Blogging the AGDC: Startup Lessons from Recent Online Games

Some of the biggest names in recent virtual worlds, MMO, and video game startup news gathered to offer their insight on what it takes to make it as a startup.  Raph Koster of Areae, Nabeel Hyatt of Conduit Labs, Daniel James of Three Rings, Anthony Castoro from Heatwave Interactive, and Joe Ybarra from Cheyenne Mountain Entertainment shared from their past experience, both successes and failures, and their current projects. "It’s never a good idea to start a company if you don’t have a good idea," said Hyatt. "People come to me because with ideas they have some cash or they’re not satisfied with they’re job, but those aren’t good reasons. It’s only if you have an idea so good that you can’t do anything else with it."

Joe Ybarra: This is the third startup I’ve been associated with. Our company was started as a developer to produce Stargate Worlds. The first one I was involved with was back in 1982 with a small company you might have heard of, Electronic Arts. I was the fifth employee there. The second was started with my own resources, which I would not recommend, in 1991.

Anothony Castoro: I did not start Electronic Arts. I started Heatwave Interactive last year. My first startup, I dropped out of college and started a game company. We lived out of my house because I couldn’t pay my developers. We failed horribly, and I used the alpha client to get a QA job at EA. Thanks, Joe. 

Daniel James: I did that too when I got out of college. Didn’t work either.

Nabeel Hyatt: I’m a serial entrepreneur, which is a way of saying I can’t get a real day job. I’ve done five startups, each in different industries. This one is in gaming. It may be part of my pattern to look for new opportunities, be seen as an interloper, get in, and then leave. I have Conduit Labs, which is buzz word friendly. 

James: I prefer buzzword enabled.

Hyatt: Which is even more buzzword friendly. 

Raph Koster: We really don’t care how you pronounce the name of the company. (Areae) So yeah, I was at giant megacorporations for most of my career and just started this company last year and got funding together around AGDC last year. This is the first time for me, not the fifth. The job I had immediately preceding was as one of, oh, 15 or 20 VP level executives in a board room at the head of a company of 300-400 people. So it’s a very different experience.

James: I’m the CEO of Three Rings, which is now a bit long in the tooth to be called a startup. We started in the doldrums of 2001 with PuzzlePirates, which has been fairly successful. We have a new product in the buzzword enabled field of user created activity. I also started companies when I was younger and more foolish. I think that’s one of the things you tend to see with entrepreneurs is that they tend to have tried a bunch of things and then failed. 

I wanted to ask the group about that. In terms of the chemistry of the team, I’ve had a very successful startup team. Let’s start with Raph.

Koster: Find your opposite. For the last couple of years, I’ve been giving business lectures, but I am so not the biz guy. I’m the design guy. The philosophy guy. For me a big part of it was finding a business guy who was fantastic and complementary. 

But you go out with a startup and part of you thinks you’re going to change the world and everyone else is missing something. So there’s some arrogance. But you’re also not going to be successful without a solid assessment of yourself and weakness.

Hyatt: You look at where you have these huge gaps going into the market. For example, the fact that I have experience in game design does not make me qualified to build MMOs. The other thing is that you have to look for someone who has that risk profile. A lot of people go into startups because they want more control, but startups often give you less control over your life. You’re beholden to one boss right now, but in a startup you’re beholden to every customer. 

Castoro: I think finding people who have the same vision no matter their skill set is critical. I met my partner virtually, over the phone, and email. He was in another continent. After a few months of knowing we were on the same page, we discovered some very amazing things. It’s a lot easier to get through the tough times when you have the same vision. And everyone gets titles, but none of it really means shit. Everyone is just as important as everyone else in a startup. Finding not just the same vision, but a broad set of skills is important.

Ybarra: I agree with everyone else, but the other thing is leadership. The company will grow, and the people that start the company will be your leaders. You’ll phase out of the initial startup excitement, and then you need to start evolving processes. And passion. Passion will see you through a lot of hard times. The last thing, that I learned the hard way, is the first person I hired at my last company is someone who handled the money. You want to find complementary skills, and the first guy you need is a CFO. 

James: That assumes you have money. We never had much, so I was okay with managing it. Just spend it. It’s not that hard. I want to touch on why now is an exciting time for a game startup. I personally think the industry has gone in a cycle of excitement. I think we’re in the midst of another cycle with new distribution platforms. Why is now a great time?

Koster: You just said it. I mean, yes. Right now there are tons and tons of people interested in Web-centric things. Things that bridge games with other things. If you go out and just say you’re building a Web-based social application with a game, someone might just throw a million dollars at you. But that’s kind of bubblish and stupid. There are a bunch of other plays that people are trying to make. There are new publishers starting now, and that hasn’t happened in a while. We’re seeing dozens and dozens of serious games startups. It’s an exciting time to be doing something. 

Hyatt: I don’t think it’s a good time to start a company. One, if you look historically at the tech sector, most of the big IPOs like Yahoo started in the troughs, not the high points. Secondly, it’s never a good idea to start a company if you don’t have a good idea. People come to me because they have some cash or they’re not satisfied with they’re job, but those aren’t good reasons. It’s only if you have an idea so good that you can’t do anything else.

Castoro: One of the great reasons to start a company, especially for games, is the maturity of the technology. My motto is content is king. I’m excited about going into the exhibition hall and there are all these booths about how they’re going to help you build a game. I don’t have to make my UI in a text file. It’s a great time to be a game developer with all the technology. I know that social worlds and connected worlds are getting a lot of play, but people love places that give them something to do. 

James: So let’s talk a little about money. There’s certainly often an equation made between someone starting a company and needing money. Perhaps we can each talk a little about the financing history of our companies.

Ybarra: I’ll give two examples that are pretty disparate. When we started EA, the whole process was basically started by Trip Hawkins approaching the VC community. At the time the Atari was pretty much the only platform out there, and little did we know that it would completely die a few months after us. We had to nursemaid that $2.1M for as long as we could to make the company get to where it needed to to be successful. We had to give away a ridiculously large amount of equity to raise that small amount of money. We had to try and get maximum value. We took two rounds of funding later and expanded. 

Completely different from that is the current company I’m associated with, Cheyenne Mountain Entertainment. It’s funded entirely by angel investors. I think we have over 100 investors in the company. We have a continuous stream of people coming in, and it never stops. In any given week we have probably 15-17 investor presentations. What makes this possible today is that we’re in a business now that the lay person can see is very successful and sexy.

James: Are these investors buying equity or profit shares like a movie business model. 

Ybarra: It’s more like the movie business model.

James: How much have you raised? 

Ybarra: A lot. We’ve raised about $31.8 million for Stargate.

Q: So you’re in a continuous money cycle. How did you structure the company to allow continuous investments?

Ybarra: The answer is a little more complicated than I can get into today. The simple answer is that we have a parent equity company. Each of our studios is an independent LLC. Each investor gets first money in and first money out. And then they profit share. We’re replicating that process. 

James: The traditional model is that each time you want new money you issue a new class of shares and dilute everyone down a little bit and, hopefully, raise the price. So long as you can get the shareholders to agree, you can keep issuing shares.

Q: For Joe, you said you don’t recommend self-funding. IS there a reason?

Ybarra: yeah. It’s your own money. The perceived control you get is just that. A perceived control. Starting a company is not a lot of fun, and if you’re putting your family’s money at risk, that’s compounding misery. And the cash I make is kind of a score keeping mechanism. I don’t want to give it away. And there are plenty of companies out there that are investing. 

Castoro: I whole heartedly agree. I should take the advice. Our company is funded originally by a corporate relationship for a project. We haven’t given any equity away. It’s a typical bootstrap. We don’t have a big war chest. Our goal is to stay lean and use the tools available to use. We will use some contract and work for hire. It’s been successful, but painful. If you have to do it for too long, it’s frustrating. But it’s left us in a position where the partners own the company, and nobody else does. We’re certainly having discussions with all the silly money that’s lying around, but we’re holding the money close to our chest. As long as we can pay our employees, that’s enough.

Hyatt: I’ve done every different type of model. I did the bootstrapping thing with Ambient Devices, largely because we couldn’t raise money. Conduit was founded at inception by myself and three other guys who went out and raised money in about 6 weeks, a $5.5M round. I’ve also done the middleground piece of piecing together angel investment to make sure you’ve got cash flow. So far the cvurrent plan seems to be working out the easiest. 

James: Well you’re giving away a big chunk of equity. What’s your plan?

Hyatt: It’s nice. I don’t have to keep fundraising. It would drive me crazy with 8 investors coming in each week. I just want to build a product. We need that capital to do that. If I felt like there was a way to bootstrap, I would have done that. But for this specific idea, this is the best way. 

Koster: Obviously I have some advantages in going out in raising money. I was fairly prominent in the game industry. I’d been acting as an executive and going out to conferences and meeting venture capitalists who would ask me for my advice. That makes it easy to turnaround and ask for money. It’s an unfair advantage. The day it was announced I was leaving SOE, I had a verbal offer of money. But I wouldn’t base your business plan on that. But we were tentative at that point. It took several months to get a partner on board. That was March. By August we had a prototype and all the offers had to change. And I agreed on that with my wife.

I did not get rich from MMOs, but I had savings. Sony very generously let me fundraise while I sat out my contract. We agreed to raise money for six months. And I turned down a lot of offers. I wanted to be lean, and flexible, and hungry. We tried to be really conservative about that. There came a point where I had to decide after spending our savings that this prototype was working well enough that I could go launch it on my own. That was the point I could say yes. I’d be doing it anyways, so it made sense to take the money. 

I had two investors instead of one. And that was important to keep the board balanced. I can’t overemphasize how important it was to be picky. We will go on to raise a B Round, but it’ll be a year into it, and we’ll have something to show.

James: There is a big difference on the effect the money will have on your life of where the money comes from and what those investors’ intentions are. That’s maybe one advantage of Joe’s model of having lots of investors. No one of them can really do anything. We’ve been very careful to make sure we trust the people we took money from. They’re kidn of like co-founders. 

There are two other things I wanted to talk about. The first is licensing and ownership of IP. Joe, why’d you go for a big fat license?

Ybarra: The original founders had been trying to find funding because they’d secured a license to Stargate. Our company wouldn’t have existed without the license. You want to own the IP, lock, stock, and barrel. You get control over it, but it’s also very risky, and it’s harder to funding. But we wouldn’t exist if it wasn’t for Stargate and the support we get from MGM. 

Castoro: Obviously I agree. Part of the reason we haven’t taken money is that we’re all about owning our IP. We don’t want a publisher involved aearly on because we’re all about owning our own IP. I’ve been on the development side of businesses and on the publishing side. We knew we wouldn’t have a big buffer, but it could pay off in the long run. Heatwave is all about original IP. There’s an advantage for having a license that people recognize. But I walways wanted to do it this way.

Hyatt: In terms of a business perspective, I’d try to skew it. Unless the core idea of a company has to do with an IP, you want as much control as possible. Including another IP just muddies the process. I have a pretty low level of trust for other people. That was a big problem with Ambient. We tried licensing the technology and got a substantial brand. It absolutely can be done. 

Koster: You tend to think IP means a shape of elf or soldier or arc or story. But that’s just one kind of IP. Technology is another kind of IP. Frankly design and methods are another kind of IP. If your company isn’t creating IP it owns, it has no value. There’s a direct correlation there. We take it very seriously even though we’re building a platform. We have a whole law firm we’re working with, just for patents. Patents are evil and necessary. 

James: The last thing I wanted to ask about was the whole hiring and HR process. How do you build culture?

Koster: We are at 12 people. We just hired our first remote employee. We turned down some great people because they couldn’t relocate to be in our open pit office where everyone sits three feet from each other. We needed our community manager to be able to turn around and smack the programmer in the head. The only reason we have our biz dev remote is that he’s in the Bay Area. It just makes sense. We’re very picky. We hired about one person per month, and everyone kind of had a veto. Environment makes a far bigger difference than your computer, your software, your programming language. It’s more important to have everyone pulling in the same direction. We get nervous when we hire two people in one month. We prize the culture we have. When you’re in a startup together, it’s a big commitment. 

Hyatt: The startup you start with is never the startup you end with. The only thing you have left at the end is culture. If it’s solid and intact, that’s the only way you can navigate. We’re in a closet of an office. We believe in meatspace hiring. I have a rough sense of who I need. The one thing we did that was atypical, we had four people when we started, and we’re bringing on six new people. That was needs based. And frankly we’ve been talking to many of those people for a long, long time. But that’s certainly a risk.

Castoro: In terms of advice, obviously chemistry is extremely important. I think hiring is just as important as firing. People don’t change. If you have someone who isn’t working out, let ‘em go. Then people on the team know that people will get fired, but making the decision as a time makes them know that management will take care of problems. It’s hard, but it doesn’t matter. 

We’re 7 or 8, and we’re not all together. There’s a lot of virtual office stuff going on. But we’re an online savvy company, and I like to think we use those tools well to keep good chemistry and communication. We’re not an open pit kind of team. My team would probably gas me if I pushed them to a pit.

We use instant messengers, and we’re looking at some virtual office deployment with HD cameras and hallways you can walk down.

Ybarra: I’ve seen a whole lot of ways, but I’ll talk about

Cheyenne

. The environment we work in sucks. There’s a whole bunch of cubies. Studio 2 is seven miles away. Having said that, I agree with Anthony. You’re not going to get all the hires correct, so you need to do what you have to. Our share holders are looking to us to provide a return on investment, and we owe that to them. One of the most important is hiring and firing the right people. 

Hiring the right people doesn’t necessarily mean hiring friends or people with good chemistry. You want people who share your vision and have good leadership. It’s the responsibility of the management to make sure the team understands the system. We have slightly over 100 people now.

Q: I want to hear more about how you found your bizdev guys. 

Koster: We interviewed a lot of people from several different industries. We interviewed game biz dev people and Web biz dev people. We interviewed people who were very senior and very junior. We went back and forth quite a lot. In the end, we hired a guy from one of our VC firms who had been helping us for 18 months. He knew the company intimately, knew our needs, knew our product, and everyone had confidence in him.

The reason this was hard for us, is none of us were biz dev people. None of us knew how to gauge those qualities. It’s like hiring someone to be a translator in a language you don’t know. How do you know they’re not just going, “Bah bah bah” and making shit up. 

Hyatt: I think it’s somewhat the easiest hire. If they’re not selling you well, they’re probably not the right sales guys.

Q: I have a question about valuation. If you’re thinking about Round A, you have valuate the company in front of the investor. How do you value it in terms of good will and breadth? How do you put value on something that has no tangible value? 

James: There could be a whole panel on it. IT would be a dull conference, but the thing about valuation is that it has nothing to do with any real numbers, or imaginary numbers, or spreadsheets. It has to do with the investors and their expectation of how much money they’re going to walk away with. Most venture investors have a target of 25,35,45% of the company.

This was one of the good things about Joe’s approach and our early approach with angel investors. But it’s really the same of just throwing numbers out until you agree on something. 

Q: In the beginning you said try and fail. I’m curious about your failures and what you learned from them.

Ybarra: This is the story I tell. If you have a lifetime batting average in baseball of .333, that means you failed 7 times out of 10. But you get to be in the hall of fame. There are things you will fail. But failures are where you learn. You try to accomplish something, and you go into a situation expecting to win, and you don’t. It’s easy. Just don’t do something when you should have been doing it. 

Castoro: Don’t go into it unless you’re willing to fail. My first failure was informative. I was in college and thought I was going to make video games. So I went and worked 80 hours a week for another company and was going to use my overtime to fund the startup, and that was hard. So I went into the industry for 15 years to learn.

Hyatt: I think my problem is that the first two startups I had, the ideas were too small. INcrementalism is death. If you’re going to do something, do something that’s so big and game changing that if you get kicked out of your house and spend no time with your kids, it’s worth it.

James: I like that, but the other idea is to do something small enough that the only one who can screw something up is you.