Acquired - Atari (with Nolan Bushnell)

0:00We'll talk during the paid portion of this podcast where I advertise my game. Welcome to season five episode five of Acquired, the podcast about great technology companies and the stories behind them. I'm Ben Gilbert and I'm the co-founder of Pioneer Square Labs, a start-up studio and early-stage venture fund in Seattle.

0:34And I'm David Rosenthal, and I'm a general partner at Wave Capital, an early stage venture firm focused on marketplaces based in San Francisco. And we are your hosts. Today, we are talking about the company that invented the home video game industry, Atari. And we have someone with us who's got some pretty good stories about it, the founder of Atari, the father of the video game industry, Nolan Bushnell. Hello, Nolan. Great to be here. Good fun. Thank you so much for joining us.

1:04As some of our listeners know, Nolan has started a swath of other businesses. One of which, awesomely, is Chuck E. Cheese, which we will get much, much deeper into later this episode. We dug up some photos of young Ben last night. Yeah, Nolan, I should let you know, I'm gonna turn my computer around right now. Chuck E. Cheese was like...

1:23by far and away, my favorite place in the world. I'm too up. And here's designed that way, you know. Here's some pictures of my third birthday at Chuck E. Cheese, and there's me with my favorite toy, which is a Chuck E. Doll. Have fun. Now, Nolan, this is fun timing for us and for our listeners. Since our last episode covered the early days of Sequoia Capital and Don Valentine's career, which you had a lot to do with. Well, Don was really Maybe the best board member I've ever had. He was also the most frustrating and infuriating. You know, he had this ability to ask me a question about my own company that I didn't know. But the minute he asked it, I knew I should have known it. And so I started to cram for board meeting saying, okay, Don's not gonna catch me this time. And he always would. So I always believed that a proper

2:20Insightful question can be very instructive. Well, that was as we covered on our last episode, you know, down in theocratic method that was really the root of, you know, what he pioneered at Sequoia. Yeah.

2:32Well, listeners, our last limited partner episode was a deep dive into marketplaces from an academic perspective. On this show, we often talk about the levers at play in marketplace businesses, and as you would suspect, there are experts who have spent their careers studying and categorizing things like take-rate, search and discovery problem, and when to subsidize.

2:51One such expert is Ramesh Jahari, a professor at Stanford and advisor to Wave along with Uber, Airbnb, StitchFix, and many other great marketplace businesses. So if you want to listen and become an acquired limited partner, you can get started with a seven-day free trial and listen right here in the podcast player of your choice by clicking the link in the show notes or going to glow.fm slash acquired. All right, listeners.

3:17Now is a great time to talk about a new partner of ours here on Acquired. LaGora, the agentic operating system that is redefining how the world's best legal teams work. Yup, it's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. LaGora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

3:45So the founders did exactly what great founders do. Operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done. And that's how you get features that customers love like tabular review where you.

4:04drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Lagores Bed here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work, and this means that the pie can grow even as each individual task takes less time.

4:24And they recently launched LaGora agent offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required. And LaGora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early LaGora numbers essentially speak for themselves when they have a head-to-head pilot with their top competitor they win 70% of the time LaGora now has over a hundred thousand lawyers on the platform from 1200 legal teams in 50 countries and crazily they went from one million to a hundred million in ARR in about 18 months truly insane numbers and that is the real test

5:16Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in house at a company, you can learn more at logora.com slash acquired and just tell them that Ben and David sent you. And now on to Atari.

5:40Yeah, let's do it. Nolan, you were born in Clearfield, Utah, right? Just outside Salt Lake City? It's about halfway between Salt Lake and Arjun. Okay, okay. We were talking a bit before the show about you're reflecting on how you became an entrepreneur. It started pretty early, right? With strawberries. Yeah. Can you tell us the story about your first business venture in Clearfield? Well, my mother...

6:08Over dinner table said we've got too many strawberries. We always had a truck garden in the back of the house and She said we've got way too many strawberries. We're gonna have to give them away so happens the next day she took me to a grocery store and I noticed in the produce section they had strawberries in these baskets for 50 cents a basket I thought to myself, hey, there's a market and I went home I picked strawberries build the basket we had a bunch of baskets sitting on the shelf in the garage filled them up and marketed them door to door the end of the day I mean this an hour and a half's work in the end of the day I had five bucks this is in a world in which my allowance was fifteen cents a week wow and so all of a sudden I said what did your family think of this well my mom was really first of all she said

7:00Well, you took that money from our neighbors. I said, no, but I provided a service. They didn't have to go all the way to the store. Yeah. You're like the good eggs of... I don't think good eggs exist down in Southern California yet, but it's fresh, farm to table groceries delivered to your door in San Francisco. It's wonderful. We didn't. Jenny loves it. We use it all the time. Now, here's the question. I've often felt that that changed my brain to say, okay, Delink pay for hours into get a good project. Yeah, or Did I have a brain that was different to begin to see that connection between strawberries and a marketplace? Yeah, nurture nature nature nature and and I can't answer that but but you saw this yourself I mean your mom didn't tell you to go. Oh, yeah, start selling strawberries. Yeah, yeah

7:58You must have been younger than 10 at this point, right? I was eight. Wow. And then when you were about 10, you started a TV repair business. That's great, right? Yeah. And that would come in quite useful later, I would imagine. Well, I'd always been kind of a checky kid. I was always curious about how things worked and that sort of thing. And I watched a TV repairman that came to our house. The TVs were big and bulky and so it was all house calls.

8:27And this was the 1960s? Oh, no. This was 1953. Wow. I mean, you know, the TVs were like a piece of furniture. Yeah. And basically cost a month's salary. Wow. Yeah. So it was a different ball game. And I noticed that all the guy did was change tubes. And so the next time our TV failed, I said, I'm going to give this a go. And of course, I'm sure it went great the first time. Well, I got a shock and, you know, there were various things. I learned how to discharge the CRT because that, you know, it's popped up to 15,000 volts. You don't want to do that. Entrepreneurship comes with risk. Yeah. But, you know, in those days, the schematic on the back panel, one tube was a vertical oscillator, another one was the first IF. And so all of a sudden, I could tell which was. So if you had

9:23a lot of role that was the vertical oscillator and if it was that, you know, and so just by looking at the screen, it was almost self-diagnostic. And so I fixed it. And in doing so, I'd found a wholesale supplier of tubes. These were all tubes. This was for semiconductors. I'm, yeah, I'm really old. This is before Fairtailed. Yeah. And so I said, hey, maybe there's a business here. And so I started marketing my skills.

9:53And at those days, a house cost was five bucks. Wow. And so I spent all day selling strawberries or you could do one house call for the same amount. No, but I didn't believe that they're going to let a 10-year-old kid get into the back of their thing for five bucks. So I decided to charge 50 cents for a house call. Oh, you undercut the market. I undercut the market a long way. And my theory was that I would monetize a different way through marking up the tubes.

10:22And that worked swimmingly. It's almost like a creature did a console business. And then, you know, a couple of months in, I started getting a reputation. So I went up to a bucket house call and two. So it was, it was a thing of market entry price, you know, you give a discount. And I had a, I made a lot of money just repairing TV sets around the. So this is pretty awesome. So like, you're 10 years old. You have your experience that, TVs and the technology going into televisions at the time. Then your next job, I believe, you get exposure to the game world, was your next adventure at Lagoon amusement park? Actually not. My TV repair business turned into a full appliance repair business and I became part of Barnell furniture company. And you know, with that, I would

11:17go out, I'd repair washers and dryers and that sort of thing. And basically, Barlow would be able to charge a lot more and I'd get half. Pretty good for a 10 year old. Yeah. Well, this was 10, 11, 12, 13, 14, 15, 16. I continued that until I went to college at 18. And you started a Utah State, right? Correct. Got it. I was living at the fraternity house and I started doing gigs. Like, you know, in those days, there was this thing and I always had money because I saved and I was an entrepreneur. In those days, there was what they called 25 for 20. And that means that a lot of the kids would get the check from their parents at the end of the month, and they'd be out of money by the 15th.

12:11And so I'd lend them 20 bucks. They had me give me 20 bucks. It's a really long one. 25 for 20. Yeah. What's the APR on 25 for 20? What did you need to collect it by? Oh, the fifth of the month. Five days then to. Yeah. Wow. That's awesome. I can see how you got into the carnival business. Oh, yeah. I'm a carnie. So you have these quite, I mean, at the time, they're like quite lucrative, especially for a college student business is going on. I was driving a MGA sports car and later on I created in for a Mercedes 190 SL. So when you get any funny looks from people that are like, how are you getting all that money to buy cars like that? You know, nobody really thought about it that much. I said, but then I did a really good one. And this was called the campus company. And the campus company was a student water that had a

13:11Calendar of events in the center and I'd sell advertising around the side and give it away free to the kids at the beginning of the quarter and I'd sell $5,000 worth of advertising and it cost me 500 bucks to print it and give them away The part that I didn't know is that once you did that I do it for every quarter Everybody would re up. So I only had to sell a couple who would fall out. So it was like nothing. So I went from Utah State to the University of Utah to BYU to Weber State. And so all of a sudden I had, I had all the colleges in the area, all the colleges in the area, 5,000 pieces. And since I was doing the sales, when I'd go to a menswear place, I'd say, you know, you can pay me.

14:03you know, 150 bucks, or I'll take a suit. And I got a moped, I got all kinds of great stuff. Amazing. That's amazing. It's like the trade in the paperclip for the house. Yeah. Wow. So the reason I bring up campus company because that was actually the driver for me to get the job at the music park. I was wondering why you needed the money to work at the music park? Well, it was the thing where I was putting myself through college.

14:33a relatively good lifestyle. Let's put it this way. I am an undisciplined disciplined person. That is, when it comes to short-term, I'm somewhat undisciplined. That is, the summer night in Utah going out with girls and things. You can spend a lot of money and I decided that in order to remove harm's way, I get a fun job at the amusement park. I keep you off the streets. Get me off the streets. And that's why I say, I'm disciplined in terms of long-term strategy, but I'm disciplined when it comes to short-term. Yeah, they're a move temptation. Exactly. It violated kind of one of my rules, which all of a sudden I was working for a paycheck for... Yeah, trading time for dollars. Trading time for dollars. But then I discovered that

15:31In the games department, they paid commission when you did above that and so all of a sudden I could turn this $1.25 an hour job into a $2.50 an hour job, which was triple full day. Yeah, you're making sure that's worth it. Yeah And then because of commission thing is this ski ball ski ball, guess your weight knock the milk bottles down, you know Get the ball to stay in the basket. Would you make the most money on like what were people just like they just couldn't keep themselves away from a game called tip him over And it was a softball and it was a one-throw you always think that you could knock him over Well, you kind of can but it's really hard. Huh, but it's it's perfect for marketing strategy Because the way the games work is you were supposed to give away

16:27One dollar for every three dollars that you made so you were to run your your booth at a 33 and a third percent merchandise percentage The way the bottles worked there were two heavies and two lights and the two heavies were on the bottom and the two lights were on the top unless you wanted to give an animal away Then you put the heavies on the top and the lights on the bottom and then a small breeze of knocking down So We had a dance hall and a concert venue. And so people who come down with dates to go see the beach boys or what have you. The high school kids, they'd come in clusters. And there'd be the captain of the football team and the head cheerleader. And then there'd be Nathan.

17:15So someone like us in high school. Yeah, Nathan the the water boy. I was captain of my high school football team. That's great. I was definitely now. I was at Chuck E. Cheese. So anyway, what I do was when it came time for Nathan the water boy to throw. I'd set a stack and he'd win one for Mary in the library in his style. We are so grateful for you. And it would it would turn the world view of the head of the football team. Yeah. Upside down. And so I could extract all the money he had because he wasn't going to let the head cheerleader to go without a stuffed animal. That's spectacular. That is amazing. It was diabolical. I've been visiting the Pong Marketing Strategy in the future in bars here.

18:11Was it after that summer then that you transferred to the University of Utah? Yeah, what happened is once I got the job there was actually a gap year when I went to work for Litton Industries in aerospace and in a clean room doing guidance systems and things like that because you were studying engineering at Utah State. Correct. And then when I was in the fraternity house, I decided that engineering took too much homework.

18:40And so I transferred over to philosophy, then to economics, and then mathematics. And it was just really about being able to screw around and not do so much homework. I kind of got into it. I liked the carny life. It does get into your upstream. Yeah, I bet. But when they made me manager of the department, because I was good at it. And one of the guys was the manager quit. And so I was chosen to be manager. I had 150 kids working for me on a 20 years old and had to train them and manage the labor percentages and set up things. And I started changing the games to increase the revenue. A lot of times when the park was packed, we were under-gamed. The faster you could get a cycle time, the more money you get.

19:38the lagoon had the highest per caps of any amusement park in the nation. So when I got ready to graduate from college, I actually had offers from all over. I had from great American things like that where I could have stayed in the amusement park game business at significantly more money than I could have gotten as an associate engineer. Wow. But I said, Hey, I've got that legacy. Yeah. That's that's evergreen. My engineering degree is not going to be that way. I need some experience. So let's talk about that. When you get to the University of Utah, the University of Utah at this time is like an amazing place in pioneering computer science and in particular computer graphics, right? Exactly. Four places in the world, Stanford, Stanford AI project, MIT, Champaign or Banna, and the University of Utah.

20:36which doesn't belong. But it was really Dr. Evans, the guy who later founded the Evans and Sullivan. Yep. And for listeners, do you know, I mean, some of the other people who were there around this time, Alan Kay, John Warnock, who founded Adobe, Jim Clark, who would go found Netflix with Mark Andreessen. Netflix, yes, net scape. And then of course, Ed Gabel, I have to ask was Ed there at the same time? He was. Wow. And I always thought that I was kind of the...

21:06the cheap and dirty guy because I was doing gaming. All these guys were doing great check. Did you know at that time, I mean, you say you were called the Utah guys, did you have a sense at the time that this place and this group of people are sort of a special primordial soup of what would become the foundations of the technology industry or were you like, ah, these people seem smart, I feel.

21:32Smart but kind of dirty and this carny like yeah, I know I had no idea that it was going to be pressing him I mean, it's pretty amazing that you have this you know We spent all this time on your growing up, but it's all three of these things. It's your entrepreneurial instincts You'd learn management running the the amusement park and then this incredible engineering and graphics environment that you're in at Utah And all of those kind of, we'll talk in a second about what comes next. But I've often said that my life has been a series of happy mistakes. You know, you know, or center and deputy, because to add to that, when I went to California and worked for Ampex, and Ampex made it recording equipment for like Hollywood and the industry. And yeah. And so what I learned there was really polishing my digital skills and my video skills.

22:26So we had the big computers, I learned how to program, but the computers we were working on had a clock speed of 750 kilohertz. And the screens that were on the computers were all vector graphic. Because raster scan wants 3.58 megahertz of data. And so if your computers are going 750 now, they had a wide address space and 64 bits.

22:56you know, so you could do some serious calculations. But they weren't fast. Yeah. Ball on the screen or the, you know, space invaders weren't going to move very fast. Well, what would happen is remember that the early video games were not Von Neumann architecture. They were basically complex signal generators. And you would, you played Space Boer back at Utah, right? Correct. So Space Boer was the first game ever belt for a computer. Absolutely. I mean, I stand on the shoulders of Steve Russell, who did that as the MIT Hobby Railroad division. And he did that on a platform. How did it get traded around and end up at Utah and other places around the country? I mean, it wasn't like you could just download it off the internet, right? It was digital equipment.

23:49Basically, thought it was a cool hack and just shipped it with every computer they sold. So every deck with these mini computers, every PCP, the one that we'd used was a PDP8 and a PDP10. Okay.

24:05Utah didn't ever have a PDP1, which is what the original source code was. Wow, and so they shipped it. It was like the solitaire of, yeah. Wow, with Space War, that's incredible. And so was it the first time that you saw Space War that you really realized what could be possible in creating this next generation of games? I'm managing the games department. I had a couple of arcades, so I knew, in a mentally, what a coin-operated game cost and what it had to earn. And I said, if I had this screen with a coin slot, it would earn a lot of money. But there's machines cost like $3.25 for three minutes into a half a million dollar or a million dollar computer and math didn't work. Can you never going to recover the cost of the machine itself? But I went through the math, and I said, maybe someday.

24:57Yeah, and then so when you arrive at Ampex, this was shortly after like Fairchild had gotten set up and National Summit conducted, which we talked about on the square. So it was a national, then pioneered outsourcing fabrication of chips to Asia and that dropped the price of chips hugely, right? Yeah, one day, I would remember seeing my office at Ampex and glue chips, there was a thing called the 7,400 series from TI.

25:24in the 9300 series. They were basically glue parts, flip flops, and gates, or gates, exclusive, or all the Boolean constructs. And they went from $2 to $15 cents a chip. Wow. And so it was that precipitous, I mean, two orders of magnitude. And I said, maybe now it's not my work. Getting close. Yeah. Yeah. Coincidentally, that Wednesday night in the Bay Area, I became a go player. Oh, yeah. And there was a, I knew we were going to get into go in a minute. Well, there was a go being the game go. Yeah, the game go. And there was a Buddhist church in San Francisco that had a 24-7 go parlor. Oh, wow. And so I could just go up there. And I would generally show up in the 1970s. This was 1968. Yeah.

26:22and so I would go up probably eight o'clock on a Sunday morning I'd play until three or four and every weekend that was kind of my go-to. But I was living in Santa Clara, California at the time and additionally Stanford had a go club that met every Wednesday evening and so I'd attend that and I got playing with a couple of the go players there.

26:49And one of the guys was named Jim Stein, who was a graduate student working at the Stanford AI lab. And after we played Go One time, he says, hey, do you want to play space war? I said, holy shit, I haven't played it since I was in college. Let's do that. And so we left the Stanford Go Club probably 10 o'clock. And we played, we went up to the AI lab.

27:18and played space war probably until three or four. I mean, my wife was not amused. You heard this many times, but like when I was in college, Ben, I'm sure when you were in college, like, this is what you did, you know, like midnight, like get back from dinner at the dining column and be like, all right, we're gonna play Mario Kart till four in the morning. Yeah, exactly. We're gonna play Halo. I was super smart. You were the first generation that was doing this. Yeah. And so that was, I said, You know, those two situations that drop in the chip price and my re-equating with Space War were, competently, the driver that said, let's do this now. For folks that know of Atari, they're probably imagining the 2,600 or they're imagining at the very least something they're playing at their homes, that's not how it started. No, it started as a coin-operated game business.

28:15What started as scissor G right correct and You can't correct Nolan David. It's correct. He knows how it started Well, I just I was playing it wasn't Atari yet and so the original plan Was that we were going to be a studio and we would design games for manufacturers and get a royalty that was that was the original plan We got some things moving around on the screen. I went to the dentist and told him about my project and he says, oh, you should call this guy, which was the head of marketing for nutting associates. I didn't even know they were in town. They were a game manufacturing manufacturer. In Mountain View. And I went up and showed them the game and they said, yeah, I think we'd be willing to license this. They said, but we don't have a chief engineer now.

29:13And I don't think they, you know, the one we had would understand this technology. Are you available? I said, I don't know. I'm pretty expensive. Of course you did. So, I sound like such a carny, don't I? This is great. Well, also, I mean, this is like, you were, I had a minute. I mean, the people that were starting companies that we talked about on You know, part one of the Sequoia episode at this time, like the trader I saved and they're like, these are hardcore scientist engineering types, you know, usually in their 40s. Usually in their 20s. You were the first, I think, real, like hacker type entrepreneur. I think so. Yeah, I often said that I blazed the trail for both gates and jobs.

30:04You know, just proving that it could be done. Yeah, because they didn't look like, you know, Gordon Moore and Bob Knight said it's kind of like the five-minute mile problem where people say, well, it can't be done. And then someone does it. And then suddenly there's this massive wave after them of people that are awoken to that the world is accepting of young brilliant 20-something CEOs and boom, we have this wave of them. No question about it. Yeah. Oh, but I got I got to finish my please. Yeah, yeah, please. So you had set up Scissor G engineering, right? Yeah.

30:33And then I went to nutting. I said, I'm pretty expensive. And they said, well, how much? I was making $850 a month at Ampix. I said $1,600. They said, yes, too quickly. So you left them on the table. And the company car. So how did that turn into what would become Atari then?

31:03Silicon Valley has a couple of things going for it that are I think underappreciated. One is that almost everybody knows intimately somebody that went off started something and made a gobsmack full of money and they say I know that guy or that girl and I'm smarter than they are and I'm sitting here Doing nine to five and they're out making a lot of money. Yeah, I can do it. You know, it's funny. I think I might have referred to this on the show before but I went to business school at Stanford many years after you were there but I think that was one of the most powerful things is like all these entrepreneurs would come talk to us guest-teach classes be there for cases do lunchtime events for us and we just you just realized like there just people do yeah there's nothing special about though but then I had a real advantage with nutty

31:59because nutting put the first computer space in and all of a sudden you start noticing and saying These guys are bozos They're paying me $1,600 a month. I have a company car. What do they do? Well, they they fired the head of sales because he was making too much money on commission No, that is a real bozo. That's a really bozo and and so When it came time for the next game, I said, I really don't want to hang my star with these guys. You know, because they will under produce, they'll nickel and dime things, and my theory in life has always been go bigger, go home. Yeah, clearly. And so when it came time for that, I said, you know, I'm gonna have to leave, and I will design your next game, but we'll do it under contract.

32:56Little be known to them, I'd already gotten a contract from Midway in Bali. So I had two contracts based on. That's great. And so you were a game designer, were you also the sort of lead engineer on that first game with them? Okay. Yeah, I was a lead engineer. I basically did all the computer space, which was commercialized spaceware. We come to the next chapter of Total Serendipity.

33:25My first engineer in Al Alcorn was actually my tech and he was in a work study program at Berkeley and He'd do six months on and then six months at Berkeley and then six months as my tech It turns out that Steve Bristol was his alternate and both those guys like when Atari came along Bristol became head of engineering and Alcorn became head of research. They were brilliant engineers. They were really good. But very different. Al was much more rigorous. That was his brilliance and his downfall. He would interview 30 people and not find one that was acceptable. Although is he the one who brought Steve Jobs to you? Yeah.

34:13So he found one who was pretty good. Yeah, although not an engineer, but then we'll get there. But Bristol, if you said, okay, we need another 20 projects. And we need in the next 15 minutes, he'd go out, he'd hire a bunch of people, he'd fire some and what have you. I mean, he was, he was, he was a scramble. It'd be messy, but it'd get done. It'd be messy, but it'd get done. Exactly.

34:37The first day that Al came to work for us. And us being now this new company that was working on a hot round. Yeah. Yeah. Was the same day that I'd heard about Magnavox showing a video game at a trade show up in in Burlington. Yeah. And so I went up and I saw this thing and it was an analog piece of crap. And and I said to you know there's no competition here. But I looked around and they were playing this ping-pong game and it looked and they were having fun with it.

35:07And there was so many things wrong with it. There was no score. There was no sound. There was no score. Who's going to play that? Not just that. After you hit the ball, you could change the dynamics of it by twisting it up. You don't get to change the name. That's just wrong on so many levels. So it was analog that it was running on like vacuum tubes. No, there's RC time constants.

35:36So basically if you have a capacitor and a resistor, it'll change the voltage based on how vast it is and that gives you a delta V. It's kind of incredible that the early video games were actually analog. Yeah. Oh, yeah. I mean, Ralph Bear with these designs were really important. In fact, the very first game, the predated Steve Russell's at MIT, was an analog game played on a oscilloscope.

36:05at the Brookhaven National Labs with a guy named Willie Higginbotham in terms of full history. Always building on the soldiers of giants. Yeah. Okay, so you saw the Magnavox. You thought, things are piece of crap. Yeah, but I said, you know, using our technology, maybe this would be a fun game. But more than that, I needed a test project for Al because computer space was really complex. And I thought, you know, as a learning project, what you want to do is bite-sized things down to get people to understand the tech. And so I described the game and it said, that's your first project. And no, like, design docker spec. It was like, here's kind of how it's going to go. Yeah, this is a blackboard. Yeah. Before whiteboards had been done. And I said, you got to get it done in a few weeks because I think I can sell it to general electric. I might have told him, I've got to deal with general electric.

37:02And I'll be damned if in two weeks he didn't have a working pong machine. But it had some problems. For example, it had on the paddles, angle, incidence, angle, reflection, you know. Yeah. I read something that this was sort of Al's idea after what you sort of drew and described that he thought.

37:24Well, it would be way more fun if we cut the paddle up into eight segments and then each segment, depending on how far away from the middle it was, actually affected the sort of angle that it bounced off of the pedal. Now, that's very interesting because the way I remember it, I came up with that idea. I'm willing to give it to Al. Who came up with speeding the ball up as the as play went on?

37:51Again, I think I did. But I'm not going to apply into it. Which is another great mechanic because it means number one, you don't really get bored of it because you can't just keep it going forever. And two, if you're collecting coin drop, then that's going to speed up those games and you're going to get more people flowing through. So before we get into what happened with this prototype, the name of the company, can you tell us how it became Atari?

38:19Which of course is a term from yeah in those days everything was snail mail and so if you wanted to incorporate the standard Way to do it was to put five company names in case the first one wasn't it wasn't available Atari was actually number three. Oh wow, so it was one scissor G one was scissor G which was owned by a candle company in Mendocino And so this is with like the state of California. Yeah, and I to this day, I don't remember what number two was. But then number three came back Atari. What an amazing name. I mean, it starts with a which is great. You know, it's funny when we when we first got it back, we weren't sure we liked it. And Atari is like the equivalent of check in or checkmate and go correct. Yeah, check is probably a good thing.

39:17close enough. So you didn't like it at first or you weren't sure. We're not sure. Yeah. Which is really funny because you know, I really believe. Yeah. That like Shakespeare says, you know, a rose by in it or the other name. Yeah. Over and over again, I've named a company that has not sounded right. Two weeks in is the best name. Yeah. Yeah. It's like how Phil Knight hated both calling the Nike swoosh, the swoosh and the swoosh itself. And now it's the, you know, one of the top five most valuable brands in the world. Yeah, exactly. Well, and this comes together with pong, right? Because the amazing Atari logo, which we'll link to in the show notes, if you don't, you know, have it etched into your memory as a, as a child, is, is wonderful. And, you know, it's a form of the day and the, and the pong paddles and the, yeah, how did you come up with the logo? How'd that come to be? That was done by George Opperman, who was brilliant.

40:14brilliant graphic designer. And I said, we need a good bug for the company. He came up with 10, and I said that one. Wow. And I mean, truly today, one of the most iconic brands ever created, T-shirts everywhere in hats. I mean, you can't go weak without seeing the Atari somewhere in your life. It's pretty, and it's optimistic. It's kind of upward.

40:40We're driving this and it was the the paddles from pong that inspired it right? No, oh no That's revisionist history. Okay. There we have it from the van himself All right listeners now is a great time to tell you about a longtime friend of the show Vanta AI has scrambled the whole security picture It used to be that you proved that you were secure once a year an audit or a static PDF then everyone would not and you're done But in an AI first world, that doesn't hold up anymore. Yup, your risk surface changes every week now. A vendor turns on an AI feature or someone writes in a new model without telling IT, and your posture is different than it was last week, let alone at your last audit. Vanta's own research found that around 70% of companies have this, quote unquote, shadow AI running with no security review at all. Right.

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42:21We're huge fans of Vanta over here and literally hundreds of acquired listeners have become Vanta customers at their companies over the years. So you can get $1,000 off Vanta at Vanta.com slash acquired. That's V-A-N-T-A dot com slash acquired for $1,000 off and just tell them that Ben and David sent you. So, okay, so you had this prototype of Al Alcorn's demo, you know, prove himself project and it turns out it's pretty fun, right?

42:51I thought to myself, you know, my carnivorous mindset, your carnivorous instinct kicked it. Maybe like- Let's re-brand carnivorous incredibly entrepreneurial. Like we can keep saying carnivorous on the show, but like we shouldn't deprecate this. This is like a core, you know, personality trait of wildly driven, scrappy entrepreneurs. Yeah. Well, I thought to myself, so maybe I can get Ballet to take this game and- Complete our contract six months in advance Because you weren't planning on this being the next game. This was just a test for sure Yeah, but if they're impressed and say look here's the game Maybe let's see what they think so we build up to and these were in wire wraps They were gonna put one on location and I got on the airplane with the other one under my arm with a modulator so I could hook up to a local TV and I went to Valley in midway and they were not impressed

43:49And because in the coin up business, there had not been a single successful two-player only game. Yeah. There was no AI driving the other paddle at this point. Right. So if there was just one person who wanted to play the game at the bar, like it was going to be a non-starter. Which in 2020 hindsight turned out to be brilliant because it gave a woman an ability to choose who she played with. The equivalent of I assume at that time, women weren't buying drinks for men, but a woman could be buying a game of ponds. Yeah, I want to play ponds, but I need a partner so she pulls somebody off a bar stool. Wow, so it introduced a completely new environment variable into the bar. And it was also covenant with the hippie, female empowerment, women are as good as men.

44:45This is a 1972, right? This was 1972. Yeah. Wow. So when Bally and Midway rejected this. Correct. But you see the potential. Would you call it a wire rig? Wire wrap. Wire wrap. And inside imagine that's no cabinet. It's just the electronics, the, you know, however many boards are in there, wires, and then you hook it up to whatever TV you can. Correct. Well, in the early days, when you were prototyping, there was a technology called wire wrap, which you'd had these pins sticking up.

45:14And you had this machine that would really wrap a copper wire around it very tightly. So it was a very good prototyping system. I don't think they use it anymore. I'm not sure. So basically, you wouldn't have to solder, but you could ensure that the wires were going to be where you thought they were going to be on the chips. Precisely. Got it. But when you looked at it, it's like a brass mess. And what happened is that when I presented to Ballet, they were tepid.

45:44And they said, let me think about it. And when I called back to the plant, they told me about the earnings that it was making at the local bar. So you would put a prototype in. Yeah. When I heard how much it was, I called it ballet. And I said, Midway doesn't want it. And you mean how much money it was making at that bar? At 80 caps. Yeah, wow. Put it in context. The game was making over $300.

46:13week and that's like three x what a normal game would make right oh yeah and the bill of materials on the machine was three hundred twenty five bucks wow so I said to myself there's a business here there's a six day payback on this assuming you get to keep up is it fifty fifty with the bar how does the revenue is fifty fifty and two weeks you're making two weeks you're making money back so but did you charge the bars out front did they have to pay for part of the machine up front or is it just a revenue split you got to put it there and I said to myself hey if I can't sell these things I can operate them and be okay yeah so I took all the money that we had in the bank and it was enough to build like a dozen of them and then from there we got the money and when we sold some

47:02because people started hearing that this game was doing well and so we went up to the San Francisco distributor and he ordered ten and the guy from Los Angeles ordered ten. I'm curious, what would the the ballet and midway deals have given you? It was, I mean obviously they take care of manufacturing because they would make the actual cabinets and hook it all up.

47:24Did they also take care of distribution? Absolutely. They did everything. So you're then saying, you know what? We're so confident in this thing. We're going to tell these guys that in a nice way, in a clever way, that we're going to do this ourselves and that we don't, you know. No, I didn't say that we're going to do it ourselves. I said, we'll go ahead and finish the project, the driving game that you want it. Oh, I see. Which there's another chapter to this. Four months in, Bali came back to us and said, we'd like to do Palm. Huh.

47:54And you already knew what a golden goose you had it. And so I said, oh, of course, at this time, there were 20 companies that were copying us because, you know, we had a garage shop. Anybody that had a change, anybody that had a garage shop could knock these puppies out. We had, you know, in those days, it took four years to get a patent. We deployed for it, but we didn't have it. And so, you know, it was, it was a wild west. And so, Bali was really, noble by saying, hey, and still just knocking us off, they took a license and paid us 5% Royal. Wow. Stand up business practice right there. Stand up business and completed our contract. Wow. Wow. Was it around this time that you started your experimental distribution channel of your own of pizza time theater within the company? No, that.

48:50You're talking about key games, not Chuck E. Cheese. Well, there was kind of the ball and paddle phase. Then we went into what I called the game innovation phase of the company. I realized that in those days, the coin op distribution network, there tended to be two, sometimes three in every major city. And it was normal to have an exclusive relationship.

49:19I could pick all the best distributors. The ones didn't have a Atari deal. They were looking for anybody that they could put into business to compete with us. And I thought, that's perilous. So I decided to create my own competition. So I took the number two marketing guy and the number two engineering guy and the number two manufacturing guys. And I had them leave in mass, set up a company across the street, or down the It was actually another place. And it was just before a trade show. And they had a game, which was the next in the line that we were going to produce. We let them put their name on it. We went to the trade show and they assigned their distribution contract with all the guys that we didn't have. So we had the world nailed. Wow. And that was key games. That was key games.

50:13In those days, you know, there wasn't the internet and all that, but we knew that you couldn't keep it secret forever. So we floated the rumor that these guys had stolen trade secrets and that we were suiting them. Okay. And then a couple of months later, we floated the idea that we settled and that now we owned a piece of key games. And did you own the entire thing from the get go? The entire thing.

50:41That's great. And then we decided that we were going to merge the companies together. Take a nice photo, shake hands, welcome to. Yeah. And then there was a question. Distributors, what do you want? Yeah. Should we take the thing away or should we give you both lines at that time? So you changed the business practices in the industry because they didn't want to give this up, right? Yeah. So now we gave both lines to both distributors. Wow. So you didn't have to have exclusivity with a distributor anymore? Bingo.

51:11Amazing. Oh, that's so great. You know, it's one of those things that in the coin-op business in 1975, we had an 80% market share. Amazing. Wow. And then going from nowhere, you know, we were undercapitalized and all that. Give us a sense of how many cabinets you then manufactured from what's 71 to 75?

51:41Probably 300 thou? Wow and each of those earning roughly a couple hundred bucks a week. Correct. How'd you capitalize that or did you manage to get pre-orders and have sort of a nice working capital cycle? Actually the business model I'm more proud of than the technology because I built this company on each my partner and I put in two hundred and fifty dollars each.

52:09That's the only capital that went into the company until Dawn Valentine in 1975, yeah. And so what we did, I figured out just in time, inventory. So all the cost was in the cabinet, the TV set, the coin meck and the power transformer, the glue parts for the computer and all that. It was a lot of numbers, but not a lot of that.

52:36So we could actually, from the time a cabinet came on the floor, we'd have the TV set and all the other pieces come in all at the same time. And so we were turning inventory 28 times a year. That's like Amazon levels. Exactly. So we were able to essentially sell a product and have 60 days to pay for the The because you had time so it operated so the company operated in positive cash well Wow, and what were the payment terms when you would deliver one of the units to 30 days, okay, but we'd give a 10% discount for five days But then we found this factory company that would buy our receivables and so I get immediate cash Wow, so you you grew

53:36to millions of dollars a year on no capital. No capital. Wow. How do you spoken with Don Valentine or any other investors and to foreshadow? That your capital hadn't really been invented yet. Yeah. Well done. Yeah. You invented it in a lot of ways. And from what I read, the sentiment around the time sort of associated coin drop with Mafia activity and gambling people didn't want to be involved in investing in this sort of mob controlled or mob perception Yeah, well, it was true during the prohibition The mob provided illegal booze illegal gambling loan-charging and prostitution when prohibition was repealed they still had their three troche and then the games

54:26Modified you know in the species they had roulette and slot machines and the whole nine yards but when all of a sudden The species emerged from underground they could easily identify the slot machines and so they started disguising them as pinball machines, but they were payout machines. They were great So that's why pinball had such a negative stigma Not because of pinball, but because a lot of them were actually slap machines. They were disguised on machines. They were. Wow. The proto venture capital industry that we talked about, you know, d'Arthur rocks and the, you know, the folks that were the Tommy Davis isn't like, they weren't gonna. I'm sure you didn't even talk to them. I didn't know. I hadn't heard of venture capital. I, you know, it was just. So how did you? I was just young and dumb. How did you and Don intersect then?

55:22He came to visit me. He found me. I didn't find him. And at that point in time, we were in six buildings and we were up about 30 million in sales. And this is like 74 or at least 75 somewhere in there. And so we were kind of getting to be big shits in the valley. Wow. And he had just set up Sequoia Capital, taking it independent from Capital Group. Now, you get this. He says, can I see your business plan?

55:51Listeners, I wish you could see the face Nolan just made. We had no business plan. I'd been running this thing by the seat of my pants. He says, well, I'll set you up with a guy that can write your business plan for you because I need it for an investment because I like your business. So I spent a few hours a day for several days with this guy named Don Yost who wrote the business plan for Atari the very first one we ever had. Wow.

56:20And when you're already doing 30 million in sales. Yeah, I know. Wild. Different world. And when Don first approached you, was it called Sequoia Capital at that point yet? Yes. Okay. So he had fully spun out from Capital Group. Correct. And how did a deal get done? What did he offer? Did you? How did how did you broached the conversation between the two of you of accepting capital to a business that had never had capital before? Well, to get the right patina on this.

56:50We had the summer of just content. I told you how we operated in positive cash flow. That's all fine and good until you fill up your production line with products that you can't sell because there's a part that's missing. What happened there? We almost went out of business. That made me out of withheld the part. There was a chip.

57:18that we needed to get, and it was on backlog for three months. And so, one month in, we were way behind on our payments. We got sued, and three months in, all of a sudden, we didn't defend ourselves because we owed the money. And so, we had these judgments against us. And so, there were sheriffs on the front door, coming to...

57:42that collect assets. What they really want to do is collect your bank account. They didn't want your chairs and tables and stuff. And so what we did is we opened up bank accounts all over the nation. And so we would just go every week. We'd use a different checking account to pay our people. Wow. Oh my goodness. Wow. Because you're trying to keep the doors open. You're trying to stay in business. You think this will get resolved and you want to keep your great people out. You have a great business too.

58:11So was it in this really tumultuous time when you did the deal with Don then really cool. Yeah, we were damaged and I did a reorganization with all my creditors and basically I gave them I said if you want 100 cents on the dollar you got to give me six months If you want 50 cents on the dollar I'll pay you in two months If you want cash right now, I'll give you ten cents on the dollar And then I said, and if you sue me, you'll never get an order from me again in our life. And then to get the line going again, I went to Jerry Sanders from AMD. And I said, we've just been cut off because of credit hold. I said, but I laid out what the option tune was. And I said, I need a $50,000 credit line for your parts.

59:10And if you give that to me, you'll be my preferred vendor from now on. Wow. Who were using fairtips before? Where were you using? Fairchild. Fairchild, okay. And TI. And they were just jerks. And Jerry said, okay. Wow. It probably was worth $50 million to AMD to be the prime supplier for Atari. Yeah. Pretty good, okay. Very good, okay.

59:38So that we've been good friends since we've got oh, that's great So my understanding from doing a little bit of research before was that effectively came to terms on what the investment would be from Sequoia during the time of of tumult and before Correct the AMD agreement. Yeah, but of course you hadn't closed yet and closed you know, you're maybe a month or a few more months goes by and you're getting ready to close the deal. And we've gotten much healthier. We know all the things that we've done, we've fixed up things, we were shipping, and all of a sudden we weren't under stress again. And so we became time to close. And that night I said to Joe, the president, I said, I can't do this. This is not the right deal. Don had champagne.

1:00:28I stopped in his trunk and he came out and I said, sorry, the price isn't right. And I said, this is the condition when I agreed to this condition now, the price is double. Double. Double. Wow. How did he react? Oh, he was pissed. But I was willing to walk away. You didn't need the capital. I didn't need the capital. Two days later, he came back and he said, okay. Wow.

1:00:58What a story for the first investment. Well, it was my relationship with Don was always a little bit love hate. You know, I could see that. You know, and because you don't you don't dick with Don Valentine.

1:01:16I've heard then that board meetings could take place in hot tubs. Can you describe the Atari culture at this point? We talked about you as the first hacker archetype as a CEO. I don't know if you called yourself a CEO, president, founder. Let me see you. Okay. What was the company like and how is it different than other companies? I think to understand that clearly you need to understand what was going on at the time.

1:01:45And we all had our hippie costumes that we dress up in our bell bottoms in our tie-dye shirts and go up to San Francisco and be posers. You guys were engineers and we were engineers but you know sometimes it was kind of fun totally to go up there and so there was this ethic the the summer of love and all that that and you know don't trust anyone over 30 and you know smash the state and all that but what really was it was a an idea that you treat everyone fairly not based on history not based on legacy not based on you know who you were and what what you came but but what your soul was what your capabilities were and so we actually created this

1:02:37company manifesto or a constitution. And so we encapsulated equal pay for equal work, very first one in Silicon Valley. So we felt and we had some amazing women that worked for us that were just love the whole idea that we had this manifesto. Speaking of the culture and the time, I mean, this must have been right around the time when this guy shows up at your office, right?

1:03:07Yeah, jobs. Yeah. Uncam dirty. He just walked in on one day and said he's not going to leave until he had gone to job. And was it this like, I mean, you guys have become pretty big in the value or well known at this point. Was it like, this is Steve Jobs, of course. Did he want to work at Atari? Because he'd heard about Atari and I heard about the culture. Yeah, absolutely. And, you know, he liked the idea that we were doing something that wasn't bombs, wasn't, uh, you know, military and by being in the game business, we actually had a real advantage because a lot of the businesses had some military outlook. And so if you were a foreign national, a lot of times you couldn't work for those companies. So we had our pick of the crop in terms of

1:03:58You know, the brits at the time had just wonderful engineers and Germans and what have you from all over the world. Yeah, and you had that unique recruiting advantage. You're in the Bay Area. The Vietnam had probably just ended at this point. Yeah, pretty much. I'm sure there are a lot of people in the Bay Area at this moment in history who are none too keen to be working for companies that were selling the militaries. Yeah. All right, listeners.

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1:06:03So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely at scale, go check out servicenow.com slash acquired and tell them that Ben and David sent you. I'm sure you've spoken many times about your experience with Steve Jobs and Steve Wozniak. You are one of the very few people in the world that were ever either of their boss. Right.

1:06:27How did that go? How were they as sort of young budding talent? And what are some of the things that they did together to Tari? So, I want to clear up this. Yeah. Wasnac never worked for me. He was always working at HP. Yeah. And I put Steve Jobs on the night ship because I knew Wallace would hang out with him. Ever the entrepreneurial. Well, I called it getting two two Steve's through the price of one.

1:06:55And he got an advisor and was and was and was a true savant. I think actually was doesn't get enough credit for the success of of Apple because he could design discrete logic chips. I mean he did the Apple too as a design construct was brilliant. It was the most efficient Articulation that you could probably it was did it all night or two nights in a row develop the drivers and the hardware to interface this floppy disk drive to the apple to Took Atari seven months Wow, and we had some smart people Wow, so those sorts of things for me just gives me tremendous respect for for the man's capability we had a

1:07:53deal where the engineers at Atari could bid on the projects. We'd give them a game list. And since we'd give a little bit of royalty to the engineers, they only wanted to work on ones that they liked. And I came up with this game called Breakout. And nobody wanted it. Quite success out in the World Breakout. Well, the perception was that ball and paddle games were over. And this was a ball and paddle game with a twist. What year was that? 74.

1:08:22Okay, so we're two three years after the amazing success of Pong right got it might have been 75 Not sure, but they'd never been a single player Pong. No, and it turns out that Breakout was actually the game that that launched the Japanese market for video games at all Yeah, and so at this point in 7475 Atari had just started shipping home consoles you would 75 75 got it the VCS that became the 2600 right so many of us had My understanding was you were the sort of game designer and and kind of visionary behind breakout This was a game that you'd sort of really come up with a concept for and so you put it on this list for for different people to bid on How does it go from there? They didn't want to do it. And so I put

1:09:17Steve on the night shift and signed it to him. This is jobs because he's the only one that works. And I knew that he wouldn't do it, but was would. Amazing. Was is not an employee of a sorry. He's just hanging out with jobs at night. How's the IP work on that? It was different employees. Yeah. Crazy. Wow. It's a was does all the technical design of breakout. Yeah. Now I did a deal where they got a bonus based on how few chips they could use. Yeah, so I read something about this that the cabinets typically had 75 plus boards in them, but it would save Atari like a $100,000 if you could remove each chip. Yeah, and that's absolutely true. And so the was design was like 40 chips. I mean, it was unheard of, but it had

1:10:17sort of feedback systems that made it really hard to test. And so once the game was done and everybody could see that it was fun, they did a recap the hacks, but I paid the bonus based on the number of chips that came back, which was $5,000. And that was a lot of money in those days. Yeah. Subsequently, was was over.

1:10:44to the house and we were talking about breakout and what have you. And I said, what did you do with your half of the money? He said, oh, I went out to dinner. And I said, that's some dinner. And he said, what do you mean? And I said, well, you know, I figured you probably ended up with $2,500. He said, this is jobs did it to me again. Jobs told me it was $500 and he got $250. Wow.

1:11:13And this is before they started Apple together. Oh, no, no, this is after. And you know, was said, you know, I really don't care. He said, because of jobs, I've made a lot of money much more than I ever thought I would at that. And I said, and he must have had a better need for it than I did. Wow. Wow. What a feeling guy. Yeah, did Jobs come and tell you that he was gonna leave Atari and go start Apple. Yeah, how did that happen? Well, he asked me to be his first investor $50,000 for a third of Apple and I just said no, which I've kind of regretted and But that's okay Don made a mistake with Apple too, so well it was really a thing where I actually think if I said yes the world maybe have been a slightly different place because

1:12:12Mike Markle who did the first investment was also very hands on mentor. And he basically turned jobs into an actually acceptable CEO that I probably wouldn't have done. Yeah, I think I've heard you refer to him as a Ho Chi Minh looking guy. Yeah. Yeah. And remember, Markle was the first president of Apple. Yeah. Markle had worked for Don Valentine, right? Yep. And the story is that Don said, Michael over to talk to Steve. I sent Steve to John. John sent Steve to work here. Wow. David, can you just catch us up on the timeline, moving through the mid-70s, sort of what happens in 75, 76, and let's get to what the next financing would look like for Atari as a company. So Sequoia and Don invested in 75. Right. Then in 76, you end up selling the company. How did that happen?

1:13:10We were far down the design path of the 2600. We knew that we had to one build a new factory to that it was going to be a highly driven by fourth quarter sales. And we just knew that we didn't have enough capital. And so we started down the path of taking Atari Public.

1:13:34And we had an S1 drapped it up and everything and then the market kind of did a hiccup. And he said, maybe not. So we went down, so we said, okay, we'll see if we can get a corporate partner. When we started down that path, Dawn says, hey, why don't you go talk to Warner people and the Warner people came out and said, that's kind of interesting and what have you. And maybe what we can do is we can do a structure where we buy it.

1:14:03And you guys make all the money and do all this stuff. You know, we were young and dumb. I had a lot of hate coming out of my shirt. What have you? And so they sent the Warner corporate jet to pick us up at the San Jose airport. And we climb on board. And of course, just to really do starstruck, they stopped in Sun Valley and picked up Clint Eastwood and Sandra Locke.

1:14:32What on the jet on the jet Wow, and so we're we're flying to New York on the Warner jet with Clinton your girlfriend Wow That didn't come up in any of the research. Oh, really? No, no, yeah, well and then We get picked up at the airport in a limo drops us off at the Waldorf Astoria side entrance That's where the VIPs go. The VIPs go. We go up and we're in a suite of rooms that has a library and a pool room and a kitchen and I mean, it's basically a 5,000 square foot apartment that we're in, you know, and you know, it's the one in a corporate apartment. Yeah, and there are three of us, Joe, Jean Lipkin and myself and we're there and you realize you're played a little bit.

1:15:26But you don't mind it because it's kind of cool. There is something very nice about getting sold to by someone who is an excellent salesperson. Exactly. So next morning we meet for breakfast and go into Warner's conference room and we start talking about deals and deal structures and what have you. And can you give us a sense for the size of Atari's business at this point, revenue or profit or anything you can call it? It's probably close.

1:15:56To 40 million 45 in revenue revenue, but this is all in the in the arcade business, right? And you're about to answer No, we were doing home pong. Oh, okay, you're doing home pong, but not the 2,600 yet got it. I didn't realize actually that you had marketed home single game Oh, yeah, there were two big dials, right? You gotta grab it and each player would twist them to move Yeah, so anyway, we gotten to a few sticking points. What have you? Hadn't quite shaken hands. We were invited over to Steve Ross's for dinner. He has a dith Avenue apartment on the top floor, top three floors. And of course, there was a screening Valt-Law Josie Whales for Clint and Sonja. Wow. Amazing. Wow. Talk about being sold to you. Yeah, exactly.

1:16:52kind of like this life. So at the end of the day, we kind of shook hands on a proposed deal. Wow. And so that, if I read correctly, was a $28 million all cash offer to the shareholders of Atari. Wasn't all cash. There were some debentures involved. And that was done as much for tax reasons as anything, because you know, you wouldn't have to pay tax on all the ones. Right. It's cheaper.

1:17:23But in addition to that, there was a huge payout like there was a 10% bonus pool. So we, personally, we'd get a big taste of the success of Atari. Oh, like a, like an urn out. Oh, wow. Yeah. Which this is before startups learned that big companies always structure the urn out in their favor. Oh, do they ever? You wrote the playbook in so many ways.

1:17:53Which of those ended up being more meaningful for you? The bonus pools or the actual one-time transaction? That's actually hard to say because what I ended up doing is I hypothesated the bonus pool to get additional capital for Chuck E. Cheese. So this is an excellent lead-in too. Okay.

1:18:15a few of us who had like looked into this before knew that you are also the founder of Chuck E. Cheese, which when you, the first time you learned that, you know, your mind's blown and you got Tweety Bird spinning around your head. The thing that I didn't know until really diving in is you started Chuck E. Cheese as a part of Atari and then bought it from Warner's to spin it back out. Correct. Take us through that. Okay. The idea before Warner's there.

1:18:45As I felt, we were selling these coin-operated games for $2,000 and in their life they'd do 30 to 50,000 in coin drop. It didn't take rocket science, Sam on the wrong side of this transaction. But I didn't want to compete with the operators that were putting them in bars and restaurants and I didn't want to compete for locations for arcades and malls and what-have-you. So I said, I'm going to have to create my own location.

1:19:14And so I said, okay, if I'm going to be building a big arcade, what's my best draw? And I said, well, we've got to have food. And what the food needs to be is pizza, because there's a wait time, ideal time for that. Then the most successful, ideal time to go play the games while you're waiting for them. Yeah. The most successful pizza parlor in the Bay Area was a thing called pizza and pipes where they had a deconstructed world-serve theorem.

1:19:45all over the place. And so there'd be an organist and you'd see the drums going and they put lights on the various things so that it was kind of a show. Yeah. And I thought to myself, okay, see you missed before. I can do something like this. It turns out that I was going to take my daughters to Disneyland. I was trying to get some ideas about what I could do that wasn't a wordless or theater organ.

1:20:13but had the same marketing, and we went to the Tiki room, and I said, oh, my engineers can do this, and we can replicate it till the Kaskama. And so, that became the working prototype for Chuck E. Cheese in terms of concept. And we literally opened the first one three weeks after we closed the Warner deal. Wow. Was it in San Jose? It was in San Jose. It was in an old brokerage house. There's 5,000 square feet in the day we opened, we knew it was too small. You know, the typical piece of parlor was a 500 square feet, maybe a thousand, you know, and this was 5,000 and yet it was way too small. Wow. And did the first one have, I mean, my memories of Tickety T's are the whole elaborate system with the tickets and the prizes and all the animatronics, the show every half hours. Was that all there in the beginning?

1:21:13Most of it. Most of it. I always felt that the right way to market it was we would survey the cost of a large pizza. We'd then up that by 15% and then give tokens that if valued at 25 cents would look like we were 15 to 20% cheaper.

1:21:37So you would just bundle in effectively some some starter game play with the pizza Exactly. Oh man was Atari Creating the games that were in Chuck E. Cheese then partially we would we would buy from anybody Yeah, like we bought ski balls and things like that from others Huh, but it was off to the races Okay, you want me to deal I got from Warner desperately yeah, they they said I was talking about expanding a budget meeting and they said, I don't think we want that. And I said, really? It's really good business. I said, I'll buy it. They said, how much do you want to pay? I said, I don't know. I said, you don't really have to work at this. I ended up... The carny wheels are turning. So, I got it for half a million bucks. How many thousand dollars a year for five years?

1:22:39Oh, they let you pay it over five years. No interest. No interest. Wow. And how many locations did you have at that point? Just the one. Oh, just the one. Okay. But that one threw off 700,000 dollars of cash flow annually. You're sitting in the corporate finance department at Warner didn't give this. I mean, they clearly just didn't didn't believe in it. I mean, yeah, they didn't believe in it. Also, you were just the king of payback periods and cash flows. Exactly. Well, That's when you don't have cash, you've got to think that way. Yeah. Yeah. What year is this that you buy it for 500K? 77. 77. Or at least it's the year that you start five payments of 100K. So that's in 77. Over the next, I don't know, decade, decade and a half, Chuck E. Cheese has close to 300 locations that you've opened. 250. 250. 125 company stores, 125.

1:23:37franchises and sold it to Brock Hotel. To who? Brock Hotel. Brock Hotel. What did that transaction look like? It was a bad deal for me. I'd taken the company public. I made more money on Chuck E. Cheese than I did on Atari. But I did it through selling stock going on. But the company 1983 was when the Video games kind of did. And Chuck E. Cheese was hit by that a little bit. And so, I had hired a new president of Chuck E. Cheese and started really seriously campaigning a sailboat, i.e. Screen off. And I might add, in 1977 I got married again.

1:24:32And, you know, once I sold the company to Atari, it took a little bit of the fire out of my belly. So it sold Atari to Warner. Yeah. Yeah. And so I got married. I was spending a lot of time wooing and wetting my bride and then we'd hang out and, you know, got the big house and did a remodel. And, you know, all the stuff you do when you have a lot of cash. When I was campaigning at Sailboat, I won the Transback. Newport to Hawaii.

1:25:02in 1983. That's a big sailboat race. You're talking to someone who doesn't. I'm not a big yes. This is like a very well-known several. It's basically longer running the America's Cup. But it's considered to be not quite America's Cup because it's mostly downhill. What is it? The wind is always at your back or something? Exactly. So you want a boat that is Very flat bottom, they can get up and surf. You fly spinners all day long, but it doesn't point up wind at all. You know, and the America's Cup, you have to be an all-around boat. I see. Instead of what they call, Transpac competitors are called sweats. To get it's great. But anyway, I won it in 1983. Congratulations. And the minute I hit land,

1:26:00I get this call, we're gonna miss our projections and lose money in the third quarter. And your public company at this. That's been a republic company. You know, what happens is, you know, when you lose money, I had a couple of lines of credit out there and that violates covenants and it just starts to create a shitstorm. So get out of that, I ended up selling. Not for a lot of money, but It's okay. There was another... I mean, you've started so many companies in the years since and continue to, but there was one more company we want to talk about before we move on to acquisition category here that came out of Chuck E. Cheese that you ended up selling to George Lucas. Can you tell us a little bit about that? Yeah, I had a project called Cadabrascope. And what I want to do is create computer-aided animation.

1:26:59And I felt that doing tweens and things like that, that the technology was good enough. And we created some pretty good software, but the computers were so crappy in those days. I mean, it was taking 48 hours to render a complete frame. I mean, you know, and half the time the computer had bombed before it finished.

1:27:21You know, if you got one frame a week, you were really rocking. And this was with a back 780, which was the go fast scientific computer at the time. And these frames are 640x480 or less? No, they were, they were, no, they were, they were 640x480. Yeah. One a week.

1:27:40One Wii. Wow. And there's not a business story. Imagine it in like 2065. Yeah. So I ended up selling my software to George Lucas when Chuckie got into trouble. Scramble for cash. And so in some ways I like to joke and say I found it Pixar technically. But George Lucas took it and did it. And while I While at Tabrascope, I showed Steve Jobs, he came over and he was very fascinated. Wow. And I told him about some of the problems we were having. And so he came to me when he was offered Pixar. And I said, from George Lucas. Yeah. And I said, the big key is render time. If you can solve the render time problem, it's a good deal.

1:28:37And what I hadn't realized is he'd figured out how to do a render farm. So where you basically atomize the problem and get a whole bunch of different computers to work on it. That was the first render farm that ever existed. Wow. Wow. Anyway, that's so cool. There's fun acquired history too because Pixar was our first.

1:29:00our first episode I think we dove into the research and you know we were excited to find out that Steve Jobs Pixar came from George Lucas at Lucasfilm and what a cool story that was and here we are a hundred episodes later getting the you know even deeper origin story it's just really cool yeah super cool all right let's go into our section after history and facts and this is an illustrious amazing history and facts what we tend to talk about now is What would have happened otherwise? And the way that I want to frame this, on this episode is, what if Atari was never started? How do you think this crazy, enormous video game industry that we have today? I'm sure you've thought about this before. Like, there's one view of it that it wouldn't exist at all, and that, you know, probably not true. There's another view that is, it would be no different than it is today, which is also probably not true. So what do you think is the middle there?

1:29:59I think that there's a 90% probability that there would be a video game post the 6502 microprocessor. I think that the technology had progressed point where it was pretty simple. The secret sauce that I provided is to figure out how to do it with state machine technology, which isn't an obvious thing to most engineers. And I think that was That was my unique contribution that is far enough out of the mainstream that it may never have happened. Or it made it. You'd just never know. There's a lot of... I would say that we were running down the hallway of a hotel and you're checking all the doors. And sometimes there's a broom closet. Most of the time it's a regular room, but every once in a while there's a ballroom.

1:30:58You're not there alone. There are many people running down those same streets. And I think it's extremely arrogant to think that you were definitive in something. I read somewhere. I don't know if it's true. I think this was after you left Atari after the acquisition that there was potentially a deal on the table for Atari to be the U.S. manufacturer and distributor for the Nintendo Entertainment System for the way I come.

1:31:27Can you can you save or do you know anything about how that I just know that that was an opportunity and It was turned down. Wow That would have been a very different very different so I want to add one thing that About the transpec because another important thing happened over the chart table for in the morning We did the rough for e-tack which was the foundation for Navigation systems, you know, if you have a mapping system in your car or on your iPhone, it's all based on the technology we created. Wow. And I think I remember reading in the research that at ETAQ, which is one of the companies you created that did navigation technologies, you had an arrow based on the space invaders. That's correct. For the car. And still to this day, any navigation, you know, Google Maps, whatever, like you're an arrow if you're the car and it's because of that, right?

1:32:25Yeah, it's kind of fun. That's awesome. Pretty cool. Well, what happened to E-Tac? Sold it to Newscore, who sold it to Sony, who sold it to... Tell Atlas and after. Tell Atlas, yeah. Wow. Oh, how these things find their way through history? Earlier this season, so it all comes back around. One other question for moving on is Atari.

1:32:54Pioneered video games in so many senses, but is not relevant today. How could Atari have traversed the waves that came over the next few decades and been what Nintendo became in especially in the United States? It all comes down to management. The company never had a strong sense of self. In fact, I think Atari is maybe the only company in the world in which the market leader abandoned its market. Can you imagine that? But it did. And the sale to Jack Tremel, you know, it was just a total cluster. That this is Warner sold it off. Yeah. Huh. They just didn't have a feeling for it. I mean, the executives they put into Atari were all record guys. They didn't realize they were record player guys as well.

1:33:54and so they were. Well, they were in East Coast company. I mean, like we covered in our last episode, it's just like fairchild, like an East Coast corporation running a West Coast technology firm in that day. And it just didn't work. Yeah, it just didn't work. And they, and, and Ray Kasar totally screwed up the corporate culture. Like we went from not allowing executives to have reserve parking spots. Because I felt that, hey, having the workers pass an empty slot with, you know, vice president was just an us versus them trope. Totally. And, and I said, I want this, I want us to be as egalitarian as possible. And yeah, I'm going to make a little bit more money, but, you know, I've got more responsibility. And, you know, we all are in the same cafeteria. We're all hanging out together, you know.

1:34:50when we have a beer bust on the back dock, we're all there, you know. And we went from that to a private dining executive dining room by a four-star chef to, you know, limos and reserve parking spots and all kinds of uspurses them tropes that was just not a tarry. The irony is, now in Silicon Valley, there's a private dining room with four-star Michelin chefs.

1:35:15for everybody and everybody tells you for blackstork and like the company pays for all of it. That's as it should be. Yeah. Well, our next segment that we typically do is acquisition category. So we decide, you know, and there's very clear cut in easy episodes where, you know, the company bought it either. It was a people acquisition technology product business line. It was for an asset. In this case, I think what's coming out is Warner didn't really know why they bought it and then that led to some of the kind of falling apart later. How would you characterize why they bought the company and what it was for? I've often thought that Steve Ross, who was suffering from prostate cancer, Berlin, had a very clear idea of what Atari was. When he got sick, I think the record guys didn't.

1:36:10You know, in a very significant way and that's where it kind of came off the rails. All right, well, normally here after category, we would go into grading. Nolan, we will take your color on everything so far, both on Warner Buying Atari and you buying Chuck E. Cheese back from Atari and growing that into what it was. We will take your color there as our grades and finish up here. Nolan, thank you so much. You know, before we close up, I got to tell you what I'm doing now.

1:36:40Please, please. AI-driven board games. I did a deep dive on the Amazon Echo and the Google Home System and the AI under it and the speech recognition and everything and became mesmerized. And I thought to myself, this is a game platform that nobody knows about. And so let me do some board games that you can talk to and that will answer.

1:37:10And so now we have St. Noir, which you can go into at Amazon right now by the board game. Then download the St. Noir app from your Amazon Echo. We're not on Google Home. We will be after the first of the year. Yeah. And you can play a murder mystery in which you're in the creepy town of St. Noir. And there are 12 creepy people, one of which is a murderer. Oh, that's fun. And the Towns people have to tell the truth. Oh, it's like mafia or werewolf but kind of yeah and but but the perpetrator lies So the game is interviewing everybody and finding out where they were on the night of the murder who they saw and what they did and

1:37:59various things and find out who is it is it multiplayer or single player or both I always play with three or four people and we we decide and talk about things but there's the board game and it's gorgeous and I Suggest everybody that's listening to this should buy six or seven particularly for Christmas Well if only you could figure out how to put a quarter slot on that go then that would be perfect Well, you know when you sell a bunch of paper For 40 bucks, that's almost just good. Maybe even better. Well, there's one other trend here that you're on that I think is brilliant. I mean, of course, AI-driven is interesting, next-generation gaming is interesting, but the most popular emerging podcast category is True Crime. And this notion that sort of like you could have interactive, gamified True Crime is really cool. Not that we're actually working on one of the

1:38:58those. Oh, awesome. Cool. That's mentioned board games. Yeah. Oh, I'll accept. When you say true crime, I'm not sure that it's going to be true. Yeah. Nolan, thank you so much. My pleasure. It was fun. This has been a true honor. We're so glad you joined us. And what a great moment in acquired history to bring a full circle with Pixar. A very first episode to be talking about the origins of Silicon Valley. And you know, you guys played such an incredible pardon that, so thank you so much for sharing the stories with us. Well, I appreciate it. All right, listeners. Now is a great time to talk about one of our favorite companies, Statsig. Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale. Yep. In the...

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