What Business Are We In?
While the Rocket Science press juggernaut moved inexorably forward, a few troubling facts kept trying to bubble up into my consciousness. The company was founded to build games with embedded video to bring Hollywood stories, characters, and narratives to a market where “shoot and die” twitch games were in vogue. But underlying the company’s existence was a fundamental hypothesis we refused to see or test - customers would care if we did.
In the game business of the early 1990’s video was at best a brief narrative, a distraction you maybe watched once, not the core of the game. Our potential customers didn’t seem to be calling for Hollywood stories, characters and narrative. That’s OK, because we knew better. We thought we had figured out what the next generation of games was going to be. We were thinking we were in the movie business, but video games were more akin to pinball; both pinball and movies were entertainment but you would never confuse them with each other. Successful pinball companies didn’t hire Hollywood talent.
Meanwhile our company was pouring an enormous amount of dollars into building tools and video compression technology, while also hiring a lot of high-priced Hollywood talent like art directors, and script and story editors.
We Don’t Need Domain Experts
When I looked around at our executive staff, there wasn’t a single founder who was a gamer. Worse, there wasn’t a single person on our executive team who had come from a game company. Nor was there anyone with game experience on our board. As the company grew a sense of unease started gnawing at the outer fringes of the “you’re in trouble” part of my brain. Meanwhile my partner was in heaven working with his newly hired group of game designers directing and producing our first games. When I pointed out my rising apprehension his response was, “I’ve been playing games since I was 10. I know what’s great and what’s not. We agreed this part of the company was my responsibility. Don’t worry the games are going to be great.” Given my fiduciary responsibility to my board and my investors did his blasé answer force me to grab him by the collar and scream, “Snap out of it, we’re in trouble!”
Nah. Instead I said, “Oh, OK, glad it’s all under control.” Then I went back to raising more money and getting more press for our soon to be spectacular games.
Hire Advice I Can Ignore
But the nagging little voice in the back of my head that said, “This doesn’t feel right,” wouldn’t go away. So I hired a VP of Marketing from Sega, one of the video game platforms on which our games would run. After only two weeks on the job, he came into my office and said, “Have you’ve seen the games we are building?” What kind of question was that? Of course I had seen pieces of the video we shot and beautiful storyboards. “No,” he insisted, “Have you seen the game play, the part that supposed to keep players addictively glued to the game console for hours?” Hmm. “No, not really, but my partner owns the studio and tells me it’s spectacular and everyone will love it. Don’t bother him; he knows what he’s doing. Go spend some time outside the building talking to potential distribution partners. Tell them how great it’s going to be and see how many pre-orders we can get.”
A month later the VP of Marketing appeared in my office again. “Steve I have to tell you some bad news, I just showed our potential channel partners and customers a few completed pieces of the games we had. They think the games stink.”
Now I know I heard his words because years later I can still remember them well enough to write them down. But somehow the translation between my ears and what I was supposed to do with what I was hearing shut down. Was my response to stop development of the games? Bring in some outside professionals to review our progress? Call a board meeting and say we may have a serious problem? Nah. I said, “That can’t be true! The press is saying we are the hottest super group around. Look, we’re on the cover of Wired magazine. They think we’re brilliant. Our VCs think we are visionary. Stop annoying our game designers and start working on selling and marketing the games.”
In hindsight it’s easy to laugh. Saying you knew how to build great games because you played them all your life was like saying, “Hey I eat out a lot so why don’t I open a restaurant.” Or “I’ve seen a lot of movies so let’s start a movie studio.” Only in Silicon Valley could we have got funded with this idea, and not surprisingly, it was our technology that had the VC’s confused. It was more like we had invented the world’s best new kitchen utensils and wanted to open a restaurant, or had built the world’s finest movie cameras and wanted to start a movie studio. Our venture backers and our executive team confused our technology and our tools — and our passion for the games business — with any practical experience in the real business we were in. We were an entertainment business – and not a very subtle entertainment business. As we were about to find out, if video game players wanted a cinematic experience, they went to the movies, they didn’t buy a video game. Our customers wanted to kill, shoot or hunt for something. Fancy video narratives and plots were not video games.
Why VC’s invested in companies like ours is what’s great and bad about entrepreneurship. A Venture Capitalist I respect reminded me that he thought about investment risk as either:
- investing $1 million in 10 companies and have all ten succeed. With each of those ten companies returning 2x their money for $20 million. Or
- investing in 10 companies and having 8 fail - but the remaining two companies returning 20x their money for $40 million.
His point was that it was in the VC’s interest in having entrepreneurs swing for the fences.
However the VC’s are managing a portfolio while you, the entrepreneur are managing one company – yours. While VC’s might love you and your firm, a 2x return isn’t why they’re in business. It’s nothing personal, but your interests and your VC’s may not be aligned. (More on this in future posts.)
The Search for the Black Swan
What keeps founders and their investors going is the the dream/belief that your startup will be the Black Swan – a company that breaks all the obvious rules, ignores tradition and does something unique and spectacular and with a result that is unpredicted and financial returns that are breathtaking.
Think of the Microprocessor, Personal Computer, Internet, Twitter, Youtube, Facebook, Google, the iPhone. Creating those technologies and companies required entrepreneurs willing to follow their own vision and convincing others that the path is worth following.
The mistake isn’t having a vision and taking risks. The mistake is assuming you are a Black Swan and continuing to ignore the facts as they pile up in front of you.
There was nothing wrong about Rocket Science having a vision radically different than the conventional wisdom. We could have been right and invented a new form of gaming and entertainment. What went awry was continuing to execute on the vision when all the evidence in front of us told us our hypothesis was wrong. We compounded the problem when we failed to have an honest discussion about why it made sense to ignore the evidence. (A tip-off is when you start saying, “they just don’t get it yet.”)
At Rocket Science, hubris took over and was about to lead to the fall.
Customer Development says having a vision, faith and a set of hypotheses are a normal part of the startup experience. But it is critical to build in a process for testing those hypothesis outside the building and listening to the responses – or you might as well throw your money in the street.
- While a lack of relevant domain expertise is not always fatal, believing you don’t need any is.
- Founders need to validate their vision in front of customers early and often.
- Your goals and your VC’s goals may not be aligned. Make sure they are.