When news came out the other day that Flipboard just raised another $50 million at a $200 million valuation for its iPad news reading app, I gave CEO Mike McCue a hard time on Twitter and here on TechCrunch. Does an iPad app startup really need $50 million, or is this yet another sign of a bubble? McCue responded on Twitter, but yesterday we spoke by phone and he went into great detail about why exactly he thinks he needs $50 million.
He came up with the number a few months ago. It’s what he calculates he needs to get to cashflow positive, or at least pretty close (more on that below). Raising money is distraction, and his preference was to raise it all at once.
But towards the end of our conversation, he also mentioned another concern which was a factor in taking as much money as he can right now. “I see a lot of competition down the pike,” he says. Rumors have been reaching him that there is a team of engineers at Google who are “saying they are building a Flipboard killer.” He adds quickly, ” I have no idea what it is,” but hearing about “this desire to kill us” is unsettling and it does add “a little concern about the unknown.”
Could this product have anything to do with the magazine-like Google Fast Flip? It is kind of clunky now, but something like that could be developed into a slick, HTML5 browser-based flip interface for news reading on tablets. Or maybe it’s a completely different project—an app for Android tablets. Or maybe it’s nothing.
Setting aside the need to fend off both real and potential competitors flooding into the market, McCue has his own internal logic for why he raised so much money. “We want to build a large business here that has the ability to get into the billions of dollars in revenue,” he says. And to get there he needs to reach tens of millions of consumers and sign up 100 to 150 publishers from 17 today.
I asked him if he plans on building his own ad salesforce, and at this point that is not the plan. He wants to keep partnering with publishers and let them sell their own ads. wants to hire engineers, and bring his employee count up from 32 to 50 or 60. At about $200,000 per employee (including salaries, benefits and other expenses), plus the network costs to support as many as 40 million Flipboard readers, his operating costs could easily get to $20 million a year. Here is what McCue told me in his own words:
Q: Why do you need $50 million?
McCue: We want to build a large business here that has the ability to get into the billions of dollars in revenue. What is the revenue model? You could charge for the app, charge for subscriptions, or you could do advertising.
We decided the only way you could get to a multi-billion dollar business is through advertising. So given that, to build an advertising business, you’ve got to have a lot of scale. You’ve got to build a consumer brand, acquire tens of millions of users, and work with a lot of publishers to get there. You have to be international, and on multiple platforms. It is a big undertaking.
Q: What does the $50 million get you?
McCue: The next milestone is to be cashflow positive. I feel like I can get to cashflow positive with about 50 to 60 people. So our plan is to hire another 18 to 28 people, we have 32 now, then hover there and build out an advertising business with publishers. The bulk of those people will be engineers. Publishers will sell their own ads. . . . Assuming we can build an audience with a really good product, then we need about 100 to 150 publishing partners to build a really big business. We have 17 now.
Q: Flipboard is the No. 2 free iPad app right now. Can anyone else catch you?
McCue: I see a lot of competition down the pike. There’s talk that some people at Google are saying they are building a Flipboard killer, and I’ve heard those rumors. What I felt was a better approach was to build the best product no matter what the competition does. But this desire to kill us—a bunch of folks there have decided to build this product, I have no idea what it is—raises a little concern about the unknown. Anytime a company like that [might go after you], it certainly is the kind of thing I give a lot of thought to.
Update: Another source says he too has heard about the Flipboard Killer project at Google. From what he can gather, it is a team of less than ten Googlers from the Boston/Cambridge area. Publishers who have seen demos like it so far, but its future is uncertain in the product reorg going on right now at Google. In other words the Flipboard Killer might itself get killed before it ever sees the light of day.