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HQ Trivia in Trouble

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A headline posted on Business Insider website on December 18, 2017 reported, “HQ Trivia was getting ready to raise money at a $100 million valuation, but some investors are reportedly backing off after learning about a founder’s ‘creepy’ behavior.” What does all this mean?

 

“HQ Trivia” is a new app that streams two live trivia game shows everyday, at 3 PM and 9 PM. Players have 10 seconds to answer each of 12 multiple-choice questions. The contestants who successfully answer all 12 questions correctly share the predetermined prize money, ranging from $1000 to $10,000. Since hundreds of thousands of users participate, there are multiple winners. On a typical show, about a dozen out of more than 600,000 players shared in the $1500 prize, or approximately $100 each.

 

Similar to other startup tech companies, HQ trivia needs to “raise money” to stay in business. HQ trivia is a free app that gives away free money. As with other free apps, it needs to build up its number of users to be able to attract advertisers. In the meantime, the company needs to have “investors” to give them capital (cash). In exchange, investors are given ownership of a percentage of the company, with the hopes that it will eventually become profitable.

 

Investment capital for small, early-stage companies typically come from venture capitalists, who are investors who bet their money on high-risk companies. As an example, Peter Thiel invested $500,000 in Facebook in 2004. In exchange, he received 10.2% ownership of then little-known company. With the success of Facebook, Thiel has made more than a billion dollars in profits from his initial investment. Although most companies fail and venture capitalists typically lose their investments, the potential for finding the next billion dollar company draws investors to risk their capital.

 

When a venture capitalist invests his money in a company, the percent ownership that he receives determines the value of the company. For example, if a venture capitalist was to give HQ Trivia $10 million dollars, and he was given 10% ownership of the company, the company would have “$100 million valuation.”  What investors are willing to pay for a specific fraction of the company determines its value.

 

One of the “founders” of HQ Trivia is Colin Kroll, who is also one of the cofounders of the video hosting service, Vine. When Twitter purchased Vine in 2012, Twitter hired Kroll. At Twitter, Kroll has been accused of “creepy” behavior towards women. When Kroll’s actions were revealed, numerous venture capital firms refused to fund HQ Trivia. Even if the app’s popularity continues to grow, if investors are unwilling to partner with HQ Trivia, the company has little chance of survival, and may be forced to part ways with Kroll.

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HQ Trivia in Trouble