Rec Room Part II (with CEO Nick Fajt)

[0] Ah, okay, good to know.

[1] So we should not ship tomorrow then.

[2] Don't do it tomorrow.

[3] Please wait until Wednesday.

[4] Yeah.

[5] Good day.

[6] Glad we asked.

[7] I'm going to send you the press release.

[8] So you just, it has the embargo at the top.

[9] Welcome to Season 8, episode four of Acquired, the podcast about great technology companies and the stories and playbooks behind them.

[10] I'm Ben Gilbert and I'm the co -founder and managing director of Seattle -based Pioneer Square Labs and our venture fund, PSL Ventures.

[11] And I'm David Rosenthal, and I am an angel investor based in San Francisco.

[12] And we are your hosts.

[13] In 2018, we did an episode on the early stage Seattle startup Rec Room.

[14] Founder and CEO Nick Fight joined us at the time to talk about their seed round that they had raised from Sequoia.

[15] At that time, they were a popular app in the slow -to -develop VR landscape with a couple hundred thousand users and zero dollars in revenue.

[16] Earlier today, Rec Room announced in the Wall Street Journal, that they had raised $100 million at a $1 .25 billion valuation from existing investors Sequoia and Index Ventures.

[17] They are now a product that spans across many platforms from, of course, virtual reality, but also to Xbox, PlayStation, and iOS.

[18] They have had astonishing growth numbers over the last year, where they grew revenue 660%, and now have over 15 million lifetime users, two million of which are creators on the platform.

[19] Ooh, and we knew them when.

[20] Indeed.

[21] The background of all of this is that 2020 was a heck of a year for the entire metaverse category.

[22] You have Epic and Fortnite's growth.

[23] They're currently rumored to be raising at a $28 billion valuation.

[24] And of course, Roblox's Blockbuster IPO that they pulled last December because there was too much demand and instead raised private capital and then did their direct listing this month and are now valued at $40 billion.

[25] The price was too high.

[26] It was too high.

[27] You could say it's been a transformative year for rec room and the entire industry to say the least.

[28] So today we are back to tell part two of the rec room story and again with the best person in the world to join us, Nick Fight.

[29] So Nick, welcome back to Acquired.

[30] Thanks for having me back.

[31] I'm I'm excited to dive back in.

[32] This is great.

[33] I think you are the first repeat guest on the main show.

[34] Wow.

[35] All right.

[36] Cool.

[37] Love it.

[38] Yeah.

[39] And over so many different stages of your company.

[40] I mean, the premise of part one was how to raise your seed round with this guy we know who's raised it from Sequoia.

[41] And he's got this cool company and who knows about this very speculative space.

[42] And here you are like a mature grown -up company back to tell all of us how to do it.

[43] And it was just a straight line from those two points.

[44] There was no hardship in between, yes.

[45] As it always is, especially in consumer entertainment, I'm sure.

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[51] Okay, listeners, now is a great time to thank one of our big partners here at Acquired, ServiceNow.

[52] Yes, ServiceNow is the AI platform for business transformation, helping automate processes, improve service delivery, and increase efficiency.

[53] 85 % of the Fortune 500 runs on them, and they have quickly joined the Microsofts at the NVIDIAs as one of the most important enterprise technology vendors in the world.

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[55] They're also a major partner of both Microsoft and NVIDIA.

[56] I was at NVIDIA's GTC earlier this year, and Jensen brought up ServiceNow and their partnership many times throughout the keynote.

[57] So why is ServiceNow so important to both NVIDIA and Microsoft?

[58] companies we've explored deeply in the last year on the show.

[59] Well, AI in the real world is only as good as the bedrock platform it's built into.

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[64] It's pretty incredible that ServiceNow built AI directly into their platform, so all the integration work to prepare for it that otherwise would have taken you years is already done.

[65] So if you want to learn more about the ServiceNow platform and how it can turbocharge the time to deploy AI for your business, go over to ServiceNow .com slash Acquired.

[66] And when you get in touch, just tell them Ben and David sent you.

[67] Thanks, ServiceNow.

[68] And lastly, I will keep this brief today.

[69] If you are not a limited partner, you should become one.

[70] We had a delightful LP call with so many of you last week and we're looking forward to more to come.

[71] You can join at Acquired.

[72] slash LP, and we can't wait to see you there.

[73] David, Nick, let's dive in.

[74] Let's do it.

[75] I'm ready.

[76] Let's do it.

[77] Okay, so as Ben said, last we left you, you guys, the plucky wreck room crew.

[78] It was February 2018.

[79] You'd raise this great seed round from Sequoia.

[80] You'd also raised an internal A from Sequoia that I think you didn't, hadn't announced by then.

[81] Everything seemed to be great.

[82] But I was actually wondering, before we get into what's happened since, we've, didn't talk as much about the sort of real founding story of Rec Room back then.

[83] And I was wondering if we could revisit it this time of how you guys actually came together out of Microsoft and started this company.

[84] I think it'll be really good context for entrepreneurs out there to understand maybe that there's not always a big grand plan to become a billion dollar company from the beginning.

[85] Yeah.

[86] I mean, I think the founding stories you normally hear, it's a very cleaned up narrative of like I had this vision or I was doing this mundane task and and I this light bulb like went off and and that was not true for us.

[87] So I was working on the HoloLens team at Microsoft and I had been working on it for I don't know, maybe like four or five years and it was right before the first headset launched.

[88] My team was really focused on kind of consumer products for HoloLens.

[89] So like video games essentially like what kind of games are people going to play at HoloLens?

[90] And then as the HoloLens team progressed, it really shifted far away from consumer towards, you know, less, let's shoot aliens in your living room to let's help Boeing assemble jet engines.

[91] It was, it really went enterprise and military.

[92] And it left my team that I was working with as, you know, kind of irrelevant.

[93] And a bunch of us got reorged.

[94] So we had this team.

[95] We all loved working together.

[96] And then the team got, where'd you get reorged to?

[97] I got reorged to the Microsoft Edge browser.

[98] So, and man, it was so, it was so difficult because I was like, I've been working on the future for like four or five years and now I'm working on Microsoft's second browser that I don't quite understand.

[99] Like, what's wrong?

[100] Why can't we fix the first one?

[101] Like, why is there another one?

[102] So, you know, I found I was moving over there.

[103] And I was just so passionate about the AR and VR space.

[104] I wanted to stay in that space.

[105] And so as soon as I found out there was going to be a reorg, I actually applied to like every company.

[106] that was doing stuff.

[107] I applied to Oculus.

[108] I applied to Magic Leap.

[109] I applied to Google.

[110] I think I applied to like Unreal or Epic, because I knew their engine was focused on it.

[111] And I got turned down everywhere.

[112] So no one, no one wanted to hire me. And I was like, man, I feel like I have this valuable skill.

[113] Like, shouldn't somebody want to hire me?

[114] Not even Magic Leap.

[115] Magic Leap, not a, not a fan, yeah.

[116] And I think there were a couple other people that felt like I did.

[117] So shortly after this reorgan, I don't know, maybe like 30 to 50 people.

[118] people left Microsoft and were just like, you know, I don't know what's next, but it's not going to be groove music or it's not going to be the calendar app, you know?

[119] And to set some context, Microsoft had been experimenting with what would become the HoloLens for like seven, eight years.

[120] I mean, it was, it predated the work done on Oculus, right?

[121] Yeah, yeah.

[122] I mean, I think I, I think my first demo of HoloLens was in like, you know, 2011 maybe.

[123] Yeah, super early.

[124] So very, very early.

[125] And I had been, working on it for years.

[126] But, you know, I think when Microsoft first started it, they saw it as a successor to connect.

[127] And then over time, it was like, well, you know, enterprise makes a lot more sense given the use cases we're able to light up right now in the expense.

[128] So, you know, in Microsoft's defense, like everything they did made a lot of sense.

[129] Like, this was not ready to be a consumer product.

[130] It was way too expensive.

[131] And the use cases that we could light up at the time just didn't make sense.

[132] And so having a bunch of game devs focused on this, like it didn't make any sense.

[133] So a bunch of the game devs left, you know, a couple of them formed various companies that kind of focused on VR, and Against Gravity happened to be one of them.

[134] So me and five other people came together to form a company called Against Gravity.

[135] And to just give you an idea of how little of a plan there was, like, the reason the company wasn't called Rec Room was we didn't have the idea of Recrum.

[136] We had no idea.

[137] We actually thought maybe we could leave, and like maybe Microsoft would like let us keep developing stuff for HoloLens.

[138] We couldn't get a dev kit.

[139] So, great.

[140] So not only did you not have the idea for Rec Room, you had no idea.

[141] The plan was just, we like working together, we're going to get together, we're going to do something.

[142] Yeah.

[143] So as I said, I think like 30 or more people left.

[144] And a bunch of them were like, oh, you know, I'm going to form this company.

[145] We're going to form that company.

[146] And then against gravity just happened to be one of those offshoots.

[147] The name against gravity actually is a demonstration of how little of a plan we had.

[148] The HoloLens headset internally was codenamed gravity.

[149] It was so heavy.

[150] Like, you know, they were called like gravity A units, gravity B units.

[151] And so we were just like, well, we don't know what we're doing.

[152] We know we're moving away from that.

[153] And I guess we'll call it against gravity.

[154] But we were like actually still very excited to go build HoloLens software.

[155] We just couldn't get a hold of a HoloLens.

[156] Some friends at Valve hooked us up with an HTC V. And we were like, okay, well, hey, we got a piece of hardware.

[157] Why don't we start messing around on this thing?

[158] Wow.

[159] That's so cool.

[160] I think honestly all of us thought like, oh, Microsoft will eventually get back in the consumer AR space and we'll just go back there.

[161] But in the interim, we'll do this.

[162] So yeah, I would say there was like not a ton of intentionality there.

[163] It was more like maybe some egos or bruise.

[164] And it was just like, well, I guess we'll take a chance and try something different.

[165] So I got to ask, you know, we're going to tell the whole story about either everything since your seat round and how you've gotten to here.

[166] to ask sort of an analysis question up front, do you think that figuring things out as you went in those early days, has that served you well in getting to hear?

[167] And obviously, most other VR companies that were started around then are certainly not doing what you guys are doing or as well as you guys are doing.

[168] Or would you say it's like, no, that was just how we started, but things have changed?

[169] I think it certainly gave the culture of the company a specific flavor.

[170] I wouldn't claim that it's like the right choice, but it was our choice.

[171] And I think it's led the rest of rec room to have a very improvised, you know, style.

[172] We don't get too attached to ideas because there wasn't, you know, ever one early on that I think we were really, really attached to.

[173] I think we had seen some challenges at HoloLens about like, you know, we kind of all envisioned this like metaverse world where, you know, maybe, you know, Different people are authoring rooms and objects, and they all work together.

[174] Like, we did see that problem.

[175] Like, at HoloLens, there was an app that some people were working on that was like a travel app.

[176] Like, you'd go to like Machu Picchu or the Coliseum.

[177] There was another one that was like...

[178] Yeah.

[179] There was like another one that was like, um, I think it was like called Hollow Skype.

[180] And so you could like chat with somebody who was like maybe hundreds of miles away.

[181] And it was really cool.

[182] And there was a final one, which I don't think many people saw, but it was like a pet.

[183] And it was like this like little virtual dog and you could teach you tricks.

[184] and stuff like that.

[185] But none of this worked together.

[186] Like, we couldn't be chatting on Skype and then, like, go to the Coliseum and then be like, let's let our pets run around the Coliseum.

[187] Like, it was one at a time.

[188] So you, like, saw your pet, or you saw the Coliseum, or you saw this person.

[189] And so that kind of highlighted for us, like, huh, you know, there's something about the app model like that doesn't work in this space.

[190] And so I think that got the gears turning a little bit of like, maybe we could build like a Wii sports version of it that was like, you know, kind of express our idea.

[191] But I would say, like, there was definitely no, like, grand world conquering plan.

[192] It was like, how do we survive for a little while?

[193] Well, and Nick, like, just to put a fine point on what you're articulating here, when you were saying that maybe the sort of app style doesn't work as well in this, you know, metaverse type world, can you help us understand what rec room is for folks who didn't catch you the last time around and maybe especially articulate this notion of, of like, it is just one big world.

[194] Like, how did you come to that and what does it mean?

[195] I mean, very gradually, and I wouldn't say I came to it.

[196] You know, I would say that there were many, many people on the team that contributed a lot of, you know, there were a lot of tiny choices that kind of helped build where it is.

[197] But yeah, so rec room, backing all the way up, rec room, it's a virtual universe.

[198] It's made up of millions of different rooms.

[199] And all these rooms are unique experiences.

[200] So there are Battle Royale islands.

[201] there are escape rooms, there are fashion shows, you could have a family reunion in Rec Room, you could have a book club, you could have a live performance of Hamilton, like all of these things have been done.

[202] So Rec Room is just like a very flexible environment where you can come together in a 3D world and users get to build these rooms and they can build and publish them.

[203] And the way that they build is very unique.

[204] Like rather than building in a game engine, you're just building kind of the way that you would in Minecraft.

[205] where you're like in the game manipulating objects and you can do it socially so you can have up to 40 people in a room that are like chatting with each other and talking about the room that they're creating maybe you want to build like a castle crashers game and i can be like then why don't you go build the moat and like david go build the castle and i'm going to work on the scoring and put a little goblin army over here like we can just have that creation experience together and so it makes creation very accessible to people even if they don't know how to code even if they don't know how to 3D model.

[206] There's unlike, say, Roblox, which we'll talk about more as we go, there's no separate creator app.

[207] It's all one world.

[208] Yeah, Roblox has another app called Roblox Studio, which is where you go and build.

[209] And it kind of looks like unity or unreal.

[210] And it's a really powerful tool set.

[211] It does presuppose some knowledge about like, hey, you understand scripting and like what prefabs are.

[212] And you might need to manage some like network authority or something.

[213] Rec Room, you're just kind of like building.

[214] Minecraft style.

[215] And then when you press publish, we're like, great, we put your, your room is now accessible on phones and PCs and Xboxes and PlayStation's and VR headsets.

[216] We'll just like host it for you and you don't submit to like a cert body or anything like that.

[217] So it's just this, it's like the Wikipedia of games.

[218] Like there's just like a lot of people contributing to this world and new rooms are constantly popping to the top of like a new hot list that people are discovering.

[219] You can follow creators to see what content they've created and get notified.

[220] when they build new stuff.

[221] And then we've started letting users monetize in their rooms.

[222] So we have an in -game currency that users can charge currency inside their rooms.

[223] And if they amass enough of the currency, we'll actually pay them out for the currency.

[224] And so we've got, you know, like 14, 15 -year -old kids in there who are earning 6, 7 grand a month in rec room.

[225] And, you know, we're trying to scale that up.

[226] We think that can be like a lot, lot bigger.

[227] But I think it just gives you an idea of like the accessibility of the creation tools are, you know, it's really anyone can go in and, you know, realize the idea that's in their head, and they can really easily distribute it.

[228] Well, it shows up in the numbers.

[229] I mean, classically, the internet was, you know, 100 % of people consumed, and then 10 % of people commented, and then 1 % of people created.

[230] And that, those numbers haven't held exactly true for a long time as we've entered this social era, but that was sort of the old, old moniker.

[231] But like, you look at 2 million of the 15 million users that you have, our creators on the platforms, which are dramatically, higher percentage since they're able to author it right there in that environment.

[232] And, you know, I'm cheating a little bit because I, you and I went in and played and you showed me the maker pen and I got to like, you know, build my own little world.

[233] But like, it's remarkably easy to use tools like that to create.

[234] It's certainly a lot more accessible.

[235] And I think if you're the generation that grew up living on the internet, living in games, it's a very familiar medium for you to create.

[236] Yep.

[237] Yeah.

[238] Well, so let's dive into the history here a little bit.

[239] So you told me a moment ago that you publish across Xbox and iOS and VR headsets.

[240] Last time we chatted, you were just a VR company.

[241] So the VR boom didn't really arrive in the way that we were all sort of speculating and hoping.

[242] You know, how did that affect you as a company and how did the calculus of, hey, maybe we should have a contingency plan come about?

[243] Yeah.

[244] So, I mean, to give a recap, I think of the previous episode, like we raised a seed round in 2016.

[245] We had launched the app and it was doing pretty well for like a VR app.

[246] And so we were able to launch a seed round around that.

[247] And then a couple months later, after working with our investors, we had a good track record of evolving the product and finding growth.

[248] And so we were able to raise an A round from, from Sequoia as well.

[249] So it was just the same investor that did the A. That happened about nine months later.

[250] And we were just kind of keeping that secret as we kind of planned out what was next.

[251] When we chatted, you know, we had just rounded out holiday 2017.

[252] We had seen a lot of growth, like probably from October to December 2017.

[253] The app like five -axed.

[254] So like we actually, we were doing really well.

[255] It was kind of a weird situation.

[256] We had had all of this growth, but then we were looking out over 2018 and we were like, man, there are no headsets on the horizon.

[257] Are there any headsets in 2019.

[258] It was like, man, like, normally where people are shipping us dev headsets you know, 12 months ahead of time.

[259] And they're like, hey, we're going to do this in the holidays and like get ready.

[260] And we just had nothing.

[261] We were like, you know, like this growth is good, but this is not a venture scale business.

[262] And your growth was basically capped by the number of VR's headsets, right?

[263] Because you were a free app.

[264] So everyone would go, or a lot, you know, the majority of people who had a headset would go download you.

[265] So you were basically like, your growth was governed by the headset growth.

[266] Oh, 100%.

[267] So to give you an idea from, like, December 2017, for the next 24 months, VR did not grow, like, at all.

[268] So your market, no growth, zero percent growth.

[269] Totally.

[270] I think we were fortunate by, like, we sobered up and realized it, like, January.

[271] So credit to the team, I think it would have been really easy to be like, oh, just 5X, like, we're world beaters.

[272] Like, we're amazing.

[273] Keep doing what.

[274] But I think it was, oh, we just 5X and that's it.

[275] Like, this is not, there's nothing on the horizon for us.

[276] They're like, this is dark days here.

[277] So we need to figure out some path for more growth.

[278] And to that point, we had been building all the content ourselves.

[279] So rec room was a universe of rooms, but they were rooms that we were building.

[280] And there were only like maybe 10 or 15 of them.

[281] And we were good at building rooms.

[282] Like, I, you know, we really enjoyed it.

[283] It was really fun.

[284] We were building these like little quest where we're like, you're going to go, you know, battle space aliens with like laser blasters or you're going to like take to the high seas and you know battle armies of skeletons it was really fun we were building these like little kind of contained rooms and we're like okay well this is just not going to work anymore like we have to do something very dramatically different and so the the two ideas that i think we seized on were the community was so creative like the community was a really bending and breaking rec room to do other things like we'd hear stories where people were like oh yeah we went to like i just invited a bunch of my friends to go play you know disc golf you have a disc golf room and we just turned off the rule sets and we have like a little picnic in the park and we're like oh okay like that's it you know somebody else was like having murder mystery parties in one of the rooms they would just turn off the tool set and last last we chatted two people had actually gotten married yeah yeah totally yeah they have you know so but there wasn't like there wasn't really the systemized like creative community.

[285] We were sort of like, people are hacking the game to get it to do things that we hadn't intended.

[286] We're like, okay, well, what if we lean into this?

[287] What if we, what if instead of our rooms, it's their rooms?

[288] And what would it mean to kind of embrace this creativity?

[289] Like, people are going through all these hoops to build these, like, amazing murder mystery parties, but they can't save anything.

[290] And if you're not in the room with, like, the host, like, it doesn't work.

[291] So what would it look like if, you know, they could set up a room and they could publish, it and other people go there and have that same experience, even without the host.

[292] So that was sort of one of the big problems we started playing with.

[293] And then the second was we're like, all right, we've got to find growth outside of VR.

[294] And there was an app called a VR chat that had really started scaling kind of around the same time outside of VR.

[295] It had really found this like pretty devoted audience on PC.

[296] And we were like, okay, well, hey, there's, it has worked for someone.

[297] Someone was able to find a marriage between VR and a flat app that works.

[298] And And, like, that gives us confidence that we might be able to do it as well.

[299] So we really started to, like, lean into user -generated content and screens.

[300] That was kind of what we called.

[301] And at least you went to iOS next, right?

[302] That was your first flat -world experience.

[303] Our first flat -world experience was actually on PlayStation.

[304] Huh.

[305] So PlayStation and PC.

[306] Because you had gotten a bunch of uptake from the PSVR.

[307] That was probably your big growth holiday 2017.

[308] Yeah.

[309] PSVR was the big.

[310] 2017 growth spurt.

[311] And then we were like, okay, well, we're already on PSVR.

[312] Like, what would it mean to make it work on PSVR without the headset?

[313] And kind of like the same question for PC.

[314] So that summer, we like did this big unveiling.

[315] And we were like, all right, now you can have players from outside of VR.

[316] Now we're like mixing in your rooms with our rooms.

[317] And it was like dark days.

[318] Like the community was not happy about it.

[319] it was a big departure from what we were doing and I think there was a like a lot of hey we want this to just be what it was like we don't want this to evolve in the way that you're doing this and what was a downside to them of having someone nod in a headset coming in well I mean I think a lot of the users who who care deeply about headsets you know that kind of is its own community itself and so you know there probably was this like bonding element of people coming in on headsets now like you care about VR I care about VR like this This is great.

[320] We both care about VR.

[321] And like, that is a magical thing that we want to preserve.

[322] Like, we want to have VR rooms where these people that care about things can find people.

[323] I think the big mistake we made out of the gate was we were like, we're just done like one big community.

[324] We're just going to like dump everybody into the same rooms together, regardless of interest or intent.

[325] And that was challenging.

[326] Like, that was probably not the right move.

[327] The other challenge was like our user generated content tools were really, you know, they were in their infancy.

[328] And so the rooms that people were building were like not very high quality.

[329] Our belief was like, look, if we can shine enough light on them and there are the right incentives, like maybe eventually we can get them.

[330] But the moment that we made the shift, like it was probably pretty abrupt.

[331] So I think the thing that we learned, like, I think for, you know, two years, we were like, all right, let's, you know, we're going to be really iterative.

[332] We're going to experiment in public.

[333] Like, we're going to ship stuff and we're not going to be embarrassed like by it.

[334] We're just going to, we want feedback from the community.

[335] And I think we probably realize, like, there's probably like some metabolism, like that the community can, you know, evolve in this, at this speed.

[336] And we probably pushed it too hard then.

[337] So you guys are, this is right after we did our last episode, you guys are pretty deep in the Traffasaro at this point, right?

[338] Oh, yeah.

[339] I mean, like, from 2017 to like all the way through 2019, it was like, no one wanted to do any VR stuff.

[340] But the VR users were like very passionate.

[341] And so it was hard to explain to that group.

[342] It was like, yeah, like, we know you just want us to focus just on you, but, like, they're so, like, if we want to keep serving you 10 years from now, like, there's, we need to keep scaling this business.

[343] Yeah.

[344] And, you know, I think some people really understood that.

[345] They were like, okay, hey, in order to make sure, like, we weren't charging any money so there was no revenue coming in.

[346] So we were like, okay, like, I think if you're a startup, you have two lifebloods.

[347] It's either revenue or growth.

[348] And we didn't have any revenue.

[349] And we weren't going to find any growth in VR.

[350] So it was like, okay, well, we're either going to make this a $30 paid app, which I don't think that serves anybody well, or we need to go find growth outside of VR.

[351] Did you consider trying to get profitable?

[352] Were you like, okay, if we were to turn on monetization, how long would it take to find something that worked?

[353] How much could we actually cover our burn and get to like a zero net burn?

[354] You know, would our investors be on board with What does the calculus look like when you're sort of examining that as a potential?

[355] I mean, it's not an unreasonable question.

[356] I think once we look, the really bright spot for us was the user -generated content.

[357] We were like, this is going to take a long time to make it click, but like eventually, if we can take these VR creators, if we can scale their creations, if we can get them monetizing a user base that's at a mobile scale, they will be happy, we will be happy.

[358] this will be, like, a really strong business with great network effects, very scalable.

[359] And if we just pivot hard towards, like, we are going to try and extract the maximum number of dollars from the very limited number of users we have so that we're cash flow neutral, like, we're just not heading along that path.

[360] So I think we were just more comfortable being like, okay, hey, we think the promise land is really this user -generated content ecosystem where we're rewarding our best creators you know, for the amazing work that they're doing, that just looked different.

[361] So I don't know that we ever really looked at it.

[362] Were there example companies or products you guys were looking to as sort of like either inspiration or like a vision of what the promised land could look like?

[363] Like, I'm wondering, like, were you looking at something like an Instagram?

[364] We're being like, yeah, like if you can get this UGC flywheel going, or maybe even Roblox at that point in time, which it was starting to spend even though most of the rest of the world didn't know it yet.

[365] Yeah.

[366] I mean, I think, you know, we were definitely aware of Roblox.

[367] We were looking at probably a lot of stuff like YouTube and Twitch.

[368] We were like, okay, look, they have this creator class.

[369] They're able to reward the best of them.

[370] It creates really great incentives throughout the ecosystem where, like, the platform's not pestering you for money all the time.

[371] You're really only rewarding the creators that you care about if you're a consumer.

[372] And then the creators are really acting as wonderful evangelists for you.

[373] your app like you you shouldn't need to spend a whole bunch of money on marketing because you know the the creators will you can have creator led growth basically so we were looking i think twitch was like a really interesting one for us to to look at there yeah this may when it actually happened might come a little later with when you introduced rec tokens in the economy but one thing i know you guys did that i think was really interesting was incentivizing You had this problem where you had this very passionate user base, you wanted new behaviors out of them, you thought they were capable of doing these new behaviors and doing them well, but you had to incentivize them to do it.

[374] And so I think if I'm getting it right, when you launched rec tokens, you got rec tokens for accomplishing specific actions that you guys set up in the environment, right?

[375] Yeah, the economy has evolved.

[376] So David's referencing a thing called rec tokens, which is basically the in -game currency that we we use and you can use the in -game currency to buy things to like kit out your um avatar so you can buy shirts and hats and gloves and you can also buy virtual food we sell a lot of virtual food like root beer and pizzas and donuts and stuff like that and then people are buying those both from you and from each other right yeah and then creators can charge for things inside their room so you could build like a nightclub with like a VIP lounge and it costs some tokens to go in there or you know a fashion show and like different outfits cost different amounts of money or maybe you're in like some haunted mansion and you know creators are selling like flashlights and light ball or like and you know light bulbs or batteries or something yeah totally so people are doing all kinds of really interesting stuff with it it's it's a pretty flexible system but like if you look at where it is today like it went through a number of different stages of evolution to get to that point.

[377] For a while, we just had avatar items and we would, you know, you just did something good in the app.

[378] We're like, you leveled up or you, you made a friend or some action we cared about.

[379] Here's an item.

[380] We then started, we're like, okay, we're not going to give you items anymore.

[381] We're going to give you currency instead.

[382] And then there's a store with, with the items.

[383] And so you started getting used to like, okay, well, I've got the currency and like, what do I want to buy?

[384] And currency equals this much item.

[385] And then we unlocked an ability to buy the currency and then we turned off the ability to earn the currency except the ability for you to earn the currency then shifted to okay well you know you maybe not you can't earn it through leveling up necessarily but you can earn it through creation so you can create something you can't earn it from us yeah but you can earn it through other people finding value and what you do and that's not entirely true like there is still we do prints a good amount of currency every day to like stimulate demand right um you know so so we the little rec room fed in the yeah exactly we're like yeah quantum state of easing in rec room yeah so we're i mean we do print an amount of currency as well because you know we we do see behaviors we want to reward we're just probably a little bit more careful about the way that it works so that it's not um it's not an easy to game system you can't create like a thousand smurf accounts and like hoard the currency and then move it around and so for people familiar with games it sounds like what you had is you had only items and then you introduced a soft currency and then you took that soft currency, made it a soft and hard currency, and then made it basically exclusively a hard currency.

[386] And soft currency is currency you earn, hard currency is currency that you buy.

[387] Yeah.

[388] So if you looked at like a gaming textbook of like how to build an economy, Recrum did all the wrong things.

[389] Like you should never have, you should never have, you should never be crossing the streams of your hard and your soft currency.

[390] You shouldn't ever shift one to the other.

[391] I think we'd just have this.

[392] idea of like, okay, this is where we want to get to.

[393] Like, creators are making money.

[394] Like, that's the end goal here.

[395] And, like, what are the, like, if that's Charazard, like, we're at Charmander, how do we, like, evolve into that thing?

[396] Can I ask, this is a derivation, but a team question, once you realize you're going to do this, and as you're doing it, are you like, ooh, we should have, like, an economist at our company?

[397] Like, how do you, is it a PM?

[398] Who owns this?

[399] Clearly not since you broke all the rules.

[400] No, we've had, we really have, like, focused pretty hard on having generalists tackle as many of our problems as possible.

[401] So the team behind this, it was like, there's an amazing designer that had worked in mobile gaming for a while.

[402] There was an amazing dev lead that worked with me at HoloLens, and, you know, him and her worked on this problem over probably two years.

[403] like okay how like we have this currency we have this economy that doesn't match at all the goal that we want like how do we keep evolving it without and i think it was largely informed by our choice early on to like okay here's screenplayers here's user generated content and that that did not work like it was too much too fast and so for this one they were kind of like okay what are the stages we need to go through where the community will understand the incentives they will go they will be excited for each of the changes that we make and they were just really thoughtful about it and they carried it out very intentionally over the course of probably about two years and then shifting to kind of the creator side what kind of behavior do you observe like let's say I build a really successful haunted mansion and I'm selling flashlights when do people decide to keep the rec tokens that they've earned and when do they decide you know what this is a job for me and I'd like to make some cash on it.

[404] It's probably a scale question.

[405] You know, the currency, it's kind of like, I guess if you went to like a thrift store and you're like, I'm going to trade in some clothes and they're like, well, you can have this much in store credit or this much in cash.

[406] Yeah.

[407] It kind of depends on like what those numbers are.

[408] GameStop back in the day, probably currently.

[409] GameStop, kind of the same deal.

[410] Yeah.

[411] And so, you know, if you go in and you're like, hey, we'll give you $60 or $300 in store credit, at GameStop, you're probably like, well, I'm going to buy a couple more games.

[412] Give me the $300.

[413] If you add, you know, two zeros to the end of that, you're like, you're going to have, you know, $30 ,000 in -store credit or, you know, six grand.

[414] You're like, well, six grand sounds better, you know.

[415] Unless you want to be a real entrepreneur and start arbitraging and reselling.

[416] I mean, depends.

[417] Honestly, it's kind of like a capital allocation question, right?

[418] Like, if you're a creator, you're like, well, how much do I want to pull out of this business?

[419] versus keep reinvesting, because they can distribute those tokens to their users by incentivizing behavior?

[420] They can do, there's some element of that.

[421] They can basically place free gifts inside their rooms and they can pay for the gifts in advance and stuff like that to try and drive activity towards their rooms.

[422] So yeah, it really comes down to like, you know, what do you value?

[423] And how much of this currency do you have?

[424] One of the classic game economy problems is you will end up with users who, have so much currency they can kind of like ruin your economy and so it's me like billionaires yes and so like and the the challenge like and it's the same like a state tax sort of sort of challenge like the problem that they run into is like these people get tired of the game because it's like no fun anymore like I can buy everything so they'll just give their account to somebody else and it'll ruin the game for that person then too because like well they don't you know it's just like the game genie has been turned on and now everything's free.

[425] And so really what we're trying to do was like, okay, well, hey, some of these users are going to have Scrooge McDuck -sized piles of in -game currency.

[426] How do we pull that out of the system so that their incentives stay aligned with ours and they're not just like dropping, you know, their accounts?

[427] Do you think a fun name for an estate tax?

[428] No, we do not have.

[429] It is fascinating, though.

[430] I mean, very quickly, even with the most sort of simple mechanics, you quickly get to a place where, I mean, even David, like, this is the first time I've heard of rec tokens.

[431] David did a better job researching than I did.

[432] And my mind is racing on all the ways that I could game this thing.

[433] And I'm sure you just have, you have to very carefully consider.

[434] Ben's going to quit acquired and your new side gig is going to be scamming record.

[435] I mean, I think these systems are, well, I think you're going to see more of them in games.

[436] They are fairly complicated to set up.

[437] There are a lot of things to be mindful of, both from like, okay, you don't want to be a bank.

[438] you don't want to create a security, you want to adhere to, you know, know your customer laws and stuff like that.

[439] So there is a lot of complexity behind the scenes.

[440] And then also there's a whole bunch of complexity for like, okay, and how do you ensure you're not getting scammed along the way here as well?

[441] So that's why we have a fairly large team focus on that problem.

[442] And, you know, to date, it's worked pretty well.

[443] That's cool.

[444] So what is through these, you know, these three kind of like major, major things you've figured out since our last episode of multi -platform, UGC flywheel and creating this economy.

[445] What does the trajectory of the business and the company look like through this time?

[446] Like obviously, you'd raised between the seed and the A, it was about $15 million from Sequoia, right?

[447] initially how are you how are you living during those that trough of those trough of sorrow years you know where you didn't have revenue coming in fundraising more was probably going to be a challenge yeah i mean i think again you know going back to the roots of recrum and i don't think we were i don't think we had a normal founding story i don't know that we had normal founding ambitions and i don't think the people that we hired were like quote unquote startup people.

[448] I don't think they were folks from the valley that spent two years at a place, got their options, and then bounced to the next, hopefully, Facebook.

[449] So I think the people that we had hired to date were like, a love rec room, a love VR.

[450] I see the problem, like I see the challenge that we're facing.

[451] And it's an interesting set of challenges.

[452] So I think because we had sort of an unconventional founding, we had hired kind of unconventional backgrounds that were like, I'm willing to see this through the likely tough times.

[453] So we had no attrition during this point at all, which was really cool.

[454] Like, nobody left.

[455] Everybody was like, all right, I understand the challenges.

[456] And like, this kind of is painful getting yelled at by the community, you know, during these transitions.

[457] But like, we really do think it's in their best interest.

[458] Like, we really do think if we want this thing to still be around in five or 10 years, like, we have to go do this stuff.

[459] And so it's, it's, worth getting some some yelled at on Reddit if it means a couple years from now we can start having these creators earning like a ton of money like that's a really interesting world to go and live in and it's worth a little bit of temporary pain so and when you say the temporary pain if you think about the VR true believers obviously I'm going to flash us too far forward today but like the Oculus Quest 2 is out by all reports that's doing very well we at PSL Ventures we have portfolio company Big Box VR with a game called Population 1.

[460] They're seeing it, you know, it's been phenomenally successful.

[461] I think you know Chuchin, the CEO well.

[462] It's a great game.

[463] Yeah.

[464] They've built a lot of good stuff.

[465] They built Smashbox.

[466] Their engine is awesome.

[467] They're great.

[468] Yeah.

[469] And so like we could be at a little bit of an inflection point now where, you know, it's too soon to tell, but, you know, VR could be here in a major consumer way.

[470] And when you were thinking in the long -term best interest of these users who are VR diehards, were you thinking like, look, the long term for Rec Room is we will be a VR thing.

[471] And this is sort of the way that we survive in the meantime.

[472] And sure, it'll be multi -platform kind of forever now that we've taken the genie out of the bottle.

[473] But were you always thinking, like, the end -all, be -all will be VR.

[474] I'll put it this way.

[475] Like, there were a bunch of companies in 2018 that had built VR things and then pivoted to, we're not going to try and do cross -platform.

[476] We're just going to, like, VR is done.

[477] We're moving to, that was never a conversation for us.

[478] We were just like, we really love VR.

[479] Man, we really hope it's a thing.

[480] There's, there's not a ton in our power to make it happen.

[481] We certainly think like a cheaper device with better marketing and less cables that works a little bit better would do well, but you know, we don't know and we can't really affect that ourselves.

[482] But we never talked like, we never talked about like, oh, we're just going to do a hard pivot out of VR, even though almost everyone that, that I, you know, was chatting with in the VR space was just like, we're hard pivoting to like, you know, this new app.

[483] Enterprise SaaS.

[484] Yeah.

[485] Yeah, we're just, we're just totally doing a totally different thing.

[486] And we really wanted to like see the VR journey through.

[487] We just knew like, okay, if we exclusively focus on VR, either this is going to be like a six person team for two years while we wait, or we can go try and find growth somewhere else through user -generated content and through other platforms.

[488] And we think we can actually ultimately build a much larger business that, you know, at the end of the rainbow, it'll have a much larger reward for VR users as well, because it'll mean if they create content, instead of reaching just VR users, they can reach VR and Xbox and PlayStation and iPhone.

[489] And all of those users are potentially monetizable to them.

[490] And so their reward can just be so much greater.

[491] And then I think we started seeing like, I think there were like a lot of VR hardcore users that were like, okay, well, like I kind of didn't like this to begin with, but, you know, there is something nice about me just being able to hop into rec room like really easily and not move my coffee table out of my way and I can just check and see if users are in there.

[492] I can just check on my room real fast.

[493] And like I can now do that without like, or like honestly because all the headsets were getting old, we had a lot of users that were like, my entire social life is in rec room.

[494] my controllers broke, and I can't get HTC to fix them, but I can still hang out with my friends because I can still make it in here.

[495] And so I think there were a lot of benefits that people started seeing from it.

[496] It definitely was not apparent when we first did it.

[497] I think there were a lot of people that were like, I don't know that this is the right move.

[498] There's also another dynamic that I want to talk about you, that you explained to me a little bit ago that maybe you could talk about here, which is if you guys had said, You know what?

[499] We're going to fork this.

[500] And there's going to be the VR version of recrroom.

[501] And then we're also going to make the flat screen version of recrium.

[502] That would be fine.

[503] But the experience, what you can do, even in a flat screen environment, when your platform is architected for VR is so much more.

[504] And you explained it to be as sort of the difference of like in a video game in like Street Fighter or whatever.

[505] Like you punt, you hit a button and you punch in Rec Room, you punch.

[506] You know, or you jump or whatever.

[507] Yeah, I think, yeah, if you look at screen games, if you look at mobile games or you look at, like, keyboard, mouse, or controller, generally the behaviors that your avatar can do, they are finite.

[508] So they can jump or they can punch or they can pick up things or they can place things.

[509] But there is a finite number of them.

[510] There are N things that your player can do because there are an N combination of these buttons.

[511] For Recrum, because we started in VR, the player actions were always infinite.

[512] it was like, well, could somebody backflip?

[513] And it's like, well, we can't stop them, right?

[514] Like, if you're wearing a headset and you do a backflip, like, that can happen, right?

[515] Can players lie down?

[516] Well, yeah, definitely.

[517] Like, can players, like, juggle?

[518] Yeah, of course.

[519] And so we, like with the UGC system, we started seeing all of these rooms that were built around behaviors we had never anticipated.

[520] It was like, okay, well, this is an escape room where you need to, like, crawl under this thing.

[521] And, like, you know, while crawling.

[522] you know, you need to pull out a lighter to like light this candle and then the candle.

[523] And so it was like, well, okay, if we're going to make this work on mobile or if we're going to make this work on a keyboard and mouse, like we can't have a crawl plus like whip out lighter button.

[524] Like that's not going to work, right?

[525] Because we don't know these things in advance.

[526] We just need to build an avatar that's really, really flexible.

[527] And like you as the, you know, controller of that marionette, you need to be able to make this avatar do like damn near anything.

[528] And so I think it just led to a very different control schema than you see in most games.

[529] Like the way that you can kind of control your rec room character's hands, you have independent control over left and right hands.

[530] And you can make them do a whole bunch of wild and weird things like dance or like wave or, you know, all sorts of wild stuff.

[531] Which is so different than like, you know, almost everything out there at like Fortnite, like, you know, Fortnite's great.

[532] It's amazing.

[533] But like you hit a button, you jump.

[534] You hit a button.

[535] You hit a button.

[536] You hit a button.

[537] You dance.

[538] Well, yeah.

[539] I mean, where we're getting at here is there's, there was a reasonably easy path that's like fork it, squash it down to 2D, and then use the same input system that, you know, works on iPhone games.

[540] And then there's a harder one that's like, can we keep it all one world and let you do, I assume not all, but a lot of the same flexibility from a screen that you can do in VR.

[541] And I have to imagine that now that you've crossed that chasm and taken, you know, door number two, it pays off in all these ways of having a critical mass of people at all times in a single universe.

[542] Oh, totally.

[543] And I mean, there were many false starts along the way.

[544] Like, I think our original idea was like, yeah, let's just jam all this into like buttons.

[545] And then at some point it was like, oh my God, we've got like 40 buttons and alt buttons and shift and control buttons.

[546] And like, I was really adamant that the game on screens be third person for a while.

[547] Like, that was an example of like really bad design on my part because it made it really impossible for creators to, like, build a world that was cohesive.

[548] Because maybe they'd build, like, an escape room in VR, and they're like, well, I've played it in VR, and it works in VR, and then you go in on screens, and it was like, okay, well, I need to pick up this Post -it note and read this really tiny writing, and I can't do that because I'm in third person.

[549] And so that was, like, a dumb move on my part.

[550] But you can see what happened.

[551] Like, I remember you were showing me, you're like, well, here's the, and this was in what, early 2018.

[552] It was like, here's the view.

[553] If you want to stream on Twitch, it goes to this third person view so that, you know, it's not this like, I want to vomit because I'm seeing through someone else's headset.

[554] It's a third party sort of camera up behind me view.

[555] And you could imagine like, well, we should translate that.

[556] You can see why you would want that to be the case.

[557] That was my design contribution that probably wasted like six months of dev time for somebody.

[558] So if they're listening now, I apologize to them.

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[577] Nick, I have a question for you.

[578] Yes.

[579] This is just like based on what we were just talking about.

[580] Was this a consideration when you were thinking about your your currency?

[581] Like, wait a minute.

[582] Can we get cash on the balance sheet?

[583] Like can we have a nice cash flow dynamic here from asking users to buy rec tokens, and then maybe we don't need to raise money as soon.

[584] Oh, from like basically like treating this as a float?

[585] Yep.

[586] I mean, honestly, the way that it played out is kind of like when we first introduced the system, still the majority of the currency was coming through like our sort of items.

[587] So, yeah, basically it was like, well, yeah, mostly what people are buying is government services.

[588] And so, like, that wasn't a huge consideration for us.

[589] you know you can see like as more and more of our economy shifts from like a rec room specific like we're selling shirts to users selling shirts yeah you really do get a float on this like and and the benefit of like these kind of ecosystems is it's not so much the float i mean the real value is like this is a much more scalable way of growing your revenue like it's it's hard to grow your revenue by being like i am going to continually come up with new services and new items and Like, every time I want to have a new hat or more hats, I need to hire more people over here.

[590] But if you build tools to let people do it, you just get a much more scalable catalog.

[591] And so, you know, in the beginning, it's a much harder way to grow revenue.

[592] In the long term, it's a much better way of growing revenue.

[593] Hmm.

[594] It's fascinating.

[595] So speaking of, by summer, early 2019 to summer 2019, you're seeing some green shoots.

[596] You're starting to get through the traffasaro.

[597] What are green shoots, David?

[598] Green shoots.

[599] So by, yeah, so if I'm going here, like, I'm looking at our summer 2019 numbers.

[600] So by that point, screens had passed VR.

[601] So it was like the larger audience.

[602] We had launched on mobile.

[603] Mobile was our fastest growing audience.

[604] And VR was still doing well.

[605] It just hadn't grown since 2017.

[606] at least in user base, we grew a lot on the engagement side, but the user base stayed around the same.

[607] So we were like, okay, we found growth outside of VR.

[608] And we actually raised a series B in April 2019.

[609] And largely it was like, look, we took this VR Wii Sports and we turned it into a cross -platform, user -generated content platform, and we're about to launch on mobile.

[610] That was kind of the story for the series B. It was like, you know, And I was, like, showing people the mobile build and, like, praying it wouldn't crash while I was, like, doing it.

[611] Because, you know, we had basically taken, like, a PlayStation app and, like, we're going to run it on an iPhone, and that should work fine, I guess.

[612] And was that, did Madrona lead that round locally?

[613] That was index, actually.

[614] That was index.

[615] That was index.

[616] Yeah.

[617] So that round was still kind of a story round, right?

[618] Yeah.

[619] I mean, I think, I think the thing that they were looking at was.

[620] Well, it would be interesting to ask them, like, what their, what their thesis on it was.

[621] I think the interesting thing that they were seeing was this is an app that has been around for years and is still growing.

[622] And it's taken some, like, interesting turns.

[623] Like, this user -generated constant thing, it's clearly not what they were doing to begin with.

[624] This multi -platform thing, clearly not what they've been doing from the beginning.

[625] But, like, both of them are working now.

[626] And maybe this team has, you know, more, more.

[627] more ways it can evolve.

[628] So I think it still was that story.

[629] Like at that point, our revenue was really de minimis.

[630] Yeah, our revenue was barely existent.

[631] I think we like, I think we had like one month of revenue.

[632] I think we were.

[633] We made like 20 grand in a month, you know, I think we were.

[634] Yeah.

[635] You had a 2021 revenue multiple on your fundraise on that.

[636] Yeah, something like that.

[637] Or a 2021 era revenue multiple.

[638] I think we were only monetizing on like one platform.

[639] That might in it.

[640] I think we were maybe only monetizing on like steam, but not on PlayStation and other stuff.

[641] So it started growing like pretty quickly after that.

[642] But yeah, at the time, it was largely a, you know, I think we had interesting engagement numbers.

[643] We were like soaking up a lot of minutes, but in terms of like a business, it was, it was, you really had to squint to see it.

[644] So kudos to index for squinting pretty hard.

[645] So then, so I think, I want to ask you about this, I think once you turned on monetization across all the platforms and the economy started to work, it seems like pretty quickly after that, the business became a really good business, right?

[646] You were generating a significant amount of revenue at pretty high margins, right?

[647] Yeah, I mean, I think you can, especially if you break out, like, okay, what's fixed cost versus variable costs, right?

[648] Like, the cost of supporting the service of rec room is relatively small.

[649] It's like, okay, well, we need these services, like we need Azure services, and we need, you know, maybe this networking middleware, and then we need moderation teams.

[650] So you're like, okay, what's that cost?

[651] You're like, well, wow, this scales really nicely.

[652] And so, like, you know, most software businesses, it's really a, okay, and how much do you want to spend on R &D to ensure that you're growing, you know, years down the line.

[653] So, yeah, the business is, the business is growing really nicely.

[654] I think there's really, really interesting dynamics from the user -generated content side.

[655] because the revenue can grow really nicely without much input from us.

[656] And then if you look at like the way, like we have slightly lower margin on that revenue, you know, versus us selling has.

[657] So you have to pay some of it out to creators.

[658] Totally.

[659] But it's really like we're happy to pay that out because those users are so valuable.

[660] They create so much value for us.

[661] They do such a good job of evangelizing the app and going and finding new users.

[662] I would rather spend money on that all day long than buy more ads on Instagram.

[663] Well, this is, so the two things I wanted to highlight here that you just did is, one, the beauty of this model is you don't really need to spend much, if anything, on user acquisition, right?

[664] Because you're, as you said, your creator -led growth.

[665] It's your creators that are creating amazing things that are spreading the word about it that are bringing in users, right?

[666] Yeah, I mean, we started doing some paid advertising like maybe two months ago.

[667] And so we're like experimenting with it.

[668] I mean, I think there's probably some number greater than zero where it makes sense.

[669] But I think everyone who's been in the venture game knows that performance marketing is not, you do not get economies of scale, right?

[670] In fact, it goes the other way.

[671] Like, the more you're spending, the worst each incremental dollar gets.

[672] But that's not true.

[673] It's me playing pinball.

[674] Like I put a quarter in every time and eventually the ball goes to the bottom.

[675] Yeah, except you're like, you run out of, like, the good pinballs early.

[676] Yeah, right?

[677] Yeah, there's, somehow there's worse and worse product market fit with every additional pinball that gets loaded in.

[678] Totally.

[679] Because, I mean, think about it.

[680] Like, let's say you're building a golf game on iOS that's, like, cartoony.

[681] So, like, the first couple users you buy are, like, I love cartoons and golf, and I have a phone.

[682] And then, like...

[683] This is exactly what I was looking for.

[684] From then, you're like, okay, well, we've got...

[685] all those users.

[686] Next up, we're like, you kind of like the PGA.

[687] And like, maybe we can get you into this, like, cartoon golf game because you like golf in some way.

[688] Right.

[689] And then you get all those users.

[690] And then, you know, Instagram's like, well, these users like being outside, I think, and like maybe sports.

[691] And like, that's kind of related.

[692] It's fun.

[693] Trust us.

[694] Yeah.

[695] And so you're paying incrementally more and more to attract these users that want your thing less and less.

[696] And so, you know, I think there's definitely an amount that makes sense to spend in performance marketing.

[697] But like I think this is how a lot of people get in trouble is like they're going to force performance marketing to work.

[698] And like the only way you force it to work is like you spend on those users that don't really want your thing.

[699] And so with the creators, like I would much rather pay creators more money and help them figure out like, okay, here's more money.

[700] Now your incentives just went up.

[701] Go find the subcommittee that really vibes with the content that you've created.

[702] And they don't need to even love every part.

[703] part of Rec Room.

[704] They just need to love the thing that you built.

[705] So, like, we can have these kind of sub -communities that are, you know, creator -led.

[706] Like, I love very specific parts of YouTube.

[707] They're very different than I bet what you guys love, certainly what Jenny loves.

[708] Like, that's great.

[709] Yeah.

[710] I think Twitch does this really well.

[711] I think there's, like, a lot of different tones and styles and personalities on there.

[712] And, you know, they'll go and find their people that make sense for them.

[713] And that's what we want to happen in Rec Room as well.

[714] Like, we want you to go, be able to build your little subcommittee.

[715] And if you're a user, we want to help you find your tribe.

[716] So, like, when you come in, we want to help direct you towards the content that we think is most likely to light up your interests.

[717] It's very akin to the concept of marketplace liquidity.

[718] I remember a great realization that Dan Lewis opened me up to when we had him on for the convoy episode was he's like, look, we got the reason we need tons and tons of loads and tons of truckers is because, like, there is one trucker load pay.

[719] that is optimal.

[720] And then the further and further you get from that, like literally physical distance, the worst of an economic deal it is for them, because they're going to have to drive to come pick up the load.

[721] You know, they may not want to.

[722] It might be the wrong day.

[723] And like, if we can get everyone on the platform, then we can always find the perfect match.

[724] But when you're subscale, you're in this territory of like most of the time it's probably suboptimal and it's probably too expensive of a transaction.

[725] And you can just sort of see that playing out in the world of games where, you know, where I suppose the world of metaverses, where the more people there are on the platform and the more sort of flexibility there is in the system, the more opportunity there is for people to find their tribe.

[726] That's why the internet is so great.

[727] There's incredible marketplace liquidity on the internet.

[728] Yeah.

[729] I mean, I think, and that's the battle that's about to be fought is like, what is the long tail of your metverse, right?

[730] So the other aspect that we've already touched on is, you know, while it's probably not, maybe not something you guys think about as actively, you do get a float out of this, like the users buy tokens up front, and then they use Rec Room, and then they spend those tokens over time to creators who then, over time, either cash them out or don't, you guys are generating float.

[731] It's the same deal with, you know, Roblox.

[732] It hasn't been covered enough about why, you know, people say Roblox is unprofitable.

[733] Their revenue numbers are still, it's like, no, no, no, it's accounting.

[734] Roblox is very, very profitable, yeah.

[735] Very, very cash flow generative.

[736] Yeah.

[737] So this like all shifts the business pretty you know like everything slow and then fast so last fall you raised your series C right yeah so in November we raised a series C we raised 20 million from Medrona and that's that's like eight months into the pandemic that was eight months into the pandemic and you know look the pandemic had been it had definitely driven activity for rec room like the moment lockdown happened you can just you can just see the jump and recrooms started getting used for a lot more unusual non -gaming things during the pandemic that was where we saw you know teachers teaching classes in there people holding group therapy sessions people having family reunions there were a lot more weddings happening in rec room uh so these were just a bunch of things that we were really excited about and it just showed the flexibility of the platform um so we did that uh raise in november and then uh we launched on Xbox in December, and then Quest 2, you know, back to the point about, like, VR, like, you know, platform shoes and oversized denim jackets.

[738] Like, it goes in and out of style, man, and like, it's coming back into style.

[739] And, you know, Quest 2, like, Oculus, like, I have to give them props.

[740] Like, they build an amazing headset and an amazing price.

[741] They did a great job marketing it.

[742] And we're seeing, like, amazing VR growth.

[743] And I think that's poised to continue as more and more people start jumping into that AR and VR world.

[744] And it seems like that's likely to happen over the next couple of years.

[745] So we're really excited about that space.

[746] Do you see this 660 % growth in 2020 more attributable to we have the best product market fit on VR and there's this incredible VR device now that's sold well or is selling well?

[747] Or do you see it primarily attributable to it's the pandemic and people need a place to congregate.

[748] That's not the real world?

[749] You know, I don't know that I can assign.

[750] it to one variable.

[751] It was kind of like all these variables kind of clicked at once.

[752] Like we launched on Xbox and we were like the number one free app on Xbox for several weeks around the holidays, which was very...

[753] Didn't you double your user base like in one week just by being launching on Xbox?

[754] I mean, Xbox was a huge amount of growth for us.

[755] And we were really surprised by that.

[756] Like we didn't really do any marketing.

[757] It was a pretty soft launch in terms of like how much noise we made about it.

[758] But there was a lot of pen up demand there.

[759] The mobile app was clicking and it's been the fastest, like, growing group.

[760] And then you see VR starting to take off all the while the UGC ecosystem.

[761] you're seeing great content getting built.

[762] We start paying creators and you just see like all the incentives spin a little bit faster.

[763] So it's kind of all of these things kind of clicking at the same time.

[764] And I don't know that I could assign.

[765] Oh, yeah.

[766] And then I guess there was like COVID also happening.

[767] Like if kids are only going to school for like two to three hours a day, they have an additional couple hours to play video games and that's largely what they're doing with it.

[768] And so we saw all.

[769] of these converging factors, and it was really like, wow, hey, the business is doing very interesting things during the last months of the year here.

[770] But like, I guess the thing to take away from this, and I would tell anybody else that's like starting a company is, these are things that we started talking about in like 2017.

[771] And it's like 2021.

[772] And it's like, okay, well, now it's not a, it's not a miracle that needs to happen anymore.

[773] It's like a system that exists.

[774] And now we need to like optimize it.

[775] But like very little, very little.

[776] Very, very.

[777] few things that are like worth building can be built quickly you guys are ever a testament to that so i imagine you know without we can get into whatever level detail you want but you know going from the whole dynamics i imagine must just have been so different going from uh hey we need to raise money in the beginning to like build this thing to then like we need to raise money like it's still a story we're building this thing that now you don't need to raise money and And to case in point, a couple months after your last raise, your insiders, they're like, let's have a lot more money at a much higher valuation.

[778] Like, what did that, what does that felt like?

[779] Like, did you see this transition coming as a CEO?

[780] Or has it been surprising as it's kind of happened?

[781] Oh, I mean, I think it's definitely been, it's definitely been surprising.

[782] I mean, I think, like, the entire ride of recrum has been surprising.

[783] And, you know, when I look back at what I was thinking.

[784] during all of these different months in the past, like, I was wrong, like a lot.

[785] Like, I was wrong all the time.

[786] And I think the thing that we built was we built a really robust organism that could survive me being wrong a lot.

[787] Like, that's what Rec Room is.

[788] Is, like, I don't need to be very right about, like, what's VR going to do this quarter?

[789] Because, like, our business doesn't depend on that.

[790] And I don't need to build, like, the best room in Rec Room this quarter to drive growth because, like, users are publishing, I don't know, 25, 30 ,000 rooms a day.

[791] So, like, there's plenty of content there.

[792] And I don't need to worry about, like, what's our next revenue generation tool?

[793] Because we've built tools for users to go figure that out, and they're experimenting.

[794] And, and so, like, when we were fundraising, I think there's a lot of times I, like, most of our fundraisers, we were just like, look, we're playing for time.

[795] Like, we think we're at a point where we can fundraise.

[796] And we think that the combination of the partner, the plan, and the price match up.

[797] up.

[798] Like, we like the partner.

[799] We're willing to, like, enter into a marriage with this person.

[800] The plan for what we can go build with this money is interesting and has a possibility of inflecting the business.

[801] And then the price is a good risk -adjusted value for both the investor and us.

[802] So that was basically, like, the calculus that we've done for every raise is we very rarely burned it down.

[803] Like, I don't think we ever burned it down to, like, we have two months to live.

[804] And if we don't raise, like, we were always raising, you know, pretty far out from.

[805] from you know day zero and then i assume this fundraise felt very different this fundraise did feel different this was not like a hey it would be nice to have more cash that this was uh this was the first time you didn't approach an investor but an investor approached you is it fair to say that i mean they're they're insiders so yeah constant communication no i think that's accurate i mean the dynamics of this round were really i think it was a it was an internal gut check for us of like do we think we can build something that's going to last for decades?

[806] And if we are, what's that plan look like?

[807] You know, what does this look like as a standalone business?

[808] What is it going to take from a capital perspective to get this to a standalone business?

[809] And then if it's really going to endure, like, what is the scale that it needs to get to?

[810] And, you know, I think we just kind of work backwards from there.

[811] We were like, okay, it's going to take a lot of money.

[812] It's going to take a lot of time.

[813] It's going to take a lot more people than we have right now.

[814] And if we can be patient about it.

[815] You know, we think, we think there's a huge business that can be built here, but it's just going to take money and time.

[816] And do we want to, we've seen what the oscillations of the market look like.

[817] We've seen the peaks of VR happiness.

[818] We've seen the troughs of VR unhappiness.

[819] Like, the same thing might happen here.

[820] Like, metaverses might be hot this year.

[821] They might trow next year for two years.

[822] Roblox is a $40 billion company on the public today.

[823] A year ago, it was a four billion dollar company.

[824] Yeah, you just don't know.

[825] Totally.

[826] And so we were like, do we want to, this is our opportunity to untether ourselves from the emotions of the market and really take a long -term play here.

[827] So I think that was really the question we asked ourselves was like, okay, what does it look like to, what does it look like for rec room to be, you know, 100, 500 times bigger?

[828] five years from now, 10 years from now.

[829] What's it going to take?

[830] And I'm thinking a lot about listeners out there who have fundraised for their startups.

[831] And they always, you know, there's the deck.

[832] And then one of the later slides is a use of proceeds.

[833] And you always got to say, like, here's what we're going to do with the money.

[834] And then here's the milestones we're going to hit with the money.

[835] And when you have a very different fundraise like this that is an offer coming to you, like, do you have to have a plan to use the money?

[836] Or is it okay to say, like, we may not spend all this money.

[837] Like, we might go public with this much money in the bank still and you know just like zoom and and that's okay well i i can tell you i mean there are a lot of things about recrum that are probably idiosyncratic and like there are many things that we did that i i would probably advise like other startups not to do but we've always been kind of vague around use of proceeds like in past rounds because we're kind like well that's you know that's the charm of rec room is like there's not really like we're making it up as we go along.

[838] Yeah, totally.

[839] And, you know, we'd kind of point to the past of like, you know, here's things that we thought we were due that we didn't.

[840] And here's things that we never thought we would do that we did.

[841] So I can like make up a slide for you and show you what those things seem like today, but like know that these could change.

[842] So I mean, we were always upfront about that.

[843] And I think we, it's self -selected.

[844] You know, there were some people that were like, this is bananas.

[845] Like, what are you guys doing?

[846] Like, this is your deck.

[847] This is crazy.

[848] And then I think other people are like, well, this is a refreshing level of honesty because like, I've been in enough board meetings to know that, like, none of these plans survive contact with reality.

[849] Yep.

[850] So for this particular one, yeah, I think there was more a conversation around how big do we think this thing can get?

[851] Like, realistically, what do we think the value of this thing can be?

[852] And I think, you know, I spent time, like, I basically, like, write little notes to myself over the years of, like, here's how I'm feeling on this day.

[853] and like, here's what I'm thinking.

[854] And, you know, when I look back, things always took longer than I thought, but they were always bigger than I thought.

[855] That was kind of like the, like, if I could write one lesson for like all the things that I was looking at over the years, it was, I was always like, man, I wish this thing was happening faster.

[856] Man, I wish this thing was happening faster.

[857] But then when it finally did happen, I was like, oh, wow, this is so much bigger than I thought this was going to be like a 50 % increase.

[858] And it's like a 10x increase.

[859] So you're probably out ahead on an IRA basis, even though it took longer.

[860] Yes, exactly.

[861] Yeah.

[862] It's just like, you know, I think we don't do a good job of thinking about nonlinear growth, like humans.

[863] Yeah.

[864] And so this was an opportunity to like, okay, how do I protect myself against my own biases of an inability to predict?

[865] Like, okay, well, having a lot of money, hiring great people, making it clear to them what the problems are and then stepping back.

[866] Like, this money lets us do that.

[867] And it also puts you into a league that I think helps with recruiting in a lot of ways.

[868] Like there's certain dollar amounts, like there's certain valuation amounts where you're like, well, I'm not joining a startup that might not be here in a year, which I think is definitely a fear that many people in Seattle have.

[869] Like I think if you're working at Amazon or Microsoft, any startup seems like impossibly small, whether it's two people or a hundred people.

[870] And so this was one that I think we thought could help.

[871] a lot of people in those bigger companies get comfort about, okay, like, I'm going to go join this company.

[872] It's legit.

[873] It's going to stay around for a while.

[874] But they're still really taking risks and thinking big.

[875] Like, we wanted to have it both ways.

[876] So this allowed us to do that.

[877] And you're like 60, 70 people.

[878] Do I have that right?

[879] We're like about 90 now.

[880] We're hiring a lot.

[881] Cool.

[882] Well, David, do we want to move on to Powers?

[883] Yeah, that's what I was thinking.

[884] So long -term listeners in the show obviously know we're huge fans.

[885] of Hamilton Helmer and Seven Powers.

[886] And one thing we like to do when we, you know, just bend in me, analyze companies is we decide what we go through the seven different powers that companies can have, according to Hamilton, and we identify which powers companies have.

[887] I don't think we've ever done it live with a CEO before, but if you're ready to be a guinea pig.

[888] Sure.

[889] Go for it.

[890] Let's do it.

[891] Okay.

[892] So the seven are counter positioning, scale economies, switching costs.

[893] network economies, process power, branding, and cornered resources.

[894] So maybe I'll jump in first, give it.

[895] Let's funny, David, we did that LP show on Roblox, and I'm trying to like remember exactly what I said there because I don't see why it would be a lick different in this case.

[896] And I know I argued fervently for something, and I'm trying to remember what it was, so I don't contradict myself and be like.

[897] I know.

[898] Oh, man. We're on the spot.

[899] Well, okay, so I'm going to go first selflessly to give Nick a break to think.

[900] think selfishly to take the incredibly obvious one of network economies.

[901] It's not just a network economies, but it's a network economy economy with the layer of rec tokens in your own currency as well.

[902] And the value that, like, the way to think about network effects, network economies is, you know, it's as more users get added to the system, it grows value.

[903] for all the other users in the system, great.

[904] But the thing about it is there's a multiplier, like I'm thinking about an algebra equation.

[905] There's like a, there's a constant that you have to put in front of that value, which is how much value does each incremental user generate.

[906] A coefficient one might say.

[907] What's the coefficient?

[908] Yeah, yeah.

[909] Thank you, Ben.

[910] What's the coefficient?

[911] And for something like rec room, the coefficient, I think, is actually really quite high because you have such a high conversion rate from user to creator.

[912] And once you become a creator, then that value that you're adding back into the ecosystem, obviously there's a scale.

[913] Some people are adding tons of value.

[914] Some people are adding little value.

[915] But overcoming that hump to become a creator, then enables more super creators.

[916] That's my thoughts.

[917] I'm going to let Nick go next because he's had a long time to think.

[918] You just want to go last.

[919] I think we talk about scale economies.

[920] a lot.

[921] I mean, I think that's, that's what we, especially for our creators, we're like, you know, the bigger rec room is the more people you're theoretically reaching.

[922] And so the higher your potential reward is, you know, a viral hit in rec room is worth X today.

[923] And we hope it's a thousand X a couple years from now.

[924] And so I think that, that contributes a lot to the, you know, if you're a creator, like you want to jump on these ecosystems early while they're growing to try and get the value from that.

[925] You're like, okay, now it's, it's achievable.

[926] for me to chart.

[927] If I wait a while, maybe it won't.

[928] And the value in the future will be so much greater.

[929] So if I can get that positioning now, I can benefit from the scale later.

[930] Do you guys do, we should ask this before.

[931] Do you do any highlighting of creators to the user base?

[932] Oh, 100%.

[933] Yeah.

[934] We select like featured rooms every week.

[935] We're constantly looking for wait.

[936] Like I would say if you come into rec room, you'll see a mix of like here is an algorithm.

[937] generically generated lists, and then here is an editorial list that's selected by staff.

[938] And are you looking for either in the algorithm or editorial, a combination of established creators that you know this stuff is awesome and new creators to kind of keep constantly seating the ecosystem and giving new people a chance?

[939] I mean, we run contests.

[940] A good example would be like every quarter we run a contest where we're like, I think the last contest we ran was like movie magic.

[941] So we're like, okay, build a room around the concept of movie.

[942] movie magic.

[943] It can be like a scene from one of your favorite movies or, you know, can have like some cinematic flair to it or, you know, something like that.

[944] And we, we actually do like an in -game ceremony where we're like, okay, you know, the best horror room was this and you get to come up and like take your, your trophy and give a little speech.

[945] It's so awesome.

[946] It's called the Roommies.

[947] And one of the ones that we highlight is like the emerging creator.

[948] Like, who haven't we never seen in a contest before that has really impressed us?

[949] Because, yeah, like, two contests later, those people are like the masters of rec room tools and they're teaching classes in rec room about how to use these tools and bend them to their will.

[950] So, yeah, I mean, we're really on the lookout for that, like, young, nascent talent for sure.

[951] And we've hired, actually, quite a few people that have, like, work at rec room today were people that were in the community.

[952] And we were like, good God, they're building, like, amazing.

[953] stuff.

[954] That's so cool.

[955] I wonder if they would come and give us feedback on like the tools we're building or help us test them to make sure we're not breaking them or explain the way that the tools work to other players like teach classes in recrum.

[956] So recrum has been like we keep an eye on it one because it's like valuable for the ecosystem and two it's like a great source of hiring.

[957] Right.

[958] The only last one that I was thinking about is do you guys think you have switching costs?

[959] Like Apple Podcast has switching costs over David and I. Like if we were to move and be like, okay, we're done with podcasting, we're going to be YouTubers now, like, that we would never do that because we've sunk so much into this investment -wise.

[960] It would take us years and years and years to rebuild the same sort of, not all the audience, but frankly, like, understanding for the medium on a, you know, something that's not podcasts.

[961] Does the same thing happen to creators in rec room?

[962] Oh, I think so.

[963] I mean, I think there's, the way that you build in rec room is just so unique, and it lets a group of people that otherwise can't create, create.

[964] Like every other tool, like Unity or Unreal or even Roblox Studios, just feels really, really different from Rec Room.

[965] And so I think it's hard to transfer those skills over.

[966] That non -transferability, though, is also the thing that, like, lets all those people who couldn't otherwise create, create.

[967] But yeah, I think once you, especially once you build up your audience, like if you have tens of thousands of subscribers in Rec Room and they get notified every time you build a new room as well, like there's a cost to switching to another platform where you maybe don't have that audience and you don't have that notification engine.

[968] Yeah.

[969] The last one I want to, we would be remiss if we didn't at least ask you.

[970] I suspect I know there.

[971] Well, I'm going to ask you first.

[972] Is there an element of counter positioning here versus Roblox relative to the age of your user base?

[973] Remind me what counter positioning is.

[974] maybe counter positioning is if you are doing something in your product or business that if your competitor if you're established entrenched incumbent competitor did it it would torpedo their business or at least be value destructive to them such that it's not economically worth them chasing you into the thing that you're doing yeah i you know i don't know if that's true i mean i think roblocks like they definitely have a very young user base and i think they're trying to grow up with that user base.

[975] I don't know that there's anything we're doing that necessarily precludes them from doing that.

[976] I think we think of Rec Room as like fairly distinct from Roblox.

[977] Like Roblox has sort of more of like a two -sided marketplace where there's like two kind of independent groups like creators and consumers.

[978] And those groups are separated by probably like a 20 year age gap.

[979] It's like there's nine to 12 year old players and then the creator base is probably like, you know, mid -20s, 30s, maybe older.

[980] Like, you're coding.

[981] You're using a game engine.

[982] And Rec Room kind of just sits in between there.

[983] We're like, hey, we just want, like, teens who basically want to play games or create games, and you can do both of those in the same session.

[984] So I think that the difference between us is maybe more, maybe, like, like, look, Instagram is very different than Photoshop, right?

[985] Like, Photoshop has a more powerful tool set, but, you know, the people that are looking at the content that are produced in Photoshop and the people that are working in Photoshop, it's not the same group.

[986] But Instagram, it's probably closer like, well, you know, I could be a creator.

[987] I could be a consumer.

[988] Tools are pretty simple.

[989] I think we kind of sit more in that category.

[990] I love that analogy.

[991] That's funny.

[992] I thought you were going to say difference between Instagram and Facebook and the networks and the ages.

[993] But yeah, no, I like that.

[994] I like that analogy even better.

[995] Well, I want to jump into a section here that's the, it's an acquired staple.

[996] What would have happened otherwise?

[997] And this is an opportunity, Nick, if there's any that you're comfortable sharing with, is there any counterfactual that we should talk about, you know, this could be that the company got acquired or that the company shut down or, you know, you decided to sign some big partnership.

[998] Anything happened in records.

[999] Is there a moment when history turned on a knife point?

[1000] You know, I think that I think the ones that probably jump out in my mind were, it was a very intentional choice to, like, I think we could have buried our head in the sands with the VR thing.

[1001] And we were like, look, we've, we've had success to date.

[1002] Every, you know, sign is pointing to this being problematic, but like, damn the torpedoes full steam ahead.

[1003] And I think that would have been a really bad idea.

[1004] I think we probably would run out of money in like 2019.

[1005] Look, there are plenty of other, I don't need to come up with a counterfactual for that one.

[1006] I think there's other companies out there that have proved that for me. So I'm really happy we made that choice.

[1007] It was tough, though.

[1008] Like, that was really really, really tough.

[1009] That was tough for the community.

[1010] It was tough for the team, too, because, I mean, I think, you know, it's, the team is really sensitive to, like, what the community thinks of Breckroom.

[1011] It really means a lot to them.

[1012] And so if we ever make any changes where the community is not happy, like, man, I feel it, like, in my stomach.

[1013] Like, I wake up with it every day.

[1014] It, like, really pains me. And there were a couple months of that, for sure.

[1015] I mean, you were, you were in a little bit of a Kobayashi -Maru situation where, like, the, if you had buried your head in the sand and gone VR, VR, VR, VR, like, you would have died.

[1016] If you had completely pivoted and be like, we're going to be an app, then you wouldn't nearly have the power that you have today as a business.

[1017] And you decided, hey, there is a door number three.

[1018] Like, we don't have to pick between these two kind of impossible, neither are good options.

[1019] Yeah.

[1020] And I think even when we we were making that choice.

[1021] We were like, are we just fooling ourselves to think that this is like really like this is really going to work?

[1022] So I'm happy that we, we did.

[1023] Yeah, but you didn't know no. No, we definitely, we definitely did not.

[1024] And then, you know, at various points in rec room's life when, when it has been harder to find growth or harder to find, you know, investment capital, we have had chats with, with various folks about like, hey, does it make, like, you never need to worry about financing again, just come into the big warm arms of the big tech company and we can figure this out for you.

[1025] And, you know, I don't know what that looks like.

[1026] I think the moment that you accept that, you're giving up your agenda for someone else's agenda.

[1027] It's no longer like our rec room.

[1028] It's no longer the community's rec room.

[1029] Some large company is buying it for a goal or an agenda that's not ours.

[1030] And so I think it really depends on what the company is to figure out if that aligns.

[1031] I would say to date we've never lined up, like, hey, we think this is in everyone's best interests to join powers with this other thing.

[1032] And actually, it's been great.

[1033] I think that was one of the things that really attracted us to this round was like, hey, there isn't a capital deficit that we need to go solve.

[1034] We can just go build.

[1035] I was going to say, I think that's one of the things that, you know, I hope in a few years when we all look back on this period in history, you know, we may be laughing a little bit at the exuberance in the market that, you know, certainly lots of people talk about.

[1036] And I don't mean with regard to, you know, I think your valuation is incredibly well deserved and you've been on such a journey.

[1037] And like, the market's hot right now.

[1038] Like if you're, yeah, the market's hot.

[1039] Let's speak clear.

[1040] If you're listening to this podcast and you think about raising money, like now is not the worst time to do it.

[1041] Yeah.

[1042] Now is the time.

[1043] But I do think, I hope that this will be a really good enduring outcome of it, which is that you don't have to.

[1044] sell your company anymore.

[1045] Like, if things are working, and even if you think things can work in the future, you don't have to ever sell because you can raise money in the private markets.

[1046] That's been true for a while.

[1047] But you can also be public now.

[1048] Like there are, Ben and I've talked about this a bunch as a theme on the show.

[1049] There are so many more $5 to $20 billion tech companies out there and will be out there than anybody ever realized.

[1050] Whereas I think before this era, it was kind of like, okay, great, you're going to sell your company for a lot of money to a big tech company.

[1051] or you're going to be one of the very, very few that can be an enduring standalone big business.

[1052] And I just don't, I don't think that dichotomy exists anymore.

[1053] I think, it's a good point.

[1054] Yeah, I mean, I think especially on the consumer side with more, I think you've seen more consumer apps shift away from the advertising model.

[1055] And I think the advertising model really was like there will be one, right?

[1056] Like, there's so many parties involved, like, having a subscale ad business just sucks.

[1057] Like, you're just going to have a bad business.

[1058] You're going to have an inefficient marketplace.

[1059] Yeah.

[1060] I mean, like, and it's a testament to what Google and Facebook built.

[1061] Those are like unassailable businesses, right?

[1062] And having, you know, one tenth of their scale is worth one, one hundredth of the value they have, right?

[1063] Like, it's just you're pushing the, that's the Sisyphus pushing a boulder up a hill.

[1064] You're never going to make it, right?

[1065] Like, it's just never going to happen for you.

[1066] And I think with more companies, especially on the consumer side, going, like, hey, we are, we are not going to use an advertising model.

[1067] It's just going to be this different exchange of value.

[1068] You can often build, you know, better businesses at smaller scales.

[1069] And they're not as subject to, like, win or take all sort of mentalities.

[1070] I think that's what you see in the gaming space.

[1071] There's, like, a lot of very big, profitable games.

[1072] There's not just, like, one game.

[1073] But it's not as true in the social media space.

[1074] there's there's like one one ring to rule them all that's a really great point especially as social media heads into the world of microtransactions and a little bit away from advertising assuming that the next generation of social media is VR and AR then it's very likely that there's going to be a direct supported model of the next sort of platform where everyone spends time and interacts with each other you know I'm probably like undereducated on this but my impression is that the market in China is less advertising driven.

[1075] Like, Oh, 100%.

[1076] Yeah.

[1077] Tencent.

[1078] And I'm, I'm curious to know, like, how that's affected the dynamics of, like, does it create more room for, you know, smaller companies to shoot up?

[1079] Yeah.

[1080] Yeah.

[1081] Well, I think the dynamics are very different.

[1082] Yeah.

[1083] There's definitely a lot more medium -sized companies shooting up.

[1084] But yeah, to what to attribute is, it's kind of like your comment earlier.

[1085] Five things are happening all at the same time.

[1086] And it's kind of hard to have attribution.

[1087] Before we move on, Nick, I want to ask you sort of one, I think because you're a friend, I feel comfortable asking this on the show, but the warm embrace of a big company is a very rational decision for founding teams to make, particularly economically.

[1088] And is there something you feel, as you sort of look at yourself or your co -founders, from a personality characteristic where you're like, that actually probably played a role in us deciding to stay independent?

[1089] Hmm, that's a reasonable question.

[1090] I guess I've never maybe examined it as deeply as I should.

[1091] I mean, look, I think anybody in my shoes is trying to, like, the larger these things get, the more incentives, like the more people that have incentives in these sort of decisions.

[1092] And at this point, I'm, you know, I'm always trying to find choices that align well with the community that's playing rack room, the people who are working at rec room, and the investors who have invested.

[1093] And I think the longer you go, like, the thing that got you here was betting on yourself, right?

[1094] The thing that got you here was betting you could keep making it bigger and bigger.

[1095] And so when you come to those crossroads, you're like, well, hey, this thing has worked for me in the past.

[1096] Like, do we take the chips off the table or do we double down?

[1097] Well, doubling down has been the right choice for X long, and it's worked out for the parties involved.

[1098] And so I think it's just like that's the decision that we've gotten comfort with for X many rounds so far.

[1099] And so it's not to say that we'll never get comfort with, with, you know, maybe tying up with a big company.

[1100] But I think we've been through enough good and bad that we're like, look, there could be bad coming and that bad could last for two years.

[1101] But we know there's going to be a bright spot on the other side and we won't get demoralized.

[1102] And we've seen the team hold together through those like storms.

[1103] And so I don't worry about it as much as maybe I did for a while.

[1104] I think a lot of people worry like, oh, everything we're going to, we've built so we'll could disappear in six months.

[1105] And I definitely worried about that more, like in the early stages of the company where I was like, man, it feels like this could all disappear.

[1106] Like, I can't believe we got here.

[1107] And then now that I've seen like the team really persevere through some dark times.

[1108] I'm like, okay, the engine that we have built has a lot of.

[1109] grit so it just makes it tough i mean i think when you're chatting with other companies then like they need to believe in what you've built more than you believe in what you've built to make the price work you know that's essentially what needs to happen and like i'm pretty bear or i'm pretty bullish and i think like like i think that's just that's just the challenge that you run into i think the longer you go right well thanks for answering that sure i did i appropriately dodge your question no it's perfect it was great it's actually a I'm a public company CEO here.

[1110] That was great.

[1111] That's a great segue into Playbook, which, you know, I think we've touched on a lot of themes here that don't need to be rehashed.

[1112] But there is one that I really want to highlight here.

[1113] And I can't, I can't say enough, at least my perception from the outside, the value this creates of one single world across platforms, across, you know, you're not creating a bunch of servers individually.

[1114] like Minecraft or something like that you have a fluid economy and a fluid set of social experiences that are able to all happen on one single place and sure you have rooms and rooms have limits but it seems to me like we've touched on this idea of liquidity or of finding the perfect match between creator and someone experiencing something in rec room I just wanted to sort of like pose this question back to you for how much gravitas I give that characteristic of your business.

[1115] Do you feel that that's sort of as important as I'm drilling in here?

[1116] Like that this is one cohesive world that's like, oh.

[1117] Yes.

[1118] Yeah, I mean, I think it is really important.

[1119] I think it's the element that gives you brand.

[1120] Like every picture that anyone takes in rec room is recognizably rec room.

[1121] I think it's the element that gives you economic control.

[1122] So people often will ask me like, are you going to do anything with NFTs?

[1123] Or like, a couple years ago, like ICOs or all the craze?

[1124] like, are you guys going to make a cryptocurrency?

[1125] And my statement to a lot of people were like, look, the value of those entities is that they are decentralized.

[1126] Like, that's the value.

[1127] And the value that Rec Room derives out of its economy and its things is they are centralized.

[1128] That's the value.

[1129] So, like, we would be throwing that away for a buzzword, right?

[1130] Like, we don't need decentralization.

[1131] Like, in fact, we don't want decentralization.

[1132] We want centralization because it's like paramount.

[1133] Like, if you think about the economy transition that I was telling you about, like, imagine going through that with like like a cryptocurrency like you'd never be able to do it right right lobbying 50 % plus of the community to be able to flip to your new yeah i would be subject to like whatever stupidity i put down in my white paper five years ago like and like i guess that's the that's the thing that i would i would tell most people like maybe other people are really good at forecasting like i am not and like that's we we just like face that that decision head on and so we're like okay how can we build optionality into the business so that when we're wrong, we're not trapped in a corner.

[1134] And so centralization in that one big world gives us a lot more control over being when we're right and when we're wrong.

[1135] We have a lot more levers to try and shift the game or the economy or the, you know, the ranking algorithms to favor activities or actions we care about.

[1136] Yeah, that makes a lot of sense.

[1137] Well, the other one that I do think is worth just highlighting here because it's so dramatically affected the trajectory the business is the realization you had that your growth was governed by someone else's growth and by being captive to one platform and betting on that future.

[1138] To the extent that you make the decision to become a venture -funded business where the capital you're taking is expensive and, you know, it is intended for ultra -high growth businesses.

[1139] Like, you become a business that needs to go seek growth.

[1140] And, you know, I don't want to put on you that capital was sort of that to that to you.

[1141] I think that was a goal of yours too, but it does strike me that there's a lesson in there for other entrepreneurs where they can sort of look and say, in the business that I'm starting, am I in control of my own growth or is my growth governed by someone else?

[1142] When we first started a company, like, I had never heard of like a series A round.

[1143] Like I had never heard of, I didn't know how you pitched investors.

[1144] Actually, probably like one of the best stories that I think I've got is like, Madrona who let our B round, I went to pitch them for a seed round.

[1145] They were like, this was not very good.

[1146] Like, this was bad.

[1147] Like, I didn't make it to the next meeting.

[1148] And I emailed them back and was like, can I come back next week?

[1149] And like, I've worked on my pitch.

[1150] And they were like, no. Like, that's not how this works at all.

[1151] But I mean, like, that's how dumb we were.

[1152] Was they David?

[1153] They were not David.

[1154] No, this is before I met David.

[1155] It was so funny because when Nick and I did meet later, and I didn't know Nick had talked to other folks, and then I told everyone, I was like, oh, man, this company said people are like, wait, are we talking about the same person here?

[1156] Like, so I think the learning curve was, was sharp.

[1157] We just started at zero.

[1158] Like, let's, so our first couple interactions with venture did not go very well.

[1159] And so we were also looking for publishers.

[1160] And so publishers, if you're not, familiar, like in the game space, they'll basically pay you per project.

[1161] So you're like, hey, this is the project I want to work on.

[1162] It's going to cost me $10 million to do this thing.

[1163] They're like, great, we'll front the money.

[1164] You're talking about electronic arts, Activision.

[1165] Yeah, totally.

[1166] There's a bunch.

[1167] We'll front you the money and we'll pay you for this very specific project.

[1168] And at the end of the project, we want X percent, like, we want to get paid back and then we want X percent of the excess capital that this thing brings in.

[1169] And that can be the right decision for a lot of games.

[1170] But because of the way it's financed, it really does.

[1171] finance a very specific type of game.

[1172] You are not going to build a services game that has like an uncertain roadmap with that model because you have to know up front like, hey, two years from now I'm going to ship this thing.

[1173] And the moment it ships, I have to step away because I actually can't finance it anymore.

[1174] Like the publisher has only financed it for these two years.

[1175] And so that's where you get these like discs that ship.

[1176] And then the moment it's out the door, you're like, okay, we're on to the sequel for that thing.

[1177] Because you have no way to finance the continued growth an iteration of the project.

[1178] And even if you could, like, the economics are really not in your favor.

[1179] You're like, you're probably splitting the revenue.

[1180] Right.

[1181] Like 50 -50, maybe worse with the publisher.

[1182] Probably worse.

[1183] Yeah.

[1184] It's like a movie.

[1185] It's like a band of contractors that comes together, has a budget, burns it down, and then there's no more dollars left, and it's not like you could do anything anyway.

[1186] Yeah, totally.

[1187] And so I think as a result of interacting more and more with the venture space, like, you know, a lot of people are like, oh, well, if you take venture dollars, are going to be forced to grow.

[1188] And I think you're more like, look, it is a framework for thinking.

[1189] Like, if you were to, the, the returns they're chasing are very specific, and it will force you into a very specific way of looking at the world and making decisions, which is not a bad thing.

[1190] It's just like, you are going to swing for the fences.

[1191] Like, that's the game you're playing.

[1192] It's like, it's about home runs.

[1193] It's not about bunt.

[1194] It's not about singles.

[1195] Like, it's about home runs.

[1196] And so you're playing home run derby.

[1197] Like you, so I think that's just the way to think.

[1198] about it is like there are ways to finance any type of of project just understand that if you have specific ambitions venture can be right for you or it can be wrong for you depending on what your what your goals are and i think we realize pretty quickly we're like look we don't have a two -year plan we want to work on this for a long time like a publisher's never going to be the right choice venture has to be the way we're financing it and this is the things that they're going to expect in terms of like growth and margin and okay so like how do we feed that back into the decision -making of, like, what is a record going to look like?

[1199] I don't think anyone has ever articulated that as well as you just did on this show.

[1200] It actually is really, really good.

[1201] And I think to rabbit hole for one quick sec on it, because I think it's something really important there.

[1202] I think people get a lot of cognitive dissonance looking at the venture market and financings where they're like, there's no plan.

[1203] How did you guys have no plan and raise all this money?

[1204] Like, you need the plan.

[1205] You need the plan.

[1206] but you had the key point there, which is if you're financing a project in the context of a movie or a traditional game studio, what now, yeah, you need a plan, like, because there's a set amount of money and you need a set, you know, return on that afterwards.

[1207] But that's not what venture is about.

[1208] Venture is about the long -term, asymmetric, uncapped upside potential.

[1209] And the way you can oftentimes, the way you can best realize that is exactly by not.

[1210] having a plan.

[1211] And by a doubt, be like, oh, shoot, okay, VR market dried up.

[1212] All right, what are we going to do?

[1213] We got to find that growth.

[1214] Well, we're going to go to screens, et cetera, et cetera.

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[1243] Okay, Nick.

[1244] So the way we're going to do grading, since we're not like grading a transaction here, is to speculate.

[1245] You know, what is the, what is the A scenario for a rec room look like three years from now.

[1246] And I think there's an obvious F scenario.

[1247] Like, you know, we could, those are like less interesting because like lots of numbers could go to zero and anything multiplied by zero is bad.

[1248] But like, what's the B minus scenario?

[1249] What sort of worries you on like stagnation or how do things sort of like just plateau?

[1250] But before we get there, let's talk about the A plus.

[1251] Like, what in the world happens for this thing to just go gangbusters.

[1252] I think there's, I think if you look at the video game space, there's a couple video games that have transcended video games, right?

[1253] Like, they are part of popular culture.

[1254] Minecraft, Fortnite, Roblox, Mario, like, these things, like everybody knows what these things are.

[1255] They have impacts well beyond gaming.

[1256] And so I think that's what the, a scenario for Rec Room is.

[1257] is like we have grown into a space where rec room can have a positive impact well beyond gaming.

[1258] It can have an impact on what digital entrepreneurship looks like.

[1259] It can have an impact on what the future of digital events look like, what the future of the metaverse looks like.

[1260] So that's the space that I'm most interested in is it's not really a financial outcome and it's not really like a valuation or we've IPOed or we've made X number of dollars.

[1261] it's really like what what is the lasting impact that the brand and the product that we've built has beyond the gaming space?

[1262] I think that's really what I focus on.

[1263] And would that primarily be attributed to this sort of like creator -led growth strategy going well?

[1264] I think it's probably like how high up can we keep ramping those incentives for creators?

[1265] Because right now we're like, okay, we're paying out X. and X buys us this style of creator spending this amount of time on their thing.

[1266] If we can 2x that, do they quit their job and then focus on this exclusively?

[1267] If we can 10x that, do they quit their job and convince five other people to quit their job and form a team to build this content?

[1268] So I think it's like how high up that ladder can you build.

[1269] Look, if you're a platform, the true test of whether you're a platform is are other people building a business on top of your business.

[1270] That's, you're only a platform if that's true.

[1271] And I think the question is like, okay, well, how big is the business somebody could build on top of rec room?

[1272] Love it.

[1273] And then the B minus.

[1274] What keeps you up at night?

[1275] How could things sort of just, hey, this is the top?

[1276] I mean, I think the B minus is like, it's so easy to get complacent.

[1277] Like, it's so easy to be like, look at all the things that we've done.

[1278] Like, we're, we crossed X. Like, we defeated these challenges.

[1279] And I think if you spend too much time thinking about the battles you, one you know you don't want to be that guy that like peaked in high school and is like still talking about like how they ran back some kickoff and and you know their homecoming game like I think it's really easy to become that as a startup where you're like we did this thing and it is it so is yeah so I think the and I think it's especially challenging as you as you grow as well like continuing to find people that want to push the boundaries of what's capable here like keep taking ownership and so I think the B minus scenario for us is just like oh man we get really content with like patting ourselves on the back and like being so proud of what we've done anytime you're raising money I think it's you have that temptation you're like I can view this as an end point like like look at the success that we've achieved it's this number on that number or you can view it as like okay the game just started again like we just put all of our chips onto the table like time to play and so that's what we need to do to avoid that b minus one is like you know you got to keep experimenting you got to keep growing i love it love that all right well carve outs nick uh mine is someone sent me invent and wander which was like a collection of writing from bezos and was sort of organized by walter isaacson and it's bezos over i don't know like two decades and the consistency and like the long -term thinking that you can just see it through the writings.

[1280] It's like this guy was writing about this in like the late 90s, you know, and you're just seeing it play out today.

[1281] I think looking at the writings of Bezos over a long period of time just gives me a new respect for like the vision and the determination that that guy has exercised over just such a long period.

[1282] of time.

[1283] I think it's really easy for people to forget, like, there was a decade when that business was, like, the smaller unloved stepchild of, like, eBay, where everybody was like, well, eBay is, like, eBay is, like, the really good business.

[1284] Like, look, like, eBay has the superior model.

[1285] It's a marketplace, not this, you know, retailer.

[1286] Yeah.

[1287] And, like, I, I remember that.

[1288] And I remember, like, nodding along reading those articles of, like, yeah, obviously, like, Amazon, how anachronistic, like, you know, managing your own inventory.

[1289] Like, that's crazy.

[1290] And then you look at what they built it in today.

[1291] And I think they just, they just slogged it out over years and years and years.

[1292] I think that's how many of the tech companies go is like, for a long period of time, people are like, oh, this valuation is crazy and like, this doesn't make any sense.

[1293] And why are people wasting money?

[1294] And they don't make any money to like, oh, my God, it's way too powerful.

[1295] Shut it down.

[1296] It's crazy how quick it can switch.

[1297] And I think Bezos just, it's clear he has had this idea in his head the entire time, especially looking back at these old writings, just very impressive.

[1298] That's awesome.

[1299] I love it.

[1300] Add it to the list.

[1301] My carve out is so appropriate for this episode on so many levels.

[1302] It is my new favorite YouTube channel called Resonant Arc. Have you guys heard of this?

[1303] Nick of it.

[1304] No, I haven't.

[1305] Oh, you're going to love it.

[1306] Okay, so it's like, they do a whole bunch of stuff on there.

[1307] They're way, obviously, way better at video production than we already acquired.

[1308] But they're like somewhat like, like so nerdy, super, super, super deep dives on video games.

[1309] And what got me hooked, I'd sort of casually watched it for a while, but what got me so hooked was they just did a massive five -part series each.

[1310] episode is like three hours long about Final Fantasy 8 which like I remember played as a kid the day it came out and then like got it the day came out and then played several times as an adult it's such a if you played this game you know it's a very controversial game unlike all the other final fantasies and they just like these guys go to town like 15 20 hours worth of content digging into this game it's awesome squall leonhart the main character right yeah I I remember Final Fantasy.

[1311] All right.

[1312] I didn't realize it was the first Final Fantasy with a different director at the helm from all the previous ones, which is why it was so different.

[1313] The more you know.

[1314] All right, mine is a YouTube video that I finally watched that I've had on my to -do list forever.

[1315] And then I was catching up with someone who reminded me that I should be, it's actually someone who listened to our Bitcoin episode and had some feedback.

[1316] And we were catching up and they reminded me you should watch this video.

[1317] And it's called How the Economic Machine Works by Ray Dalio.

[1318] Neither have you ever watched this.

[1319] I think I maybe did a while back.

[1320] It's unbelievably succinct.

[1321] It's unbelievably digestible at any level.

[1322] You know, you're both, you know, four notches above the economic understanding necessary to understand this video.

[1323] But it's basically a 30 -minute primer on the economy.

[1324] He's like, we got three big things that happen over time.

[1325] One, you have productivity growth.

[1326] Two, you have short -term debt cycles.

[1327] And, you know, clearly we're experiencing that right now.

[1328] And then you're always experiencing it.

[1329] And then on top of that, you've got the long.

[1330] long -term debt cycle.

[1331] And he sort of explains, like, recessions, depressions, all the different levers that the Fed has, that the government has, that, you know, wealth redistribution has, and when each of these different things are appropriate, it's just like a crazy, succinct way to understand, like, how to zoom out from our current conversation around, oh, no, it's a bubble, and say, like, well, actually, like, what tends to happen over, like, several hundred years out of an economy, especially ours, and here in the the U .S. And, you know, where might we be in the accommodation of these three factors in our current one?

[1332] And it's a, it's old, too.

[1333] It's from like 2012 or something.

[1334] So it's not, it's not written for people pining to understand right now, which I think gives it a little bit more authority.

[1335] And so, I highly recommend it.

[1336] We'll link it in the show notes.

[1337] Well, worth your time.

[1338] Well, with that, Nick, thank you so much for joining us.

[1339] Thanks for having me. Where, what do you want to plug?

[1340] What should listeners, go check out.

[1341] Go check out rec room.

[1342] Yeah.

[1343] Yeah, we told you you could have just made a reclum your carve -out.

[1344] Yeah, yeah, go check it out.

[1345] Send us feedback.

[1346] Like, the app is far from done.

[1347] And so we're always interested in people's feedback.

[1348] Awesome.

[1349] Well, Nick, we hope to have you back for part three someday.

[1350] And I don't want to foreshadow what event that could even happen, but let's just say in the far future.

[1351] What about, Nick, what about a, what about a If people want to get involved in rec room more deeply, they want to work with you, they want to get in touch with you, partner with you guys.

[1352] What's the best way to reach?

[1353] We are hiring, yes, for sure.

[1354] So we would love it if you, so go to recroom .com.

[1355] There's a bunch of jobs listed on there.

[1356] There's new ones being posted every week.

[1357] We would love to have you as part of the team.

[1358] I think we've found there's so much untapped potential, especially in the Pacific Northwest with the really, really big tech companies.

[1359] I think you see that there's like all the talent and startup ambition in the San Francisco space and there's like all the talent up in Seattle, but like there's not as much of that spark.

[1360] And I think there's so many people at a Microsoft or an Amazon or a Google or a Facebook that would enjoy their life more.

[1361] Who are listening to this.

[1362] Yeah, who would enjoy their life more on the startup journey.

[1363] I mean, I wouldn't want a lot of them higher highs, lower lows, but definitely like a much more rewarding journey when you're sitting at the end of a five -year journey and looking back.

[1364] I think there's like a lot more.

[1365] It will certainly make your life much more interesting.

[1366] I'll take it from Nick and I, both former Microsoft.

[1367] So you could do, you know, this is another thing that Dan Lewis brought up during our convoy episode, but I just have to say it one more time.

[1368] Like, you always overweight the risk of joining a startup.

[1369] You always think, oh, my gosh, this is so risky.

[1370] But, like, your downside is wildly capped.

[1371] Like, you could just go get your old job or probably a better one.

[1372] And if it goes well, God forbid, like, who knows what unforeseen doors that opens in your future.

[1373] Oh, for sure.

[1374] And, like, I think when most people are calculating, like, what is going to happen at a startup or what is going to happen to me at Microsoft, like, they're using the law of averages.

[1375] And so I just asked them, like, okay, are you average?

[1376] Like, do you think you are an average person?

[1377] Like, because...

[1378] That is some serious jujitsu.

[1379] Wow.

[1380] I love it.

[1381] Well, I mean, look, I think then the math makes a lot of sense.

[1382] Like, if you, yeah, if you feel like you're, you're going to be subject to that law of averages and you're going to score in the middle, like Microsoft's a great, a great spot.

[1383] If you do think you're in the top 25 or, you know, the top 10%, like, your upside's really capped at Microsoft's.

[1384] Like, there is only so fast you can grow there.

[1385] There's only so much responsibility you can get over such a short period of time.

[1386] and so like that's not true at startups and so if you really feel like you know your career is capped in some way i you know i think people i tell them like hey the risk is really worth it like you really can find a lot more responsibility and a lot more ownership and have a lot more impact on a product ben and i would be remiss if we didn't also throw in uh also applies to starting a company for most people totally totally yeah sorry no no go if you don't start a company go work at record exactly i i i think i mean to go back to bezos the the regret minimization function that he uses which is like hey when i'm looking at any decision and i think about you know what am i going to feel in five years when i look back on this choice and people tend to regret the decisions that they you know they didn't jump at not the ones that they let pass yeah totally it's a great framework you're like stealing all these future potential carve outs all right listeners we're going to wrap here.

[1387] We told you about the Slack.

[1388] Go check it out.

[1389] Acquired .fm slash slack.

[1390] We'll be talking about this episode.

[1391] If you want to be an LP, that's at Acquired .com slash LP, and you should.

[1392] And frankly, if you are not subscribed or soon to be called following, as we are finding out, subscribed is going to be a reserved word for paid podcasts.

[1393] And following is what happens when you follow a free podcasts.

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[1395] And if you like this episode and you have a friend or coworker that you think, hey, like I thought of them during this episode.

[1396] Share it with them.

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[1398] With that, we will see you next time.

[1399] See you next time.

[1400] See you next time.

[1401] See you.