Failure and Redemption

Posted on February 26, 2013 by steve blank

“What’s gone and what’s past help
Should be past grief.”

William Shakespeare – The Winter’s Tale

We give abundant advice to founders about how to make startups succeed yet we offer few models about dealing with failure.

So here’s mine.
——–

In my experience, living through failure has 6 stages:

  • Stage 1: Shock and Surprise
  • Stage 2: Denial
  • Stage 3: Anger and Blame
  • Stage 4: Depression
  • Stage 5: Acceptance
  • Stage 6: Insight and Change

While I had been part of a few failed startups, none of them had fallen squarely on my shoulders until Rocket Science Games where my business card said CEO. It was there that I lived through all 6 stages and came out the other side a changed man.

Failure

Stage 1: Shock and Surprise
We raised $35 million and after 18 months made the cover of Wired magazine. Wired 2.11 CoverThe press called Rocket Science one of the hottest companies in Silicon Valley and predicted that our games would be great because the storyboards and trailers were spectacular. 90 days later, I found out our games are terrible, no one is buying them, our best engineers started leaving, and with 120 people and a huge burn rate, we’re running out of money and about to crash. This can’t be happening to me.

Stage 2: Deny any of it was your fault
In my mind, I had done everything the investors asked me to do. I raised a ton of money and got a ton of press. We hired everyone according to our plan. It was everyone else who screwed up. I did everything right.

Stage 3: Get angry and blame everyone else
This was the fault of my cofounder since he was in charge of game development, it was the engineers who bailed on me, it was the sales and marketing people who didn’t tell me how bad the games were, it was the VC’s who refused to put any more money in the company, it was Sega’s fault for making a bad gaming platform…

State 4: Get depressed
When the inevitability and magnitude of the failure sunk in, I slept in a lot. There were days I’d get up late and go to bed again at 5 pm. I lost interest in anything associated with my past industry. (To this day I still can’t play a video game.)

Redemption

Step 5: Gradually accept your role in the failure
A few weeks after leaving, I began to think about what I should have done, could have done and pondered why I didn’t do it. (I didn’t listen, I didn’t act, I didn’t own my role as CEO, I wasn’t prepared to do what was right or leave.) This was hard and didn’t happen overnight. My wife was a great partner here. I often reverted to Stages 2 and 3, but over time I took ownership of my primary role in the debacle.

Stage 6: Gain insight and change your behavior
This was the hardest part. While I stopped blaming others, understanding what I could change in my behavior took long months. It would have been much easier to just move on, but I was looking for the lessons that would make my next startup successful. I looked at the patterns of behavior, not just at my last company but also across my entire career. I learned how to dial back the hubris, get other smart people to work with me – rather than just for me, listen better, and act and do what was right – regardless of what others thought I should do.

Epilogue
For my next startup I parked the behaviors that drove Rocket Science off the cliff. We established a team of founders who worked collaboratively. When my co-founders and I got the company scalable and repeatable, we hired an operating executive as the CEO and returned a billion dollars to each of our two lead investors.

Now when I listen to entrepreneurs who’ve cratered a company, I listen for their stories of failure and redemption.

Lessons Learned

  • Six stages of failure and redemption
  • Don’t get stuck in Stages 2, 3 or 4  – move forward
  • Don’t skip acceptance of your role
  • Get to insight so you can change your behavior—then commit to the challenge of doing it differently the next time

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Filed under: Family/Career/Culture, Rocket Science Games, Science and Industrial Policy | 48 Comments »

VC’s Are Not Your Friends

Posted on February 3, 2011 by steve blank

One of the biggest mistakes entrepreneurs make is not understanding the relationship they have with their investors. At times they confuse VC’s with their friends.

Lets Go to Lunch
At Rocket Science our video game company was struggling. Hubris, bad CEO decisions (mine) and a fundamental lack of understanding that we were in a “hits-based” entertainment business not in a Silicon Valley technology company were slowly killing us.

One day I got a call from my two investors, “Hey Steve, we’re both going to be up in San Francisco, lets grab lunch.” I liked my two investors. I’d known them for years, they were smart, trying to figure out the video game market with me, (in hindsight a business that none of us knew anything about and shouldn’t have been in,) coached me when needed, etc. Our board meetings were collegial and often fun.

We were just about to have a board meeting in another week to talk about raising another round of financing to keep our struggling disaster afloat. I had assumed that my VC’s were behind me. Thinking we were having a social call, I was completely unprepared for the discussion. (Lesson – never take a VC meeting without knowing the agenda.)

“Steve, we thought we’d tell you this before the board meeting, but both our firms are going to pass on leading your next round.” I was speechless. I felt like I had just been kicked in the gut and stabbed in the back These were my lead investors. It was the ultimate vote of no confidence. If they passed the odds of anyone in the entire country funding us was zero. I knew they had been questioning our ability to stay afloat as a company in the board meetings so this wasn’t a complete surprise but I would have expected some offer a bridge loan or some sign of support. (I finally got them to agree if I could find someone else to lead the round they would put in a token amount to say they were still supportive.)

“Is this about me as the CEO?” I asked. “I’ll resign if you guys think you can hire someone else you want to back.” They looked a bit sheepish and replied, “No it’s not you. You should stay and run the company. However, we realized that we’ve backed a business we don’t know much about, the company is a money sink and both our firms have no stomach for this industry.”

“But I thought you guys were my friends?!” You’re supposed to support me!! I said out of utter frustration.

VC’s Are Not Your Friends
I had just gotten a very expensive reminder. I liked my board members. They liked me. But while I was just seeing a single board member, I was just one of twenty companies in their current fund portfolio. Their fiduciary responsibility was to manage a portfolio of investments for their limited partners. And what they promised their own investors was that they would invest money in deals that would grow in value and achieve liquidity. As much as they liked me as the entrepreneur, they couldn’t throw good money after bad when they thought the deal went south.

I wish I could tell you I understood this all at the time. I didn’t. I was angry, took it personally for a long time (past the demise of Rocket Science) until I realized they were right.

While the best VC’s treat entrepreneurs like you are their most important customer, and they add tremendous value to your startup (recruiting, strategy, coaching, connections, etc.) they are not doing it out of the goodness of their hearts. Entrepreneurs need to understand that VC’s are simply a sophisticated form of financial investors who in turn need to satisfy their own investors. At the end of the day VC’s have to provide their limited partners with great returns or they aren’t going to be able to raise another fund.

If you succeed so do they. Great VC’s do everything they can to make you successful. But just like your bank, credit card company, mortgage holder, etc. they are not confused where their long term loyalty lies.

It’s not with you.

Postscript
The irony is 15 years later, no longer doing startups, these two VC’s truly have become my friends. We have lunch often, teach together and swap war stories of the day they pulled my funding.

It wasn’t an easy lesson.

Lessons Learned

  • You see one VC, they see 20 CEO’s
  • Don’t confuse your business with your VC’s business
  • Your interests are aligned if you both see the same path to liquidity
  • Don’t confuse being friendly with your VC’s with VC’s as your friend

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Filed under: Rocket Science Games, Venture Capital | 31 Comments »

You Negotiate Commodities, But You Seize Opportunities

Posted on September 16, 2010 by steve blank

It took losing something important to understand the difference between a commodity and an opportunity. Along the way I also learned yet another way entrepreneurs see the world differently from their investors.

Advisory Board
In the early days of Rocket Science I realized that we needed high-level advice on multiple fronts; technology, game development, video game distribution, etc. At one of our initial board meetings we had agreed on the general principle of an advisory board and put together an overall stock budget to compensate advisors.

One of the first potential advisors I reached out to was someone who 10 years earlier tried to hire me as the VP of Marketing of his new division at Sun Microsystems. For lots of reasons that never worked out, but I liked him so much that the following year I tried to hire him as the VP of Engineering of Ardent. (He was having too much fun at Sun and turned me down.)

Now a decade later, we caught up over lunch and I found that he was in the middle of taking a new job inside his company and had some time on his hands. Chatting with him just reinforced my earlier opinion that he was an extraordinary combination of sheer technical talent, great business and common sense and a level-headed decision maker. I knew he would bring immense value to me and the company.

Over the next week we exchanged emails over advisory board stock. I made him an offer and he countered with one I thought was still reasonable (but I didn’t tell him that.) The timing was perfect, my board meeting was in two days. I could get him the stock he asked for approved at my board meeting and then reply.

Death by Spreadsheet
I was so excited to break the news to the board that I put this new advisor on as the first agenda item. Even back then the advisor was a well-known name in Silicon Valley. The conversation went great and everyone agreed he’d teach us a lot – until one of the board members asked, “How much stock do we have to give him?”  I threw out the number of shares I had offered and he had requested, naively thinking everyone would see what a no-brainer this was. Instead what I got was, “Wait a minute. He’s asking for one-third of our advisory board stock budget. We had agreed we were going to get 5 to 6 advisors with that amount of stock.” At first I wasn’t sure I was hearing this correctly. The advisor was a world-class guy, in my judgment he was worth more than all the other advisors I was going to get.

Then the other VC’s piled on. “You need to live on the budget we gave you. Go back to him and offer him less stock.”

As a first-time CEO getting beaten up my board I thought this wasn’t a fight worth having. (I couldn’t have been more wrong.) So I agreed to go back to my potential advisor and tell him the best I could do was my first offer.

I was about to get a few lessons that have lasted for a long time.

Thanks But No Thanks
Putting my best marketing spin on it, I sent our potential advisor a message that essentially said, “I’m not sure I can meet your request, but here’s another offer.” I dressed it up as best as I could, making some of the other terms more palatable, but it still wasn’t what he asked for.

I guess I shouldn’t have been surprised when he sent me a very polite note back that said, “Thanks but no thanks. I’m now getting more involved in my new job as CTO and I’m too busy to go back and forth negotiating this.”  But I was crushed. I knew my company had just lost something important. Something that I couldn’t just go out and replace. And I realized I screwed up in at least two major ways.

You Negotiate Commodities, But You Seize Opportunities
I hadn’t just lost a potential advisor I had lost an irreplaceable opportunity. We lost him not just over a stock offer. We lost him because we had treated him as a commodity – something that was readily available from multiple sources – and that you could negotiate its price.

In reality what I had in front of me was an opportunity – a favorable combination of circumstances that rarely occurs and if seized upon would have given me an advantage.

You treat commodities and opportunities radically differently.

Founding CEO’s are supposed to search for a repeatable business model, not just blindly execute their original plan. That requires you to identify opportunities and seize the day. Opportunities are not just about sales, marketing or product. In this case it was about a resource I had in my hands and let go of.

I had acted like an employee, not as a founder and certainly not as the CEO of a startup. I had let my board tell me that the opportunity I saw was a commodity that could be managed by a spreadsheet. And I didn’t stand up for what I had believed in.

It would never happen again.

Lessons Learned

  • Great entrepreneurs see opportunities before others do.
  • Ask, “Is it a commodity or an opportunity?”
  • If it’s a one-of-a-kind that give you an advantage, it’s an opportunity.
  • Grab opportunities with both hands and don’t let go.
  • It’s better to beg for forgiveness than ask for permission.
  • Carpe Diem

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Filed under: Rocket Science Games | 24 Comments »

Incentives and Legends

Posted on February 1, 2010 by steve blank

Entrepreneurs and the early startup team all need to be motivated by a shared vision, passion and desire to build a large company.  Yet it’s the company legends that live on.

Fund Raising
Rocket Science, our little startup was less than a year-old.  We had been busy assembling our team and had just hired the last member of our exec staff.  We had also just closed our Series B financing with a major overseas partner.  The financing felt like a real validation of our strategy. In truth, it was only proof that our reality distortion field worked in Asia as well.

My Wife Thinks I Deserve a Bonus
One of the new hires was Jim Wickett, my VP of Business Development.  He knew so little about technology that I used to say he needed a manual to operate a light switch, but I hired him because a small voice said, “He’ll do extraordinary things.”

He did.  And still does.

Jim, among other things ran the fundraising for us in Asia and worked with an outside firm that had great connections in Japan to drag us around Tokyo and get the deal closed.  As in raising $10Million dollars kind of closed.

Everyone at our startup was working on startup starvation salaries, and Jim had taken a large pay cut to join us. When the Japanese partner deal was done, Jim said,  “Steve, I deserve at least a $10,000 bonus.  I haven’t been home in weeks, and I pulled off a financing even you admit was unbelievable.”

I patiently explained that this type of miraculous event was the norm for startups. The engineers were pulling off miracles on a daily basis, we were all taking fumes for salaries, but our payoff will be when our stock is worth something.  Until then, tell your wife you’ll get $10,000 when hell freezes over. No bonuses in a startup. To his credit Jim said while he understood, he was going to hear about it at home for not being appreciated.

Dinner
Since our management team hadn’t met each others’ spouses, I thought the financing would be a great reason to get everyone together for a low key celebratory dinner.  We picked a restaurant in Palo Alto down the street from the company and got a private room.

We drank lots of wine, had a nice dinner and after the dinner plates had been cleared I made a speech about teamwork, startup, passion, commitment, blah, blah.

I then congratulated the outside firm that Jim had used in Japan. I had invited their CEO and his wife and handed him a check for their retainer bonus for their help in the deal. Jim kept glancing at his wife who was giving him frosty looks and was very clearly not happy.

The New Briefcase
I then announced that it was unfair that Jim shouldn’t go unrecognized for his hard work so I had an award for him as well. The atmosphere around Jim’s wife began to thaw.  I said, “Jim had carried the same old beat up leather briefcase he had since law school and I knew he wouldn’t trade it for anything but I think its time he had something more professional looking.  So Jim, on behalf of the company, we bought you a new briefcase.”

The look on both Jim’s face and his wife’s went from happy to disbelief, to “I can’t believe you’re working for this idiot” on his wife’s face to “I can’t believe I work for this idiot” on Jim’s face.

I said, “Your new briefcase is under the table by your feet.  Why don’t you just put it on the table.”  Jim rooted around a bit and found the briefcase and put it on the table. It was the ugliest and cheapest briefcase you will ever see.

Everyone was now looking slightly embarrassed, all thinking that perhaps they had the most obtuse CEO in Silicon Valley. I thought Jim’s wife was going to throw a steak knife across the table.  I made another speech about how great Jim was and then sat down and said, “Lets get the waiter for coffee and desert.”

The ugly briefcase with its implicit statement sat on the table virtually steaming.

Legend
“Oh, one more thing,” I said.  “Jim, can you open up the briefcase and dump the papers on the table. We should clear out the stuffing so you can put your papers from your old briefcase in it.”

With almost an audible sigh, Jim unlatched the briefcase, held it upside down over the table and dumped out the contents.

In slow motion, dollar bills began to tumble out of the new briefcase.  And they kept coming out.  And they started making a pile of bills in front of Jim and his wife and the rest of the executive staff.

15,000 dollars in dollar bills.

Jim’s wife started crying.

I said, “Extraordinary work in a startup is the norm, but you performed even beyond my expectations. In my startups that’s worth recognizing.”

Rewards for extraordinary effort became part of the company’s legend.

Epilogue
Lest you think only salespeople are motivated by cash in a startup, over the life of the company we sprung the same surprise on engineers who did deliver the impossible. And at Christmas we gave out hundred dollar bills to each employee. While this small token of appreciation would have been dismissed if it had been a check, it had our engineers showing these bills to their friends in other companies.

In three or so years these cash incentives added up to no more than $50K. While everyone understood the theory that we were working to make the stock valuable, the cash reminded them that we cared and noticed.

Lessons Learned

  • Cash has a much greater affect than a check.
  • Awards for critical contributions can make a lasting impact.
  • Small amounts spread through the company can be a great motivator.
  • Done correctly it turns incentives into legends.

Filed under: Family/Career/Culture, Rocket Science Games | 16 Comments »

Someone Stole My Startup Idea – Part 1: Are Those My Initials?

Posted on December 3, 2009 by steve blank

In my 21 years of startups I’ve had my ideas “stolen” twice.  Once it almost mattered. This is about the time it didn’t.

Worries from the garage
One of the worries I hear from entrepreneurs (not just my students) is that Customer Development means getting out of the building and sharing what you are working on.  What if, gasp, someone steals my idea?  Then all my hard work will be for nothing.

This actually happened to me twice in my career.

The first time was at Rocket Science Games. I was positioning the company as the second coming of the video games businesses at the intersection of “Hollywood Meets Silicon Valley.”  This was a great positioning, it helped us raise lots of money and get tons of press.  I had a wonderful set of slides that illustrated (to me) this inevitable trend. At the end of the presentation was one “uber” chart I had labored over for months which laid out all the converging trends in the industry. I used it in all presentations and gave it at industry conferences.

Are those my initials on the slide?
Fast forward nine months. My co-founder, head of business development and I were in Japan raising money. We were sitting in the conference room of a large well-respected media firm when their CEO breezed in to give us an overview of who they were and how forward thinking their firm was. I thought highly of this firm and was in awe of their content and films so I was a bit blown away when the CEO got to the finale of their presentation. It was, as he explained, the sum of their strategy and strategic thinking for online media.  And the slide was….

My slide.

Not a summary of my slide, or a Japanese copy of my slide, but my actual slide. I stood up from my seat, and walked around the boardroom table to get closer to the screen just to be sure. The CEO was beaming at my interest in the details of the slide. Examining the slide, I pointed to the bottom right and said to our translator, “Tell him my initials are still on the bottom.” The interpreter’s face went white, and after a lot of “I can’t tell him that,” he did.

We weren’t sure if we should feel insulted or complimented, but after a few deep breaths (and a lot of kicking under the table by my head of business development) my smart VP of business development used it as an opportunity to point out how honored we were that there was an obvious strategic alignment between the two companies. (I sat there smiling tightly.) Given the potential for a cross-cultural meltdown all parties behaved politely.  The CEO turned out to be a very nice guy and rented a big bus to take his staff and all of us sightseeing, dinner and drinking around Tokyo. (I’m sure when he got back to the office he was handing out a personalized knife to the executive on his staff who had borrowed my slide.)

In the end, the CEO couldn’t get his board to give us the cash in exchange for the Japanese distribution rights and some equity. We ended up raising money from Sega.

I heard later that the slide disappeared from his presentation.

—–

The next time one of my ideas was “borrowed,” it was a little less benign and more like the nightmare founders fear.  More in the next post.

Lessons Learned

  • If you present slides publicly, assume everyone including your competitors will have them.
  • If you present slides privately, assume a high probability that your competitors will acquire them
  • Do not put your trade secrets, proprietary algorithms, patentable technology, secret sauce, etc. on presentation slides – ever.
  • That still leaves you tons to talk about in a first and even second meeting.
  • For slides that contain diagrams or drawings that you created, make sure your initials and date are on them.

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Filed under: Rocket Science Games | 15 Comments »

Rocket Science 5: Who Needs Domain Experts

Posted on July 16, 2009 by steve blank

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.”

loadstar

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.”

Hindsight
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.

Interest Alignment
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.

Customer Development
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.

Lessons learned?

  • 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.

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Filed under: Customer Development, Rocket Science Games | Tagged: , , | 8 Comments »

Rocket Science 4: The Press is Our Best Product

Posted on July 13, 2009 by steve blank

At Rocket Science while my partner Peter was managing the tools and game development, I was managing everything else. Which at this stage of the company was marketing and financing.

Our “Hollywood meets Silicon Valley” story played great in Silicon Valley, they ate it up in Hollywood, and the business press tripped over themselves to talk to us.  The story had universal appeal, and we spun the tale and keep the buzz going.  It worked. Judging by the ink we had gotten, we were the hottest company in the game business, with stories in Fortune, Forbes, Variety, The Hollywood Reporter, and the cover of Wired magazine. Yet we hadn’t shipped a single product.

While it felt wonderful at the time, this was a very bad idea.

Wired 2.11 Cover

Everyone Else is an Idiot
The theme of our press blitz was all about how we were going to show the old tired game companies the right way to make video games. Our press infuriated the established companies who had spent years building games that sold well, but had zero press recognition.  (They all accurately predicted our demise because of our lack of game expertise.)  Ah, the arrogance of inexperience. Fortunately I’ve never been good at lying, to be effective in communicating a story I truly had to believe in what I was saying.  At the time I was a true believer that Rocket Science was going to change the gaming world. The positive effect of the tidal wave of press was as a door opener for us to raise money from corporate partners.  Companies in the entertainment business around the world knew who we were, and were interested in meeting us, if only to see what the hype was about. Our VP of Business Development had no problems getting meetings and fund raising was easy.

The Digital Dream Team
Way before the Internet phenomenon, we had created “Rocket Science the brand” that was much bigger in size and importance than Rocket Science the company. One magazine called us the “Digital Dream Team”, young, edgy and hip, and by the looks of the company (great building, nice furniture, and well dressed 20-year olds) we were trying to live up to the reputation.  All this activity occurring before we actually shipped a product.  We were larger than life, but as one potential investor told us, “You guys are all hat and no cattle.”

Believing Your Own BS is Toxic
Lots of noise and smoke before a product ships seems to be a toxic byproduct of enthusiastic entrepreneurs. Every generation of new technology seems to find a willing audience in naïve journalists and eager readers.  However, when the smoke clears the surviving companies are more than likely the ones that focussed on execution, not on creating a cacophony of press releases. If Rocket Science wasn’t a clear enough lesson in the danger of premature enthusiasm, the dot-com bubble that followed should have been. The only difference between us and the Internet bubble that would follow was that we did branding on the cheap by creating our image with public relations, whilethe dot-bomb era was to do it by spending enormous sums on advertising (those large venture rounds had to get spent somewhere.)

Hindsight is wonderful.  For years the one solace I was able to take from the Rocket Science debacle was that I had got the branding right. Then I watched the criminally expensive dot-bomb-bust branding activities to see how futile and wasteful it was to brand a company before it has shipped products.

To a Hammer Everything Looks Like a Nail
In hindsight my failure was that I executed to my strength – telling a compelling story – without actually listening to customer feedback.

It wasn’t that I didn’t know how to listen to customers.  It wasn’t that I didn’t have a smart VP of Marketing who was getting early feedback from customers and screaming that the games didn’t match the hype.  It’s that as CEO I was too busy talking to the press and raising money to hear customer comments directly.

I had outsourced customer feedback and ignored the input. In fact, hearing input that contradicted the story I was telling created cognitive dissonance.  So while the words may have passed through my ears I couldn’t “hear” it.  Not being able to hear negative customer input is an extremely bad idea.

Out of the Ashes
A few of the key tenets of Customer Development, came from the ashes.  The Customer Discovery lessons of “get outside the building and test your hypothesis with customers,” and “the founders need to hear the results,” came from this debacle.

The Customer Validation lesson of, “no formal launch until you have early sales validating the product and sales process” was also born here.  Given the lukewarm feedback we were getting from potential customers and channel buyers we should have dramatically dialed back the hype until the follow-on games could match it. Given the talented people we had, there’s no doubt they would have done so.  Instead the huge mismatch between expectations and reality of our first games diminished the brand and demoralized the company – we never recovered.

Lessons Learned

  • PR is not a product- it is a demand creation activity to fill a sales channel
  • The product needs to come close to the hype
  • Fire the CEO who insists on press and PR before they understand customer feedback
  • Branding is a process that should happen after you have customers

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Rocket Science 3: Hollywood Meets Silicon Valley

Posted on July 9, 2009 by steve blank

What do you mean you don’t want to hear about features?
I was now a CEO of Rocket Science, and having a great time building the company (more about that in future posts.) Unfortunately, while I had gone through phases of video game addiction in my life, in no way could I be described as even a “moderate hard-core gamer,” which ruled me out as a domain expert.  So I got out out of the building to meet and understand our customers and distribution partners. I remember after a month or two of talking to 14-22 year old male gamers (our potential target market,) I realized that for the first time in my career I had no emotional connection to my customers or channel partners.

I was about 90 days into the company when I began to realize there was something very different about this business. In previous companies I could talk about technology details and how the product features could solve a customers problem. But people didn’t buy video games on features and they weren’t looking to solve a problem.  I was in a very, very different business.

I was in the entertainment business.

There couldn’t have been a worse choice for CEO in Silicon Valley.

Alarm bell one should have started ringing – for me and my board.

Rocket Science logo

Hollywood Meets Silicon Valley was an Oxymoron
A key premise of our new company was that our video compression and authoring technology would revolutionize how games were made and played. We believed that by putting full motion video (i.e. movies) into video games we could tell stories, build characters, have narratives and bring all the 100 years of craft and cinematic experience of Hollywood to the sterile “shoot and die” twitch games that were currently in vogue.  (This wasn’t just some random Silicon Valley fantasy. My partner had convinced several major Hollywood names that this was the inevitable consequence of the merger of Hollywood and Silicon Valley.  And at the time it was a plausible scenario.)

But in reality our passionate belief that video would transform gaming was just our hypothesis. There was zero proof in the marketplace that was the case. And we weren’t going to be bothered to go out and prove ourselves wrong with facts.  (Why should we – our VC’s had already told us what geniuses we were by fighting to even get into the deal to fund us.  Never mind that no one on our board was in the game business or even played games.)

Alarm bell two should have started ringing – for me and my board.

Swing For the Fences
Since we were so smart we were going to ramp up and build not one game, but an entire game studio based on this hypothesis.  Why shouldn’t we.  Doing one game and seeing customer reaction meant a) acknowledging that some of our assumptions might be wrong, and 2) wasting time.  We were all about scale and swinging for the fences.  That’s what VC funded companies do, don’t they?

Alarm bell three should have started ringing – for my partner and me.

Tools Are the Not the Product
We were going to build an easy to use authoring system that would revolutionize how games were made. (My partner had convinced several of the key members of the Apple Quicktime team to join us.) Our tools group became as important as our content group. Unfortunately, the market was going to remind us that games are about game play.

Customers don’t care about your tools regardless of what business you’re in. Customers of software applications don’t say, “wow, elegant code base.” In movies theater-goers don’t leave talking about your cameras, just whether they were entertained, and in restaurants diners don’t care about your cooking implements, what matters is what the food tasted like.  The tools may provide efficiencies, but what customers care about is your final product. (Later on, way too late, we’d remind ourselves it’s the game stupid.)

Alarm bell four should have started ringing louder for me.

Lessons learned

  • Never, ever, start a company when you’re not passionate about the company, product and customers
  • Always validate your key assumptions on what makes your company tick
  • Swing for the fences is your VC’s strategy.  Make sure it is yours.
  • Don’t confuse your passion for your tools with why your customers will buy your product.

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Rocket Science 2: Drinking the Kool-Aid

Posted on July 2, 2009 by steve blank

Sometimes faith-based decisions can be based on too much faith.

Entrepreneur-in-Residence
After SuperMac I had been approached by one of our venture investors to be an entrepreneur in residence (EIR), a Silicon Valley phrase which says one thing but means another.

To an entrepreneur, being asked to join a venture firm with an Entrepreneur-in-Residence title means you have been tapped on the shoulder by the VC gods. It means you get to sit at a venture capital firm (some even pay you for the privilege) and stay until you have come up with an idea for your next company or have joined a company you’ve met as they passed through the VC’s offices.  Depending on the size of the venture firm they may have one to three EIR’s who stay an average of a year or so.  It really means that the VC’s would like to own a piece of you.

To a VC it’s a cheap investment, and if they somehow don’t bind you to their firm, someone else will.  In reality an EIR is a set of wonderful golden handcuffs.  Of course no VC firm will come right out and say, “If you’re an EIR for us you can’t do your next deal with any other firm.”  Hmm… You’ve taken their money, eaten their food, sat in their meetings and you are going to take money from someone else?  They have your soul.  It sounded like a great deal. I had no idea what I wanted to do next, and would get paid to think about it?  How could it go wrong?  Little did I know.

Video Games
At SuperMac, Peter Barrett was the witty and creative 24-year old Australian engineer who had designed several of our most successful products, culminating with the software for the Video Spigot.  Now he wanted to go off start his own company. I offered to introduce him to the firm whose Entrepreneur-in-Residence offer I had just accepted. I asked Peter what kind of company he had in mind and was surprised and dismayed by the answer, “I want to make video games.”  I remember thinking, “What a disappointment one of the smartest engineers I know and he is going to waste his time making games.”  I didn’t give his video game idea another thought. I set up the meeting for him, and at the request of the VC who was going to see him, agreed to sit in when they met.

It was a Friday and we showed up at the VC offices on Sand Hill road. Peter had no slides, and I had absolutely no idea what he was about to say, all I knew is that he wanted to talk about something I was utterly uninterested in – video games.

Henry the Vth
To this day, the VC and I still believe either Peter made what was the single most compelling speech we have ever heard or he had slipped something funny into our water.  As Peter began to speak extemporaneously our mouths slowly fell open as he described the video game market, its size, its demographics, the state of the technology, and the state of games. He took us through a day (and a night) of a hardcore gamer and told us about the new class of CD-ROM based game machines about to hit the market.

Peter described the first company in which “Hollywood meets Silicon Valley” and we were enthralled. When he elaborated how CD-ROMs were going to change both the nature of gaming and the economics of the content business, we were certain he had a brilliant idea and by the end of the meeting convinced that this was a company would make a ton of money.

By the end of the meeting the seasoned venture capitalist and I had signed up.

While this all might sound farcical now, a little historical context is in order.  The CDROM content business in the early 1990’s was one of the many of the long line of venture capital fads.  If you were a “with it” VC you needed to have a “Content” or “Multimedia” company in your portfolio to impress your limited partners – educational software companies, game companies, or anything that could be described as content and/or Multimedia.

There Ought to be a Law
Nowadays there are laws that allow you to back out of a time-share condo contract, or used car purchase after seven days because even the government believes there are times when grown adults lose their minds and stand up and yell “Yes I believe, sign me up!”  There are still no laws like that in the venture capital business.

A month later, after raising $4 million dollars (we literally had VC’s fighting over who else would fund us), Peter and I started our video game company, Rocket Science Games.

In reality I had been hired as CEO and the adult supervision and administrative overseer of one of the most creative talents in the valley. And I would get to use my marketing skills at generating an industry-wide reality distortion field to make this company look like the second coming.

I was going to find out why this wasn’t a good idea.

Lessons learned

  • Your level of due diligence should be commensurate with your position in the company and proportional to the reality distortion field of the presenter
  • Never join (or start) a company whose business model you can’t draw
  • Subjects in which you are not a domain expert always sound exciting
  • Sleep on any major decision

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Rocks in the Rocket Science Lobby

Posted on June 1, 2009 by steve blank

In 1994 Rocket Science Games was the only video game company with a rock in its lobby.

We had moved our game development facilities from Berkeley and Palo Alto and consolidated into one building on Townsend Street in the “South of Market” neighborhood in San Francisco.  (We’re were just around the corner from the future home of SF Giants AT&T Baseball Park, which then was just a rubble-strewn parking lot in a sketchy neighborhood.)

Since we were the hip, new, edgy, “Hollywood meets Silicon Valley” video game company (more about “big hat, no cattle” startups in subsequent posts,) our office obviously had to match the image.

Our receptionists’ desk was built on the wing of a WWII P-51 fighter plane, and the rest of the office décor matched.  All that is, except for our lobby, as our offices were on the 4th floor. When you got off the elevator, you faced a non descript corporate-looking set of walls.

This was about the time Christies and Sotheby’s were starting to auction Soviet space program artifacts, and I was thinking that perhaps a spacesuit in the lobby would be appropriate given our name.

One day, out for a walk at lunch, enjoying one of my favorite activities – watching them tear down the Embarcadero freeway (San Francisco urban upgrade post 1989 earthquake,) – I realized I was looking at the answer.

And it was much, much better than a space suit.

A week later as our employees came up the elevator there was a Lucite case on a pedestal with a single grey rock, lit with a single spotlight, on a velvet pillow.  In front of it was a brass plaque that read:

“Moon rock, Apollo 18, July 1973 – Copernicus Crater.”

Apollo 16 Moon Rock

For the next few years, people from all around South of Market would come by the Rocket Science Games lobby to see our moon rock. It added to the mystique  of the company – which helped with raising money and getting press ink. Everyone agreed that having our own moon rock was way cool.

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Postscript: In all that time, not a single person who admired the moon rock questioned its provenance or authenticity.  A bit surprising considering the intersection between geekdom and space.  Maybe it was just too much ancient history.

NASA’s moon missions ended at Apollo 17.

The rock was a piece of rubble from the Embarcadero Freeway.

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Only over time would I realize it augured the future of the company.

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