under the hood that actually makes the damn thing work. this is what the company spends money building and maintaining and "owns." the community is all the stuff that happens on the platform: posts, people, petty squabbles. so the platform is where the content lives, but ultimately the content is the reason people use reddit—no one’s like “yeah, I spend time on here because the backend framework really impressed me."
and all of this content is supplied by users, which is not unique among social media platforms, but the content is also managed by users, which is. paid employees do not govern subreddits; unpaid volunteers do. and moderation is the only thing that keeps reddit even remotely tolerable—without someone to remove spam, ban annoying users, and (god willing) enforce rules against abuse and hate speech, a subreddit loses its appeal and therefore its users. not dissimilar to the situation we’re seeing play out at twitter, except at twitter it was the loss of paid moderators;  reddit is arguably in a more precarious position because they could lose this unpaid labor at any moment, and as an already-unprofitable company they absolutely cannot afford to implement paid labor as a substitute.
oh yeah? spell "IPO" backwards
so here we are, June 2023, and reddit is licking its lips in anticipation of a long-fabled IPO. which means it’s time to start fluffing themselves up for investors by cutting costs (yay, layoffs!) and seeking new avenues of profit, however small.
this brings us to the current controversy: reddit announced a new API pricing plan that more or less prevents anyone from using it for free.
from reddit's perspective, the ostensible benefits of charging for API access are twofold: first, there's direct profit to be made off of the developers who (may or may not) pay several thousand dollars a month to use it, and second, cutting off unsanctioned third-party mobile apps (possibly) funnels those apps' users back into the official reddit mobile app. and since users on third-party apps reap the benefit of reddit's site architecture (and hosting, and development, and all the other expenses the site itself incurs) without “earning” money for reddit by generating ad impressions, there’s a financial incentive at work here: even if only a small percentage of people use third-party apps, getting them to use the official app instead translates to increased ad revenue, however marginal.
(also worth mentioning that chatGPT and other LLMs were trained via tools that used reddit's API to scrape post and content data, and now that openAI is reaping the profits of that training without giving reddit any kickbacks, reddit probably wants to prevent repeats of this from happening in the future. if you want to train the next LLM, it's gonna cost you.)
of course, these changes only benefit reddit if they actually increase the company’s revenue and perceived value/growth—which is hard to do when your users (who are also the people who supply the content for other users to engage with, who are also the people who moderate your communities and make them fun to participate in) get really fucking pissed and threaten to walk.
pricing shenanigans
under the new API pricing plan, third-party developers are suddenly facing steep costs to maintain the apps and tools they’ve built.
most paid APIs are priced by volume: basically, the more data you send and receive, the more money it costs. so if your third-party app has a lot of users, you’ll have to make more API requests to fetch content for those users, and your app becomes more expensive to maintain. (this isn’t an issue if the tool you’re building also turns a profit, but most third-party reddit apps make little, if any, money.)
which is why, even though third-party apps capture a relatively small portion of reddit’s users, the developer of a popular third-party app called apollo recently learned that it would cost them about $20 million a year to keep the app running. and apollo actually offers some paid features (for extra in-app features independent of what reddit offers), but nowhere near enough to break even on those API costs.
so apollo, any many apps like it, were suddenly unable to keep their doors open under the new API pricing model and announced that they'd be forced to shut down.
backlash, blackout
plenty has been said already about the current subreddit blackouts—in like, official news outlets and everything—so this might be the least interesting section of my whole post lol. the short version is that enough redditors got pissed enough that they collectively decided to take subreddits “offline” in protest, either by making them read-only or making them completely inaccessible. their goal was to send a message, and that message was "if you piss us off and we bail, here's what reddit's gonna be like: a ghost town."
but, you may ask, if third-party apps only captured a small number of users in the first place, how was the backlash strong enough to result in a near-sitewide blackout? well, two reasons:
first and foremost, since moderators in particular are fond of third-party tools, and since moderators wield outsized power (as both the people who keep your site more or less civil, and as the people who can take a subreddit offline if they feel like it), it’s in your best interests to keep them happy. especially since they don’t get paid to do this job in the first place, won’t keep doing it if it gets too hard, and essentially have nothing to lose by stepping down.
then, to a lesser extent, the non-moderator users on third-party apps tend to be Power Users who’ve been on reddit since its inception, and as such likely supply a disproportionate amount of the high-quality content for other users to see (and for ads to be served alongside). if you drive away those users, you’re effectively kneecapping your overall site traffic (which is bad for Growth) and reducing the number/value of any ad impressions you can serve (which is bad for revenue).
also a secret third reason, which is that even people who use the official apps have no stake in a potential IPO, can smell the general unfairness of this whole situation, and would enjoy the schadenfreude of investors getting fucked over. not to mention that reddit’s current CEO has made a complete ass of himself and now everyone hates him and wants to see him suffer personally.
(granted, it seems like reddit may acquiesce slightly and grant free API access to a select set of moderation/accessibility tools, but at this point it comes across as an empty gesture.)
"later" is now "now"
TL;DR: this whole thing is a combination of many factors, specifically reddit being intensely user-driven and self-governed, but also a high-traffic site that costs a lot of money to run (why they willingly decided to start hosting video a few years back is beyond me...), while also being angled as a public stock market offering in the very near future. to some extent I understand why reddit’s CEO doubled down on the changes—he wants to look strong for investors—but he’s also made a fool of himself and cast a shadow of uncertainty onto reddit’s future, not to mention the PR nightmare surrounding all of this. and since arguably the most important thing in an IPO is how much faith people have in your company, I honestly think reddit would’ve fared better if they hadn’t gone nuclear with the API changes in the first place.
that said, I also think it’s a mistake to assume that reddit care (or needs to care) about its users in any meaningful way, or at least not as more than means to an end. if reddit shuts down in three years, but all of the people sitting on stock options right now cashed out at $120/share and escaped unscathed... that’s a success story! you got your money! VCs want to recoup their investment—they don’t care about longevity (at least not after they’re gone), user experience, or even sustained profit. those were never the forces driving them, because these were never the ultimate metrics of their success.
and to be clear: this isn’t unique to reddit. this is how pretty much all startups operate.
I talked about the difference between “make money now” companies and “make money later” companies, and what we’re experiencing is the painful transition from “later” to “now.” as users, this change is almost invisible until it’s already happened—it’s like a rug we didn’t even know existed gets pulled out from under us.
the pre-IPO honeymoon phase is awesome as a user, because companies have no expectation of profit, only growth. if you can rely on VC money to stay afloat, your only concern is building a user base, not squeezing a profit out of them. and to do that, you offer cool shit at a loss: everything’s chocolate and flowers and quarterly reports about the number of signups you’re getting!
...until you reach a critical mass of users, VCs want to cash in, and to prepare for that IPO leadership starts thinking of ways to make the website (appear) profitable and implements a bunch of shit that makes users go “wait, what?”
I also touched on this earlier, but I want to reiterate a bit here: I think the myth of the benign non-monetized internet of yore is exactly that—a myth. what has changed are the specific market factors behind these websites, and their scale, and the means by which they attempt to monetize their services and/or make their services look attractive to investors, and so from a user perspective things feel worse because the specific ways we’re getting squeezed have evolved. maybe they are even worse, at least in the ways that matter. but I’m also increasingly less surprised when this occurs, because making money is and has always been the goal for all of these ventures, regardless of how they try to do so.
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numberly · 11 months
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