Acquired - Rec Room Part II (with CEO Nick Fajt)

0:00Ah, okay, good to know. So we should not ship tomorrow then. Don't do it tomorrow. Please wait. Okay, great. Yeah. Good day. Glad we asked. I'm gonna send you the press release. So you just it has the embargo at the top. Welcome to season eight, episode four of acquired the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert and I'm the co-founder and managing director of Seattle based Pioneer Square Labs in our venture fund.

0:37PSL ventures. And I'm David Rosenthal, and I am an angel investor based in San Francisco. And we are your hosts. In 2018, we did an episode on the early stage Seattle startup, Rec Room, founder and CEO Nick Fight joined us at the time to talk about their seed round that they had raised from Sequoia. At that time, they were a popular app in the slow to develop VR landscape with a couple hundred thousand users and zero dollars in revenue.

1:06Earlier today, Reck Room announced in the Wall Street Journal that they had raised $100 million at a $1.25 billion valuation from existing investors Sequoia and index ventures. They are now a product that spans across many platforms from, of course, virtual reality, but also to Xbox, PlayStation and iOS.

1:27They have had astonishing growth numbers over the last year where they grew revenue 660% and now have over 15 million lifetime users, 2 million of which are creators on the platform. And we knew them when. Indeed.

1:46The background of all of this is that 2020 was a heck of a year for the entire metaverse category. You have Epic and Fortnite's growth. They're currently rumored to be raising at a $28 billion valuation. And of course, Roblox's blockbuster IPO that they pulled last December because there was too much demand and instead raised private capital and then did their direct listing this month and are now valued at $40 billion. The price was too high.

2:15It was too high. You could say it's been a transformative year for rec room and the entire industry to say the least. So today we are back to tell part two of the rec room story. And again, with the best person in the world to join us, Nick fight. So Nick, welcome back to acquired. Thanks for having me back. I'm excited to dive back in. This is great. I think you are the first repeat guest on the main show. Wow. All right. Cool.

2:43Love it. Yeah, and over so many different stages of your company. I mean, the premise of part one was how to raise your seed round with this guy we know who's raised it from Sequoia. And he's got this cool company. And who knows about this very speculative space. And here you are, like a mature grown up company back to tell all of us how to do it. And it was just a straight line from those two points. There was no hardship in between, yes. As it always is, especially in consumer entertainment, I'm sure.

3:12Well, listeners, are you an acquired Slack member? If not, what have you been waiting for? It is a spectacular community discussing, of course, recent acquired episodes, but more importantly, it's just a genuine and smart group of people having a thoughtful, nuanced and respectful discussion about the tech and investing news of the day. Fun fact that I just learned is one listener recently hired three other smart members of the acquired community this month into his company directly from the Slack community.

3:41you can join at acquired.fm slash slack. All right, listeners. Now is a great time to talk about a new partner of ours here on acquired, LaGoura, the agentic operating system that is redefining how the world's best legal teams work.

3:58Yup, 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. Lugora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry? So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm.

4:24for 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 drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Legora's 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.

4:53And 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 100,000 lawyers on the platform from 1200 legal teams in 50 countries, and crazily, they went from 1 million to 100 million in ARR in about 18 months. Truly insane numbers, and that is the real test.

5:46Plenty 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 lastly, I will keep this brief today. If you are not a limited partner, you should become one.

6:12We had a delightful LP call with so many of you last week, and we're looking forward to more to come. You can join at acquired.fm slash LP. And we can't wait to see you there. David, Nick, let's dive in. Let's do it. I'm ready. Let's do it. Okay. So as Ben said, last we left you, you guys, the plucky Requiem crew. It was February 2018. You'd raised this great seed round from Sequoia. You'd also raised an internal A from Sequoia that I think you didn't had announced.

6:42by then, everything seemed to be great. But I was actually wondering before we get into what's happened since we didn't talk as much about the sort of real founding story of Recreum back then. I was wondering if we could revisit it this time of how you guys actually came together out of Microsoft and started this company. I think it'll be really good context for entrepreneurs out there to understand. Maybe that there's not always a big grim plan to become a billion dollar company from the beginning.

7:12Yeah, I mean, I think the the founding stories you normally hear it's a very cleaned up narrative of like I had this vision or I was doing this mundane task and and I this light bulb like went off and and that was not true for us. So I was working on the HoloLens team at Microsoft and I had been working on it for I don't know maybe like four or five years and it was right before the first headset launched. My team was really focused on kind of consumer products for HoloLens. So like video games, essentially, like what kind of games are people going to play at HoloLens? And then as the HoloLens team progressed, it really shifted far away from consumer towards, you know, less, let's shoot aliens in your living room to, let's help Boeing assemble jet engines. It was really when Enterprise and military. And it left my team that I was working with as

8:02you know, kind of a relevant and a bunch of us got re-orged. So we had this team, we all called, loved working together and then the team got, where did you get re-orged too? I got re-orged to the Microsoft Edge browser. And man, it was so difficult because I was like, I've been working on the future for like four or five years and now I'm working on Microsoft's second browser that I don't quite understand. Like, what's wrong?

8:30Why can't we fix the first one? Like, why is there another one? So, you know, I found I was moving over there and I was just so passionate about the AR and VR space. I wanted to stay in that space. And so, as soon as I found out there was going to be a reorg, I actually applied to like every company that was doing stuff. I applied to Oculus. I applied to Magic Leap. I applied to Google. I think I applied to like Unreal or Epic.

8:56because I knew their engine was focused on it. And I got turned down everywhere. So no one wanted to hire me. And I was like, man, I feel like I have this valuable skill. Like shouldn't somebody want to hire me? Not even magically, magically, not a fan. Yeah. And I think there were a couple other people that felt like I did. So so shortly after this, I don't know, maybe like 30 to 50 people left.

9:17Microsoft and we're just like, you know, I don't know what's next, but it's not going to be groove music, or it's not going to be the calendar app, you know. And to set some context, Microsoft had been experimenting with what would become the HoloLens for like seven, eight years. I mean, it was, it predated the work done on Oculus, right? Yeah, yeah. I mean, I think I, I think my first demo of HoloLens was in like, you know, 2011 maybe. Yeah, super early. So very, very early.

9:45And I had been working on it for years, but I think when Microsoft first started it, they saw it as a successor to connect. And then over time, it was like, well, enterprise makes a lot more sense, given the use cases were able to light up right now in the expense. So in Microsoft's defense, everything they did made a lot of sense. This was not ready to be a consumer product. It was way too expensive. And the use cases that we could light up at the time just didn't make sense. And so having a bunch of game devs focused on this didn't make any sense.

10:11So a bunch of the game devs left, you know, a couple of them formed various companies that kind of focused on VR and against gravity happened to be one of them. So me and five other people came together to form a company called against gravity and to just give you an idea of, like, how little of a plan there was, like, the reason the company wasn't called Recrum was we didn't have the idea of Recrum. We had no idea. We actually thought maybe we could leave and like, Maybe Microsoft would let us keep developing stuff for HoloLens. We couldn't get a dev kit. It's so great. Not only did you not have the idea for record, you had no idea. The plan was just, we're working together, we're going to get together, we're going to do something. As I said, I think like 30 or more people left and in a bunch of them we're like, I'm going to form this company, we're going to form that company and then against gravity just happened to be one of those offshoots. The name against gravity actually

11:05is a demonstration of how little of a plan we had. The HoloLens headset internally was codenamed gravity. It was so heavy, like, you know, they were called like gravity A and it's gravity B units. And so we were just like, well, we don't know what we're doing. We know we're moving away from that. And I guess we'll call it against gravity. But we were like, actually still very excited to go build HoloLens software. We just couldn't get a hold of HoloLens. Some friends at Valve.

11:33hooked us up with an HTC Vive and we were like, okay, well, hey, we got a piece of hardware. Why don't we start messing around on this thing? Wow. That's so cool. I think honestly, all of us thought like, oh, my Microsoft will eventually get back in the consumer AR space and we'll just go back there. But in the interim, we'll do this. So yeah, I would say there was like not a ton of intentionality there. It was more like, you know, maybe some egos or brews and it was just like, well, I guess we'll.

12:03We'll take a chance and try something different. We're going to tell the whole story about everything since your seed round and how you've gotten here, but to ask an analysis question upfront, do you think that figuring things out as you went in those early days has that served you well in getting to here? Obviously, most other VR companies that were started around then are...

12:29Certainly not doing what you guys are doing or as well as you guys are doing or would you say it's like no that was just how we started but things have changed I think it certainly gave the culture of the company a specific flavor I wouldn't claim that it's like the right choice but it it was our choice and I think it's led the rest of rec room to have a very improvised you know style We don't get too attached to ideas because I there wasn't you know, ever one early on that I think we were really, really attached to. I think we had seen some challenges at HoloLens about like, you know, we kind of all envisioned this like metaverse world where, you know, maybe different people are authoring rooms and objects and they all work together. Like, we did see that problem. Like, at HoloLens, there was an app that some people were working on that was like a travel app. Like, you go to like Machu Picchu or the Colosseum. There's another one that was like- There's like, we're doing that. Yeah, there was like another one that was like, um,

13:27I think it was called hollow Skype. And so you could like chat with somebody who was like maybe hundreds of miles away and it was really cool. And there was a final one which I don't think many people saw but it was like a pet. And it was like this like a little virtual dog and you could teach it tricks and stuff like that. But none of this worked together. Like we couldn't be chatting on Skype and then like go to the Coliseum and then be like let's let our pets run around the Coliseum. Like it was one at a time. So you like saw your pet or you saw your the Coliseum or you saw this person.

13:56And so that kind of highlighted for us, there's something about the app model that doesn't work in this space. And so I think that got the gears turning a little bit of like, maybe we could build a Wii Sports version of it that way. Kind of express our idea, but I would say that was definitely no grand world conquering plan. It was like, how do we survive for a little while? And Nick, just to...

14:24put a fine point on what you're articulating here when you were saying that maybe the sort of app style doesn't work as well in this, you know, metaverse type world. Can you help us understand what rec room is for folks who didn't catch you the last time around? And maybe especially articulate this notion of like, it is just one big world. Like, how did you come to that? And what does it mean? I mean, very gradually, and I wouldn't say I came to it. You know, I would say that there were many, many people on the team that contributed a lot of you know, there were a lot of tiny choices that kind of helped build where it is. But yeah, so rec room, backing all the way up, rec room, it's a virtual universe. It's made up of millions of different rooms and all these rooms are unique experiences. So there are battle royale islands, there are escape rooms, there are fashion sit shows, you could have a family reunion in rec room, you could have a book club, you could have a live performance of Hamilton, like all of these things have been done.

15:23Rack room is just like a very flexible environment where you can come together in a 3D world and users get to build these rooms and they can build and publish them. And the way that they build is very unique. Like rather than building in a game engine, you're just building kind of the way that you would in Minecraft. You're like in the game manipulating objects and you can do it socially. So you can have up to 40 people in a room that are like chatting with each other and talking about the room that they're creating and maybe you want to build like Castle Crashers game, I could be like, then why don't you go build the mode and like David, go build the castle. And I'm going to work on the scoring and put a little goblin army over here. Like we can just have that creation experience together. And so it makes creation very accessible to people, even if they don't know how to code, even if they don't know how to 3D model. Yeah, there's unlike say Roblox, which we'll talk about more as we go. There's no separate creator app. It's all, it's all one world.

16:19Yeah, Roblox has another app called Roblox Studio which is where you go and build and it kind of looks like Unity or Unreal and it's a really powerful toolset. It does presuppose some knowledge about like, hey, you understand scripting and like what prefabs are and you might need to manage some like network authority or something. Record, you're just kind of like building.

16:39Minecraft style and then when you press publish we're like great we put your your room is now accessible on phones and PCs and Xboxes and PlayStation and VR headsets We'll just like host it for you and you don't submit to like a cert body or anything like that So it's just this it's like the Wikipedia of games like there's just like a lot of people contributing to this world and new rooms are constantly popping to the top of like a new hot list that people are discovering you can follow creators to see what content they've created and get notified when they build new stuff. And then we've started letting users monetize in their rooms. So we have an in-game currency that users can charge currency inside their rooms. And if they amass enough of the currency, we'll actually pay them out for the currency. And so we've got 14, 15-year-old kids in there who are earning 6, 7 grand a month in Rec Room. And we're trying to scale that up. We think that can be a lot bigger.

17:34But I think it just gives you an idea of the accessibility of the creation tools. It's really anyone can go in and realize the idea that's in their head and they can really easily distribute it. Well, it shows up in the numbers. Classically, the internet was 100% of people consumed and then 10% of people commented and then 1% of people created. Those numbers haven't held exactly true for a long time as we've entered this social era, but that was sort of the old moniker. But you look at two million of the 15 million users that you have are creators on the platforms to dramatically higher percentage since they're able to author right there in that environment and you know I'm cheating a little bit because I you and I went in and played and you should be the maker pan and I got to like you know build my own little world but like it's remarkably easy to use tools like that to create. It's certainly a lot more accessible and I think if you're the generation that grew up living on the internet.

18:31living in games. It's a very familiar medium for you to create. Yep. Yeah. Well, so let's dive into the history here a little bit. So you told me a moment ago that you publish across Xbox and iOS and VR headsets. Last time we chatted, you were just a VR company. So the VR boom didn't really arrive in the way that we were all sort of speculating and hoping, you know, how did that affect you as a company and how did the calculus of, hey, maybe we should have a contingency plan come about. Yeah, so I mean, to give a recap, I think of the previous episode, like we raised a seed round in 2016. We had launched the app and it was doing pretty well for like a VR app. And so we were able to launch a seed round around that. And then a couple months later, after working with our investors, we had a good track record of

19:23evolving the product and finding growth. And so we were able to raise an A round from from Sequoia as well. So it was just the same investor that did the A. That happened about nine months later. And we were just kind of keeping that secret as we kind of planned out what was next. When we chatted, you know, we had just rounded out holiday 2017. We had seen a lot of growth, like probably from October to December 2017 that the app like 5x. So like We were actually doing really well. It was kind of a weird situation. We had had all of this growth, but then we were looking out over 2018 and we were like, man, there are no headsets on the horizon. Are there any headsets in 2019? It was like, man, normally people are shipping us dev headsets 12 months ahead of time and they're like, hey, we're going to do this in the holidays and get ready. We just had nothing. We were like, this growth is good, but this is not.

20:19This is not a venture scale business. And your growth was basically capped by the number of VR headsets, right? Because you were a free app. So everyone would go or a lot, you know, the majority of people who had a headset would go download you. So you were basically like, your growth was governed by the headset growth. 100%. So to give you an idea from like December 2017, for the next 24 months, VR did not grow. Like at all. So you're your your market.

20:46No growth is zero per second. Totally. I think we were fortunate by like we sobered up and realized it like January. So I credit to the team. I think I think it would have been really easy to be like, oh, we just five X like we're world beaters. Like we're amazing. Keep doing what, but I think it was, oh, we just five X and that's it. Like this is not there's nothing on the horizon for us. They're like, this is dark days here. So we need to figure out some path for more growth.

21:14And to that point, we had been building all the content ourselves. So Rec Room was a universe of rooms, but they were rooms that we were building. And there were only like, maybe 10 or 15 of them. And we were good at building rooms. Like, you know, we really enjoyed it. It was really fun. We were building these like little quests where we're like, you're going to go, you know, battle space aliens with like laser blasters, or you're going to like take to the high seas and, you know, battle armies of skeletons. It was really fun. We were building these like little kind of contained rooms. And we were like, okay, well, this is just not going to.

21:44or work anymore. We have to do something very dramatically different. The two ideas that I think we seized on were the community was so creative. The community was really bending and breaking record to do other things. We'd hear stories where people were like, oh yeah, we went to...

22:03Like I just invited a bunch of my friends to go play, you know, disc golf. You have a disc golf room and we just turned off the rule sets and we have like a little picnic in the park and we're like, oh, okay, like that's it. You know, somebody else was like having murder mystery parties in one of the rooms. They would just turn off the tool set and. Last week's added two people had actually gotten married. Yeah, yeah, totally. Yeah, they have, you know, so there, but there wasn't like, there wasn't really the system as high as like creative community. We were sort of like People are hacking the game to get it to do things that we hadn't intended. Like, okay, well, what if we lean into this? What if we, what if instead of our rooms, it's their rooms? And what would it mean to...

22:44to kind of embrace this creativity. Like people are going through all these hoops to build these like amazing murder mystery parties, but they can't save anything. And if you're not in the room with like the host, like it doesn't work. So what would it look like if, you know, they could set up a room and they could publish it and other people go there and have that same experience, even without the host? So that was sort of the one of the big problems we started playing with. And then the second was we're like, all right, we've got to find growth outside of VR. And there was an app called VRChat.

23:13that had really started scaling kind of around the same time outside of VR. It had really found this like pretty devoted audience on PC. And we were like, OK, well, hey, there's it has worked for someone. Someone was able to find a marriage between VR and a flat app that works. And like, that gives us confidence that we might be able to do it as well. So we really started to like lean into user generated content and screens. That was kind of what we went.

23:38At least you went to iOS next, right? That was your first flat-world experience. Our first flat-world experience was actually on PlayStation. So PlayStation and PC. Because you had gotten a bunch of uptake from the PSVR. That was probably your big growth holiday. That was the big 2017. Yeah. PSVR was the big 2017 growth spurt. And then we were like, okay, well, we're already on PSVR. What would it mean to make it work on PSVR without the headset?

24:06and kind of like the same question for PC so that summer we like did this big unveiling and we were like all right now you can have players from outside of VR now we're like mixing in your rooms with our rooms and it was like dark days like the community was not happy about it it was a big departure from what we were doing and I think there was a lot of how we want this to just be What it was like we don't want this to evolve in the way that you're doing this and what was a downside to them of having someone nod in a headset coming in Well, I mean, I think a lot of the users who who care deeply about headsets, you know that kind of is its own community itself and so You know there there probably was this like bonding element of people coming in on headsets now like you care about VR. I care about VR like this is great. We both care about VR and like

25:01That is a magical thing that we want to preserve. We want to have VR rooms where these people that care about things can find people. I think the big mistake we made out of the gate was we were like, we're just one big community. We're just going to dump everybody into the same rooms together regardless of interest or intent. That was challenging. That was probably not the right move. The other challenge was our user-generated content tools were really... They were in their infancy. The rooms that people were building were like not very high quality. Our belief was like, look, if we can shine enough light on them and they're the right incentives, like maybe eventually we can get them, but the moment that we made the shift, like, it was probably pretty abrupt. So I think the thing that we learned, like, I think for, for, you know, two years, we were like, all right, let's, you know, we're gonna be really iterative, we're gonna experiment in public, like, we're gonna ship stuff and we're not gonna be embarrassed, like, buy it, we're just gonna, we want feedback from the community. And I think we probably realized like,

25:59there's probably like some metabolism like the community can you know evolve in this at this speed and we probably pushed it too hard then. So you guys are this is right after we did our last episode you guys are pretty deep in the trough of sorrow at this point right? Oh yeah, I mean like from 2017 to like all the way through 2019 it was like no one wanted to do any VR stuff but the VR users were like Very passionate and it was hard to explain to that that group it was like Yeah, like we know you just want us to focus just on you but like they're so like if we want to keep serving you 10 years from now like there's We need we need to keep scaling this business Yeah, and you know, I think some people really understood that they were like okay, hey in order to make sure like we weren't charging any any money so that there was no revenue coming in so we were like okay like

26:55I think if you're a startup, you have two lifebloods, either revenue or growth. And we didn't have any revenue. And we weren't going to find any growth in VR. So it was like, OK, well, we're either going to make this a $30 paid app, which I don't think that serves anybody well, or we need to go find growth outside of VR. Did you consider trying to get profitable? Were you like, OK, if we were to turn on monetization, how long would it take to find something that worked? How much could we actually cover our burn and get to like a zero net burn?

27:25you know, what are investors beyond board with that? What does the calculus look like when you're sort of examining that as a potential? I mean, it's a non-reasonable question. I think once we look, the really bright spot for us was the user-generated content. We were like, this is going to take a long time to make it click, but like, eventually if we can take these VR creators, if we can scale their creations, if we can get them monetizing a user base that's at a mobile scale.

27:53They will be happy we will be happy this will be in like a really strong business with with great network effects very scalable and if we if we just pivot hard towards like we are going to try and extract the maximum number of dollars from the very limited number of users we have so that we're cashflow neutral like We're just not heading on long that path So I think we were just more comfortable being like okay, hey, we think that the promised land is really this user-generated constant ecosystem where where we're rewarding our best creators, you know, for the amazing work that they're doing that just looked different. So I don't know that we ever really looked at it. Were there example companies or products you guys were looking to as sort of like, either inspiration or like a vision of what the promised land could look like? Like I'm wondering, like, were you looking at something like an Instagram?

28:45Yeah, like if you can get this UGC flywheel going or maybe even Roblox at that point in time, which it was starting to spend even though most of the rest of the world didn't know it yet. Yeah, I mean, I think, you know, we were definitely aware of Roblox. We were looking at probably a lot of stuff like YouTube and Twitch. We were like, okay, look, they have this creator class. They're able to reward the best of them. It creates really great incentives throughout the ecosystem where, like, The platform is not pestering you for money all the time. You're really only rewarding the creators that you care about if you're a consumer. And then the creators are really acting as wonderful evangelists for your app. You shouldn't need to spend a whole bunch of money on marketing because the creators will, you can have creator-led growth, basically. So we were looking, I think Twitch was like a really interesting one for us to look at there, yeah.

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31:27This may when it actually happened might come a little later with when you introduced wreck tokens and the economy, but one thing I know you guys Did that I think was really interesting was Incentivizing you know you had this problem where you had this very passionate user base you wanted new behaviors out of them You thought they were capable of doing these new behaviors and doing them well, but you had to incentivize them to do it and so I I think if I'm getting it right, when you launched rec tokens, you got rec tokens for accomplishing specific actions that you guys set up in the environment, right? Yeah, the economy has evolved. So David's referencing a thing called rec tokens, which is basically the in-game currency that we use. And you can use the in-game currency to buy things to kid out your avatars. You can buy shirts, and hats, and gloves. And you can also buy virtual food. We sell a lot of virtual food.

32:23root beer and pizzas and donuts and stuff like that and then people are buying those both from you and from each other, right? Yeah, and then creators can charge for things inside their room so you could build like a nightclub with like a VIP lounge and it costs some tokens to go in there or you know a fashion show and like different outfits cost different amounts of money or maybe you're in like some haunted mansion and you know creators are selling like flashlights and light ball or like and you know, light bulbs and batteries. So people are doing all kinds of really interesting stuff with it. It's a pretty flexible system. But like if you look at where it is today, like it went through a number of different stages of evolution to get to that point. For a while, we just had avatar items and we would, you know, you just did something good in the app, we're like, you have a lot, you made a friend or some action we cared about, here's an item. We then started

33:20We're like, okay, we're not gonna give you items anymore. We're gonna give you currency instead. And then there's a store with the items. So you started getting used to like, okay, well, I've got the currency and like, what do I want to buy? And currency equals this much item. And then we unlocked an ability to buy the currency. And then we turned off the ability to earn the currency.

33:42except the ability for you to earn the currency then shifted to, okay, well, you know, you maybe not, you can't earn it through leveling up necessarily, but you can earn it through creation. So you can create something. You can't earn it from us, but you can earn it through other people, find value, and what you do. And that's not entirely true. Like there is still, we do prints a good amount of currency every day to like stimulate them hand, right? You know, so we, the little rec room fed in the camera. Yeah, exactly. Yeah.

34:10quantitative easing in record. Yeah. So we're, I mean, we do print an amount of currency as well because, you know, we do see behaviors we want to reward. We're just probably a little bit more careful about the way that it works so that it's not, um, it's not an easy to game system. You can't create like a thousand smurf accounts and like hoard the currency and then move it around. And so for people familiar with games, it sounds like what you had is you had only items and then you introduced a soft currency and then you took that soft currency made it a soft and hard currency and then made it basically exclusively a hard currency. And soft currency is currency or hard currency is currency that you buy. Yeah. So if you looked at like a gaming textbook of like how to build an economy, Reckrom did all the wrong things. You should never have, you should never have, you should never be crossing the streams of your hard and your soft currency. You should never shift one to the other. I think we just had this idea of like, okay, this is where we want to get to. Like creators are making money.

35:09That's, that's the end goal here. And like, what are the, like, if that's Charizard, like we're at Charmander, how do we like evolve into that thing? Can I ask that? This is a derivation, but a team question. Once you realize you're going to do this, and as you're doing it, are you like, oh, we should have like an economist at our company. Like, how do you, Is it a PM who owns this? Clearly not since you broke all the rules. No, we we've had We really have like focused pretty hard on having generalists tackle as many of our problems as possible So the team behind this it was like there's an amazing designer that had worked in in mobile gaming for a while there was an amazing DevLead that worked with me at HoloLens and you know him and her worked on this this problem over

36:03probably two years. We have this economy that doesn't match at all the goal that we want. How do we keep evolving it? And I think it was largely informed by our choice early on. It's like, okay, here's screenplayers, here's user generated content. And that did not work. It was too much, too fast. And so for this one, they were kind of like, okay, what are the stages we need to go through where the community will understand the incentives? They will go.

36:32they will be excited for each of the changes that we make and I think they were just really thoughtful about it and they carried it out, you know, very intentionally over over the course of probably about two years. And then shifting to kind of the creator side, what kind of behavior do you observe? Like, let's say I build a really successful haunted mansion and I'm selling flashlights. When do people decide to keep the rec tokens that they've earned and when did they decide, you know what? This is a job for me and I'd like to make some cash on it. It's probably a scale question. You know, the currency, it's kind of like, I guess if you went to like a thrift store and you were like, I'm going to trade in some clothes and I'm like, well, you can have this much in in store credit or this much in cash. Yeah. It kind of depends on like what those numbers are. Game stop. Yeah. Probably currently. Game stop, kind of the same deal. Yeah. And so, you know, if you go in and you're like,

37:27Hey, we'll give you 60 bucks or $300 in store credit at GameStop. You're probably like, well, I'm gonna buy a couple more games give me the 300 bucks. If you add, you know, two zeros to the end of that and you're like, you can have, you know, $30,000 in in store credit or, you know.

37:45Six grand, you're like, well, six grand sounds better, you know. Unless you want to be a real entrepreneur and start arbitrage, it's kind of like a capital allocation question, right? Like, if you're a creator, you're like, well, how much do I want to pull out of this business versus keep reinvesting? Because they can distribute those tokens to there.

38:06Users by incentivizing behavior. They can do... There's some element of that. They can basically place free gifts inside their rooms and they can pay for the gifts in advance and stuff like that to try and drive activity towards their rooms. So yeah, it really comes down to like, you know, what do you value? And how much of this currency do you have? One of the classic game economy problems is you will end up with users who have so much currency that can kind of like ruin your economy.

38:35And so it's me like billionaires. Yes. And so like. And the the challenge like and it's the same like a state tax sort of sort of challenge like the problem that they run into is like these people get tired of the game because it's like no fun anymore like I can buy everything. So they'll just give their account to somebody else and it'll ruin the game for that person then too because like well they don't you know it's just like the game genie has been turned on and now everything's free.

39:04And so really what we're trying to do was like, okay, well, hey, some of these users are going to have Scrooge McDuck size piles of in-game currency. How do we pull that out of the system so that their incentives stay aligned with ours and they're not just like dropping, you know, there's like a fun name for an estate tax. No, we do not have. It is fascinating though. I mean, very quickly, even with the most.

39:28sort of simple mechanics, you quickly get to a place where, I mean, even David, and I like, this is the first time I've heard of rec tokens. David did a better job researching than I did. And my mind is racing on all the ways that I could, I could game this thing. And I'm sure you just have, you've to very carefully. It's good to quit acquired and you're new side. I think these systems are, well, I think you're gonna see more of them in games. They are fairly complicated to set up. There are a lot of things to be mindful of, both from like, Okay, you don't want to be a bank. You don't want to create a security. You want to adhere to, you know, know your customer laws and stuff like that. So there is a lot of complexity behind the scenes. And then also, there's a whole bunch of complexity for like, okay, and how do you ensure you're not getting scammed along the way here as well? So that's why we have a fairly large team focus on that problem. And you know, to date, it's worked pretty well. That's cool. So what is through these?

40:25these three major things you've figured out since our last episode of multi-platform, UGC flywheel and creating this economy. What does the trajectory of the business and the company look like through this time? Obviously, you'd raised between the seed in the A, it was about $15 million from Sequoia right initially.

40:49How are you, how are you living during those that trough of this trough of sorrow years, you know, where you didn't have revenue coming in fundraising more was probably going to be a challenge. Yeah, I mean, I think again, you know, going back to the roots of, of rockroom and I don't think we were, I don't think we had a normal founding story. I don't know that we had normal founding ambitions. And I don't think the people that we hired were like, quote, unquote, Startup people I don't think they were folks from the Valley that Spent two years at a place got their options and then bounce to the next hopefully Facebook So I think the people that we had hired to date were like a love rack room a love VR I see the problem like I see the challenge that we're facing and it's an interesting set of challenges So I think because we had sort of an unconventional founding we had hired kind of unconventional backgrounds that were like

41:47I'm willing to see this through the likely tough times. We had no attrition during this point at all, which was really cool. Nobody left. Everybody was like, all right, I understand the challenges. This is painful getting yelled at by the community during these transitions. But we really do think it's in their best interest. We really do think if we want this thing to still be around in five or ten years, we have to go do this stuff.

42:16getting some some yelled at on Reddit if it means a couple years from now we can start having these creators earning like a ton of money like that's a really interesting world to go and live in and it's worth a little bit of temporary pain so When you say the temporary pain, if you think about the VR true believers, obviously I'm gonna flash us too far forward today, but the Oculus Quest 2 is out. By all reports, that's doing very well. PSL Ventures, we have a portfolio company big box VR with a game called Population 1. They're seeing it. It's been phenomenally successful. I think you know, Chuchin, the CEO, well. It's a great game. They've built a lot of good stuff. They built Smashbox. Their engine is awesome. They're great.

42:57We could be at a little bit of an inflection point now where, you know, it's too soon to tell, but, you know, VR could be here in a major consumer way. And when you were thinking in the long-term best interest of these users who are VR diehards, were you thinking like, look, the long-term...

43:14for Reck Room is we will be a VR thing. And this is sort of the way that we survive in the meantime and sure it'll be multi-platform kind of forever now that we've taken the genie out of the bottle. But we're always thinking like the end all be all will be VR. I'll put it this way. Like there were a bunch of companies in 2018 that had built VR things and then pivoted to we're not going to try and do cross platform. We're just going to like VR's done.

43:41We're moving to, that was never a conversation for us. We were just like, we really love VR. Man, we really hope it's a thing. There's not a ton in our power to make it happen. We certainly think like a cheaper device with better marketing and less cables that works a little bit better would do well, but we don't know and we can't really affect that ourselves. But we never talked about like, we're just gonna do a hard pivot out of VR.

44:10Even though almost everyone that I, you know, was chatting with in the VR space was just like, we're hard pivoting to like, you know, this new app. Enterprise SaaS, yeah. Yeah, we're just totally doing a totally different thing. And we really wanted to like see the VR journey through. We just knew like, okay, if we exclusively focus on VR, either this is gonna be like a six person team for two years while we wait.

44:37or we can go try and find growth somewhere else through user generated content and through other platforms and we think we can actually ultimately build a much larger business that you know at the end of the rainbow it'll have a much larger reward for VR users as well because it'll mean if they create content instead of reaching just VR users they can reach VR and Xbox and PlayStation and iPhone and all of those users are potentially monetizable to them and so their reward can just be so much greater and then I think we started seeing like I think there were a lot of VR hardcore users that were like, okay, well, I kind of didn't like this to begin with, but there is something nice about me just being able to hop into Reck Room really easily and not move my coffee table out of my way. I can just check and see if users are in there. I can just check on my room real fast. I can now do that without, honestly, because all the headsets were getting old, we had a lot of users that were like, my entire social life is in Reck Room and my controllers broke.

45:36And I can't get you to see to fix them, but I can still hang out with my friends because I can still make it in here. And so I think there were a lot of benefits that people started seeing from it. It definitely was not apparent when we first did it. I think there were a lot of people that were like, I don't know that this is the right move. There's also another dynamic that I want to talk about. You explained to me a little bit ago that maybe you could talk about here, which is if you guys had said, you know what?

46:06we're gonna fork this, and there's gonna be the VR version of Requiem, and then we're also gonna make the flat screen version of Requiem. That would be fine, but what you can do, even in a flat screen environment, when your platform is architected for VR is so much more, and you explain it to be as sort of the difference of like, you know, video game in like Street Fighter or whatever, like you hit a button and you punch.

46:34In Recreum, you punch or you jump or whatever. Yeah, I think, yeah, if you look at screen games, if you look at mobile games or you look at keyboard, mouse or controller, generally the behaviors that your avatar can do, they are finite. So they can jump or they can punch or they can pick up things or they can place things. But there is a finite number of them. There are n things that your player can do because there are an n combination of these buttons. For Recreum, because we started in VR, player actions were always infinite. It was like, well, could somebody backflip and it's like, well, we can't stop them, right? Like, if you're wearing a headset and you do a backflip, like, that can happen, right? Can players lie down? Well, yeah, definitely. Like, can players like juggle? Yeah, of course. And so we, like, with the UGC system, we started seeing all of these rooms that were built around behaviors we had never anticipated. It was like, okay, well, this is an escape room where you need to like,

47:31crawl under this thing and like, you know, while crawling, you know, you need to pull out a lighter to like light this candle and then the candle. And so it was like, well, okay, if we're going to make this work on mobile or if we're going to make this work on a keyboard and mouse, like we can't have a crawl plus like whip out lighter button. Like that's not going to work, right? Because we don't know these things in advance. We just need to build an avatar that's really, really flexible and like you as the, you know, controller of that Mary and that you need to be able to make this avatar do like damn near anything. And so I think it just led to a very different control scheme than you see in most games. Like the way that you can kind of control your rec room characters hands, you have independent control over left and right hands and you can make them do a whole bunch of wild and weird things like dance or like wave or you know, all sorts of wild stuff. Which is so different than like, you know, almost everything out there. Like Fortnite, like Fortnite is great. It's amazing. But like you hit a button, you jump.

48:30You hit a button, you hit a button, you dance. Well, yeah, I mean, what we're getting at here is there was a reasonably easy path that's like fork it, squash it down to 2D, and then use the same input system that, you know, works on iPhone games. And then there's a harder one that's like, can we keep it all one world and let you do, I assume not all, but a lot of the same flexibility from a screen that you can do in VR. And I have to imagine that Now that you've crossed that, Kazum, and taken door number two, it pays off in all these ways of having a critical mass of people at all times in a single universe. Oh, totally. And I mean, there were many false starts along the way. I think our original idea was like, yeah, let's just jam all this into buttons. And then at some point, it was like, oh my god, we've got 40 buttons and alt buttons and shift and control buttons. And I was really adamant that the game on screens be third person for a while.

49:26That was an example of really bad design on my part because it made it really impossible for creators to build a world that was cohesive. Maybe they'd build an escape room in VR and they're like, well, I've played it in VR and it works in VR and then you go in on screens and it was like, okay, well, I need to pick up this post and read this really tiny writing. I can't do that because I'm in third person. So that was a dumb move on my part.

49:53But you can see what happened, like I remember you were showing me, you're like, well here's the, and this was in what, 20, early 2018, it was like here's the view, if you want to stream on Twitch, it goes to this like third person view so that...

50:06You know, it's not this like I want to vomit because I'm seeing through someone else's headset. It's a third-party sort of camera up behind me view. And you could imagine like, well, we should translate that. You can see why you would want that to be the case. That was my design contribution that probably wasted like six months of dev time for somebody. So if they're listening now, I apologize to them. All right, listeners.

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52:05So 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. Nick, I have a question for you. Yes. This is just like based on what we were just talking about. Was this a consideration when you were thinking about your, your currency? Like, wait a minute. Can we?

52:25get cash on the balance sheet, like can we have a nice cash flow dynamic here from asking users to buy rec tokens and then maybe we don't need to raise money as soon. Oh, from like basically like treating this as a float. Yep. I mean, honestly, the way that it played out is kind of like when we first introduced the system, still the majority of the currency was coming through like hour.

52:48Sort of item. So yeah, basically, it was like, well, yeah, mostly what people are buying is government services. And so like that wasn't a huge consideration for us. And you know, you can see like as more and more of our economy shifts from like a rack room specific, like we're selling shirts to users selling shirts. Yeah, you really do get a float on this. Like in the benefit of like these kind of ecosystems is it's not so much the float. I mean, the real value is like This is a much more scalable way of growing your revenue. It's hard to grow your revenue by being like, I am going to continually come up with new services and new items. And every time I want to have a new hat or more hats, I need to hire more people over here. But if you build tools to let people do it, you just get a much more scalable catalog. And so, in the beginning, it's a much harder way to grow revenue. In the long term, it's a much better way of growing revenue.

53:48It's fascinating. So speaking of, by summer early 2019 to summer 2019, you're seeing some green shoots. You're starting to get through the Trophissaro. What are green shoots, David? Green shoots. So by, yeah, so if I'm going here, like I'm looking at our summer 2019 numbers. So by that point, Screens had passed VR so it was like the larger audience We had launched on mobile mobile was our fastest growing audience and VR was still doing well just haven't grown since since 2017 at least in user base We were really we grew a lot on the engagement side But the user base stayed around the same So we were like, okay, we found growth outside of VR and we actually raised a series B in in April 2019 and largely it was like

54:44Look, we took this VR Wii Sports, and we turned it into a cross-platform user-generated content platform, and we're about to launch on mobile. That was kind of the story for the series beat. I was like showing people the mobile build, and like, praying it wouldn't crash while I was like, dangling it. Because, you know, we had basically taken like a PlayStation app, and we're gonna run it on an iPhone, and that should work. Fine, I guess. Was that, did Madonna lead that round?

55:14locally that was index actually that was index that was index yeah so that that round was still kind of a story round right yeah I mean I think I think the thing that they were looking at was well I it would be interesting to ask them like what they're what their thesis on it was I think that the interesting thing that they were seeing was this is an app that has been around for years and it's still growing and it's taken some like interesting turns. Like the user generated a constant thing. It's clearly not what they were doing to begin with. This multi-platform thing clearly not what they've been doing from the beginning, but like both of them are working now and maybe this team has more ways it can evolve. So I think it still was that story. Like at that point, our revenue was really diminimous. Yeah, our revenue was barely existent.

56:08I think we had like one month of revenue. We made like 20 grand in a month, you know? I think we were. Yeah. You had a 2021 revenue multiple on your fundraise on that. Yeah. Or a 2021 era revenue multiple. I think we were only monetizing on like one platform. That might have been it. I think we were maybe only monetizing on like steam, but not on PlayStation and other stuff. So it started growing like pretty quickly after that. But yeah, at the time, it was largely a You know, I think we have interesting engagement numbers we were like soaking up a lot of minutes But in terms of like a business it was it was you really had a squint to see it so kudos to index for squinting pretty hard So then so I think I want to ask you about this. I think Once you you turned on monetization across all the platforms and the economy started to work It seems like pretty quickly after that the business became a really good business, right like you

57:08You were generating a significant amount of revenue at pretty high margins, right? Yeah, I mean, I think you can, especially if you break out, like, okay, what's fixed cost versus variable cost, right? Like the cost of supporting the service of Recrum is relatively small. It's like, okay, well, we need these services, like we need Azure services, and we need, you know, maybe this networking middleware, and then we need moderation teams. So you're like, okay, what's that cost? You're like, well, all the scales really nicely.

57:37And so, most software businesses, it's really a, okay, and how much do you want to spend on R, D to ensure that you're growing years down the line? So yeah, the business is growing really nicely. I think there's really, really interesting dynamics from the user generated content side, just because the revenue can grow really nicely without much input from us. And then if you look at the way we have slightly lower margin on that, revenue, you know, versus selling some of it out to creators. Totally. But it's really like, we're happy to pay that out because those users are so valuable. They create so much value for us. They do such a good job of evangelizing the app and going and finding new users. I would rather spend money on that all day long than buy more ads on Instagram. Well, this is so the two things I wanted to highlight here that you just did is one.

58:35The beauty of this model is you don't really need to spend much if anything on user acquisition, right? Because you're, as you said, your creator led growth. It's your creators that are creating amazing things that are spreading the word about it that are bringing in users, right? Yeah, I mean, we've started doing some paid advertising like maybe two months ago. So we're like experimenting with it. I mean, I think there's probably some number.

59:01greater than zero where it makes sense but I think everyone who's been in the venture game knows that performance marketing is not you do not get economies of scale right in fact it goes the other way like the more you're spending the worst each incremental dollar gets but that's not true it's it's me playing pinball like I put a quarter in every time and eventually the ball goes to the bottom yeah except you're like you run out of like the good pinballs early. Yeah, right. Yeah, there's somehow there's worse and worse product market fit with every additional pinball that gets loaded in totally because I mean, think about it. Like let's say you're building a a golf game on iOS that's like cartoony. So like the first couple of users you buy are like, I love cartoons and golf and I have a phone. And then like exactly what I was looking for from then you're like, okay, well, we've got all those users. Next up, we're like, you kind of like the PGA.

59:55And like, maybe we can get you into this like cartoon golf game because you like golf in some way. Right. And then you get all those users. And then, you know, Instagram's like, well, these users like being outside, I think, and like maybe sports and like that's kind of related. It's fun. Trust us. Yeah. So you're paying incrementally more and more to attract these users that want your thing less and less. And so, you know, I think there's, there's definitely an amount that makes sense to spend in performance marketing. But like, I think this is how a lot of people get in trouble. It's like they're kind of forced performance marketing to work. And like the only way you force it to work is like you spend on those users that don't really want your thing. And so with the creators, like I would much rather pay creators more money and help them figure out like, okay, here's more money. Now your incentives just went up. Go find the sub community that really vibes with the content that you've created. And they don't need to even love every part of rock room. They just need to love the thing that you built. So like we can have these kind of sub communities that are

1:00:53You know create or let like I love very specific parts of YouTube They're very different than I bet what you guys love. Certainly what Jenny loves like did that's great Yeah, I think Twitch does this really well. I think there's like a lot of different tones and styles and personalities on there And you know, they'll go and find their their people that makes sense for them and that's what we want to happen in recommend as well like we want you to go be able to build your little sub. And if you're a user, we want to help you find your tribe. So when you come in, we want to help direct you towards the content that we think is most likely to light up your interests. It's very akin to the concept of marketplace liquidity. I remember a great realization that Dan Lewis opened me up to when we had him on for the Convoy episode was he's like, look, we got the reason we need tons and tons of loads and tons and tons of truckers is because there is one

1:01:44trucker load pair that is optimal and then the further and further you get from that like literally physical distance the Worse of an economic deal it is for them because they're gonna have to drive to come pick up the load, you know, they may not want to it might be the wrong day and like if we can get everyone on the platform then we can always find the perfect match but when you're sub-scale you're in this territory of like most of the time it's probably sub-optimal and it's probably too expensive of a transaction and you can just sort of see that playing out in the world of games where you know where I suppose the the world of meta versus where the more people there are on the platform and the more sort of flexibility there is in the system the more opportunity there is for people to find their tribe. So why the internet is so great there's incredible marketplace liquidity on the internet. Yeah I mean I think and that's that's the battle that's

1:02:35about to be thought is like, what is the long tail of your metaverse, right? So then the other aspect that we've already touched on is, you know, well, it's probably not maybe not something you guys think about as actively. You do get a float out of this, like the users buy tokens up front and then they use a recroom and then they spend those tokens over time to creators who then over time either cast the matter don't. You guys are generating float. It's the same deal with, you know, Roblox. It hasn't been covered enough about why People say, Roblox is unprofitable. They're revenue numbers. They say, no, no. It's accounting. Roblox is very, very profitable. Yeah. Very, very cash flow generated. Yeah. So this all shifts. The business pretty, you know, like everything slow and then fast. So last fall, you raised your series C, right? Yeah. So in November, we raised a series C. We raised 20 million from Moderna.

1:03:33And that's that's like eight months into the pandemic that was eight months into the pandemic and let you know look the pandemic had been It had definitely driven activity for rec room like the moment lockdown happened you can just you can just see the jump and in rec rooms started getting used for a lot more unusual non-gaming things during the pandemic that was where we saw you know Teachers teaching classes in there people holding group therapy sessions people having family reunions. There were a lot more weddings happening in rec room So these were just a bunch of things that we were really excited about now it just showed the flexibility of the platform So we did that raise in November and then We launched on Xbox in December and then quest to you know back to the point about like VR like you know platform shoes and

1:04:24oversized denim jackets like it goes in and out of style man and like it's coming back in the style And you know quest to like Oculus like I have to give them props like they they build like an amazing headset and an amazing price they did a great job marketing it and We're seeing like amazing VR growth and I think that's poised to continue as more and more people start jumping into that AR and VR world and it seems like that's likely to happen over the next couple years So we're really excited about that space Do you see this 660% growth in 2020 more attributable to? We have the best product market fit on VR and there's this incredible VR device now that sold well or is selling well or do you see it primarily attributable to? It's the pandemic and people need a place to congregate. That's not the real world. You know, I don't know that I can assign it to one variable. It was kind of like

1:05:15all these variables kind of clicked at once like we launched on xbox and we were like the number one free app on xbox for several weeks around all the days which was very didn't you double your user base like in one week just by being launching an xbox I mean xbox was huge amount of growth for us and we were really surprised by that like we didn't really do any marketing it was a pretty soft launch in terms of like how much noise we made about it but there's a lot of pen up demand there uh the mobile app was clicking and it's been the fastest like growing group and then you see VR starting to take off all the while the UGC ecosystem you're seeing great content getting built and we start paying creators and you just see like all the incentive spin a little bit faster so it's kind of all of these things kind of clicking at the same time and I don't know that I could assign oh yeah and then I guess there was like COVID also happening like if kids are only going to school for like two to three hours a day they have an additional couple hours to play video games and that's largely what they're doing with it.

1:06:10And so we saw all these convergent factors and it was really like, wow, I have businesses doing very interesting things during the last months of the year here. But like, I guess the thing to take away from this and I would tell anybody else that's like starting a company is these are things that we started talking about like 2017 and it's like 2021 and it's like, okay, well now.

1:06:33It's not a it's not a miracle that needs to happen anymore. It's like a system that exists and now we need to like optimize it but like very little Very few things that are like worth building can be built quickly You guys are ever a testament to that So I imagine you know without We can get into whatever level detail you want, but you know going from The whole dynamics I imagine must just have been so different going from hey, we need to raise money in the beginning to like Build this thing to then like we need to raise money like it's still a story or build this thing that Now you don't need to raise money and and to case in point a couple months after your last raise your insiders are like Let's have a lot more money at a much higher valuation like what did that? What is that felt like like did you see this transition coming as a CEO or or

1:07:26Has it been surprising as it's kind of happened? Oh, I mean, I think it's definitely been, it's definitely been surprising. I mean, I think, I think like the entire ride of, of Reckrim has been surprising and, you know, when I look back at what I was thinking during all of these different months in the past, like, I was wrong, like, a lot. Like, I was wrong all the time.

1:07:48And I think the thing that we built was we built a really robust organism that could survive me being wrong a lot. Like, that's what Rack Room is is like, I don't need to be very right about like, what's VR gonna do this quarter because like our businesses independent on that. And I don't need to build like the best room in Rack Room this quarter to drive growth because like users are publishing, I don't know, 25, 30,000 rooms a day. So like there's plenty of content there. And I don't need to worry about like, what's our next revenue generation So because we've built tools for users to go figure that out and they're experimenting and and so like when we were fundraising I think there's a lot of times I like most of our fundraisers we were just like look we're playing for time like we think we're at an a point where we can fundraise and we think that the combination of the partner the plan and the price match up like we like the partner we're willing to like

1:08:44Enter into a marriage with this person the plan for what we can go build with this money is interesting and has a possibility of inflecting the business and then the price is a good risk-adjusted value for both the investor and us So that was basically like the calculus that we've done for every raise is We very rarely burned it down like I don't think we ever burned it down to like we have two months to live and if we don't raise like we were always raising You know pretty far out from from you know day zero and then I assume this fundraiser felt very different. This fundraiser felt different. This was not like, hey, it would be nice to have more cash. This was the first time you didn't approach an investor, but an investor approached you. Was it fair to say that? I mean, they're insiders, so it's a concert communication. No, I think that's accurate. I mean, the dynamics of this round, who are really... I think it was an internal gut check for us of like, do we think we can build...

1:09:42something that's going to last for decades. And if we are, what's that plan look like? You know, what does this look like as a standalone business? What is it going to take from a capital perspective to get this to a standalone business? I mean, if it's really going to endure, like, what is the scale that it needs to get to? And, you know, I think we just kind of worked backwards from there. We were like, okay, it's going to take a lot of money. It's going to take a lot of time. It's going to take a lot more people than we have right now. And if we can be patient about it, you know, we think we think there's a huge

1:10:11business that can be built here. It's just going to take money and time. And do we want to... We've seen what the oscillations of the market look like. We've seen the peaks of VR happiness. We've seen the... the trials of VR unhappiness. Like the same thing might happen here. Like, metaverses might be hot this year. They might...

1:10:32Right. Travel next year for two years. Roblox is a $40 billion company on the public markets today. A year ago it was a $4 billion company. Yeah, you just don't know. Totally. And so we were like, do we want to... This is our opportunity to untether ourselves from the emotions of the market and really take a long-term play here. So I think that was really the question we asked ourselves was like, okay, what does it look like to...

1:11:00What does it look like for for rec room to be you know a hundred five hundred times bigger? Five years from now ten years from now. What's it gonna take and I'm thinking a lot about listeners out there who have fundraise for their startups and they always you know There's the deck and then the one of the later slides is a use of proceeds and you always got to say like here's what we're gonna do with the money and then here's the milestones We're gonna hit with the money and when you have a very different fundraise like this that is an offer coming to you like Do you have to have a plan to use the money or is it okay to say like, we may not spend all this money. Like, we might go public with this much money in the bank still and, you know, just like Zoom and that's okay. Well, I can tell you, I mean, there are a lot of things about Reckrim that are probably idiosyncratic and like, there are many things that we did that I would probably advise like other startups not to do, but we've always been kind of vague around use of proceeds.

1:11:58like in past rounds because we were kind of like well that's you know that's the charm of rec room is like there's not really like we're making it up as we go love yeah totally and you know we'd kind of point to the past like you know here's things that we thought we would do that we didn't and here's things that we never thought we would do that we did so I can like make up a slide for you and show you what those things seem like today but like know that these could change so I mean we were always upfront about that and I think we it It's self-selected. You know, there were some people that were like, this is bananas. Like, what are you guys doing? Like, this is your deck. This is crazy. And then I think other people are like, well, this is a refreshing level of honesty because like, I've been in enough board meetings to know that like, none of these plans survive contact with reality. So for this particular one, yeah, I think there was, there was more conversation around how big do we think this thing can get? Like realistically, what do we, what do we think of the, the value of this thing can, can be in it?

1:12:55I think, you know, I spent time like, I basically like write little notes to myself over the years. Like, here's how I'm feeling on this day. And like, here's what I'm thinking. And, you know, when I look back, things always took longer than I thought, but they were always bigger than I thought. That was kind of like the, oh, like if I could write one lesson for like all the things that I was looking at over the years, it was, I was always like, man, I wish this thing was happening faster. Man, I wish this thing was happening faster. But then when it finally did happen, I was like, oh, wow, this is so much bigger than, I thought this is gonna be like a,

1:13:2550% increase and it's like a 10x increase. So you're probably out of head on an IRR basis even though it took longer. Yeah, exactly. Yeah, it's just like, you know, I think we don't do a good job of thinking about non-linear growth like humans. And so this was an opportunity to like, okay, how do I protect myself against my own biases of an inability to predict? Like, okay, we'll have a lot of money hiring great people.

1:13:55making it clear to them what the problems are and then stepping back. This money lets us do that. And it also puts you into a league that I think helps with recruiting in a lot of ways. There's certain dollar amounts, there's certain valuation amounts where you're like, well, I'm not joining a startup that might not be here in a year, which I think is definitely a fear that many people in Seattle have.

1:14:19Like, I think if you're working at Amazon or Microsoft, any startup seems like impossibly small, whether it's two people or a hundred people. And so, this was one that I think we thought could help a lot of people in those bigger companies get comfort about. Okay, like, I'm gonna go join this company. It's legit. It's gonna stay around for a while, but they're still really taking risks and thinking big. Like, we wanted to have it both ways, so this allowed us to do that. And you're like 60, 70 people? Do I have that right?

1:14:48We're like about 90 now. We're higher in a lot. Cool. Well, David, do we want to move on to powers? Yeah, that's what I was thinking. So long-term listeners in the show obviously know we're huge fans of Hamilton Helmer and Seven Powers and one thing we like to do when we, you know, just bend in me and analyze companies is we...

1:15:09decide what we go through the seven different powers that companies can have. According to Hamilton, and we identify which powers companies have, I don't think we've ever done it live with a CEO before, but if you're ready to be a guinea pig, sure, go for it. Let's do it. Okay, so the seven are counter-positioning scale economies, switching costs, network economies, process power, branding, and cornered resources.

1:15:37Maybe I'll jump in first. Give it a little bit. We did that LP show on grow blocks, and I'm trying to remember exactly what I said there, because I don't see why it would be a lick different in this case. And I, I know I argued fervently for something, and I'm trying to remember what it was, so I don't contradict myself and be like, I know. Oh, man, we're all the spot. Well, okay, so I'm going to go first selflessly to give Nick a break to think selfishly to take the incredibly obvious one of network economies.

1:16:07It's not just a network economy, but it's a network economy with the layer of wreck tokens in your own currency as well. The way to think about network effects, network economies is, as more users get added to the system, it grows value for all the other users in the system. Great, but the thing about it is, There's a multiplier, like I'm thinking about an algebra equation, there's like a there's a constant that you have to put in front of that value, which is how much value does each incremental user. What's the coefficient? Exactly. Yeah. Thank you. What's the coefficient? And for something like rec room, the coefficient I think is actually really quite high because you have such a high

1:17:03conversion rate from user to creator and once you become a creator, then that value that you're adding back into the ecosystem. Obviously there's a scale. Some people are adding tons of value. Some people are adding little value, but overcoming that hump to become a creator then enables more super creators. That's my thoughts. I'm gonna let Nick go next because he's had a long time to think. You just want to go last. I think we talk.

1:17:29we talk about scale economies a lot. I mean, I think that's, that's what we, especially for our creators, we're like, you know, the bigger rec room is the more people you're theoretically reaching. And so the higher your potential reward is, you know, a viral hit in rec room is worth X today. And we hope it's a thousand X a couple of years from now. And so I think that that contributes a lot to the You know, if you're a creator, like you want to jump on these ecosystems early, whether growing to try and get the value from that. You're like, okay, now it's achievable for me to chart if I wait a while, maybe it won't. And the value in the future will be so much greater. So if I can get that positioning now, I can benefit from the scale later. Do you guys do? We should ask this before. Do you do any highlighting of creators to the user base? Oh, 100%. Yeah.

1:18:19We select like featured rooms every week. We're constantly looking for weight. Like I would say, if you come into Reck Room, you'll see a mix of like, here is an algorithmically generated list, and then here is an editorial list that's selected by staff. And are you looking for, either in the algorithm or editorial, a combination of established creators that you know, this stuff is awesome and new creators to kind of keep constantly seeding the ecosystem and giving new people a chance?

1:18:48I mean we run contests all a good example would be like every quarter we run a contest where we're like I think the last contest we ran was like movie magic so we're like okay build a room around the concept of movie magic can be like a scene from one of your favorite movies or you know can have like some cinematic flare to it or you know something like that and we we actually do like a an in-game ceremony where we're like okay the you know the the best Horror room was this and you get to come up and take your trophy and give a little speech called the Roommies. One of the ones that we highlight is the emerging creator. Who haven't we never seen in a contest before that has really impressed us?

1:19:33Yeah, like two contest later those people are like the masters of of Requ room tools and they're teaching classes in Requ room about how to use these tools and bend them to their will So yeah, I mean we're really on the lookout for that like young nascent talent for sure and we've hired actually Quite a few people that have like work at Requ room today where people that were in the community and we were like good God there building like amazing stuff so cool like I wonder if they would come and give us feedback on like the tools we're building or help us test them to make sure we're not breaking them or explain the way that the tools work to other players like teach classes and record. So record has been like we keep an eye on it one because it's like valuable for the ecosystem in two. It's like a great source of higher. Right. The only last one that I was thinking about is do you guys think you have switching costs like Apple podcasts has switching pods.

1:20:24cost over David and I. Like if we were to move and be like, okay, we're done with podcasting. We're going to be YouTubers now. Like that we would never do that because we've sunk so much into this investment wise, it would take us years and years and years to rebuild the same sort of not only audience, but frankly, like understanding for the medium on a, you know, something that's not podcast. Does the same thing happen to creators in rec room? Oh, I think so. I mean, I think I think there's The way that you build in Rack Room is just so unique and it lets a group of people that otherwise can't create create. Like every other tool like Unity or Unreal or even Roblox Studio just feels really really different from Rack Room. And so I think it's hard to transfer those skills over. That non-transfer ability though is also the thing that like lets all those people who couldn't otherwise create create. But yeah, I think once you, especially once you build up your audience, like if you have

1:21:20tens of thousands of subscribers in rec room and they get notified every time you build a new room as well. Like there's a cost to switching to another platform where you maybe don't have that audience and you don't have that notification engine. Yeah. The last one I want to, we'll be remiss if we didn't at least ask you. I suspect I know there. Well, I'll ask you first. Is there an element of counter positioning here versus Roblox?

1:21:47relative to the age of your user base. Remind me what counterpositioning is. Maybe counterpositioning is if you are doing something in your product or business that if you're a competitor, if you're established, entrenched in combating competitor, did it? It would torpedo their business. Or at least we value destructive to them such that it's not economically worth them chasing you into the thing that you're doing.

1:22:14Yeah, I don't know if that's true. I mean, I think Roblox, they definitely have a very young user base, and I think they're trying to grow up with that user base. I don't know that there's anything we're doing that necessarily precludes them from doing that. I think we think of Reck Room as fairly distinct from Roblox. Roblox has more of a two-sided marketplace where there's two independent groups, creators and consumers. Those groups are separated by probably a 20.

1:22:44Your age gap, it's like there's nine to 12 year old players and then the creator base is probably like you know mid 20s 30s maybe older like you're coding you're you're using a game engine and Recroom kind of just sits in between there or like hey, we just want like teens who basically want to play games or create games and you can do both of those in the same session So I think the difference between us is maybe more maybe like it's like Look, Instagram is very different than Photoshop, right? Photoshop has a more powerful toolset, but the people that are looking at the content that are produced in Photoshop and the people that are working in Photoshop is not the same group, but Instagram is probably closer. Like, well, I could be a creator, I could be a consumer. Tools are pretty simple. I think we kind of sit more in that category. I love that analogy. It's funny. I thought you were going to say different speed Instagram and Facebook and the networks and the ages, but yeah, no, I like that analogy even better.

1:23:40Well, I want to jump into a section here that's the it's an acquired staple. What would have happened otherwise? And this is an opportunity, Nick, if there's any that you're comfortable sharing with, is there any counterfactual that's that we should talk about, you know, this could be that the company got acquired or that the company shut down or, you know, you decided to sign some big partnership. Is there a moment when history turned on a knife point? You know, I think that I think the ones that probably jump out in my mind were, it was a very intentional choice to, like, I think we could have buried our head in the sands with the VR thing. And we were like, look, we've had success to date every, you know, sign is pointing to this being problematic, but like, damn, the torpedoes full steam ahead. And I think that would have been a really bad idea. I think we probably would have run out of money in like 2019. I look, there are plenty of other

1:24:36I don't need to come up with a counterfactual for that one. I think there's other companies out there that have proved that for me. So I'm really happy we made that choice. It was tough, though. That was really, really tough. That was tough for the community. It was tough for the team, too, because I mean, I think the team is really sensitive to what the community thinks of Breck Room. It really means a lot to them. And so if we ever make any changes where the community is not happy, man, I feel it in my stomach.

1:25:05I wake up with it every day. It really pains me. There were a couple months of that for sure. You were in a little bit of a Kobayashi Maru situation where if you had buried your head in the same and gone, VR, VR, VR, you would have died. If you had completely pivoted and be like, we're going to be an app, then you wouldn't nearly have the power that you have today as a business.

1:25:32Decided, hey, there is there is a door number three like we don't have to pick between these two kind of impossible neither are good options. Yeah, and I think even when we were making that choice, we were like, are we just fooling ourselves to think that this is like really like this is really going to work. So I'm happy that we we did. Yeah, you didn't know. No, we definitely we definitely did not. And then you know, at various points in Reckrim's life when when it has been.

1:25:58harder to find growth or harder to find investment capital. We have had chats with various folks about like, hey, you never need to worry about financing again. Just come into the big warm arms of the big tech company and we can figure this out for you. And I don't know what that looks like. I think the moment that you accept that, you're giving up your agenda for someone else's agenda. It's no longer like our rec room. It's no longer the community's rec room.

1:26:26large company is buying it for a goal or an agenda that's not ours. And so I think it really depends on what the company is to figure out if that aligns. I would say to date, we've never lined up like, Hey, we think this is in everyone's best interests to join powers with this other thing. And actually, it's been great. Like, I think that was one of the things that really attracted us to this round was like, Hey, There isn't a capital deficit that we need to go solve. We can just go build. That's what I was going to say. I think that's one of the things that I hope in a few years, when we all look back on this period in history, we may be laughing a little bit at the exuberance in the market that certainly lots of people talk about. And I don't mean with regard to it.

1:27:17I think your valuation is incredibly well-deserved and you've been on such a journey. The market's hot right now. The market's hot. Let's be clear. You're listening to this podcast and you're thinking about raising money. Now is not the worst time to do it. Now is the time. But I do think I hope that this will be a really good enduring outcome of it, which is that you don't have to sell your company anymore. If things are working, even if you think things can work in the future, you don't have to ever sell.

1:27:45because you can raise money in the private market. That's been true for a while. But you can also be public now. There are, Ben and I've talked about this a bunch as a theme on the show. There's so many more five to $20 billion tech companies out there and will be out there than anybody ever realized. Whereas I think before this era, it was kind of like, okay, great. You're going to sell your company for a lot of money to a big tech company. Or you're going to be one of the very, very few that can be a enduring standalone big business.

1:28:14And I just don't, I don't think that dichotomy exists anymore. Hmm. I think it's a good point. Yeah. I mean, I think especially on the consumer side with more, I think you've seen more consumer apps shift away from the advertising model. And I think the advertising model really was like, there will be one. Right. Like there's so many parties involved, like having a subscale ad business just sucks. Like you're just going to have a bad business and you're going to have an inefficient marketplace. Yeah. I mean, like And it's a testament to what Google and Facebook built. Those are like, on a saleable business. And having one tenth of their scale is worth one one hundredth of the value they have. It's just you're pushing the... That's the...

1:29:03Sisyphus pushing a boulder up a hill. You're never going to make it, right? It's just never going to happen for you. And I think with more companies, especially on the consumer side going, like, hey, we are not going to use an advertising model. It's just going to be this different exchange of value. You can often build, you know, better businesses at smaller scales. And they're not as subject to like winner-take-all sort of mentality. So I think that's what you see in the gaming space. There's like a lot of very big profitable games. There's not just like one game.

1:29:33but it's not as true in the social media space. There's like one ring to rule them all. That's a really great point, especially a social media heads into the world of microtransactions and a little bit away from advertising. I mean, assuming that the next generation of social media is VR and AR, then it's very likely that there's gonna be a direct supported model of the next platform where everyone spends time interacts with each other. You know, I'm probably like, under educated on this, but my impression is that the market in China is less advertising driven, like 100% yeah, and I'm I'm curious to know like how that's affected the dynamics of like does it create more room for you know smaller companies to to shoot up

1:30:20Yeah, well, I think the day I was there. I think the sheer number of people. Yeah, there's definitely a lot more medium-sized companies shooting up, but yeah, to what to attribute is it's kind of like your comment earlier. Five things are happening all at the same time and it's kind of hard to have attribution. Before we move on, Nick, I want to ask you sort of one. I think because you're a friend, I feel comfortable asking this on the show, but the warm embrace of a big company is a very rational decision for founding teams to make, particularly economically.

1:30:49And is there something you feel as you sort of look at yourself or your co-founders from a personality characteristic where you're like, that actually probably played a role in us deciding to stay independent? Hmm, I said reasonable question. I guess I've never maybe examined it as deeply as I should. I mean, look, I think anybody in my shoes is trying to, like the larger these things get, the more.

1:31:20incentives, like the more people that have incentives in these sort of decisions. And at this point, I'm, you know, I'm always trying to find choices that align well with the community that's playing rack room, the people who are working at rack room, and the investors who have invested. And I think the longer you go, like the thing that got you here was betting on yourself, right? The thing that got you here was betting you could keep making it bigger and bigger. And so when you come to those crossroads, you're like, well, Hey, this thing has worked for me in the past. Do we take the chips off the table or do we double down? Well, doubling down has been the right choice for X long and it's worked out for the parties involved. So I think it's just like that's the decision that we've gotten comfort with for X many rounds so far. It's not to say that we'll never get comfort with maybe tying up with a big company.

1:32:16I think we've been through enough good and bad that we're like look there could be bad coming and that bad could last for two years but we know there's gonna be a bright spot on the other side and we won't get demoralized and we've seen the team hold together through those like storms and so I don't worry about it as as much as maybe I did for a while I think a lot of people worry like oh everything we're gonna we've built it will could disappear in six months and I definitely worried about that more like in the early stages of the company where I was like Man, it feels like this could all disappear. I can't believe we got here. And now that I've seen the team really persevere through some dark times, I'm like, okay, the engine that we have built has a lot of grit. So it just makes it tough. I mean, I think when you're chatting with other companies, then they need to believe in what you've built more than you believe in what you've built to make the price work. That's essentially what needs to happen.

1:33:11I'm pretty bear or I'm pretty bullish and I think like like I think that's just that's just the challenge that you run into like think the longer you go. Right. Well, thanks for answering that. Sure. I did. I appropriately like dodge your question. No, it's perfect. It was great. It's actually a great. It's actually a great. It's great. That's a great it's a great segue into playbook, which you know, I think we've touched on a lot of themes here.

1:33:39That don't need to be rehashed, but there is one that I really wanted to highlight here and I can't I Can't say enough the at least my perception from the outside the value this creates of one single world across platforms across You know, you're not creating a bunch of servers individually like like Minecraft or something like that you have a fluid economy and a fluid set of social experiences that are able to all happen on one single place. And sure you have rooms and rooms have limits, but it seems to me like we've touched on this idea of liquidity or of finding the perfect match between creator and someone experiencing something in rec room. I just wanted to sort of like pose this question back to you for how much gravitas I give that characteristic of your business. Do you feel that that's sort of as important as I'm drilling in here?

1:34:36Like, that this is one cohesive world that's like, oh, yes. Yeah. I mean, I think it is, I think it is really important. I think it's the element that gives you brand. Like every picture that anyone takes in record is recognizably record. I think it's the element that gives you economic control. So people often ask me like, what are you going to do anything with NFTs or like a couple of years ago, like ICOs or all the crays, like, are you guys going to make cryptocurrency? And my statements to a lot of people are like, look, the value of those.

1:35:05entities is that they are decentralized. That's the value. And the value that Recrum derives out of its economy and its things is they are centralized. That's the value. So we would be throwing that away for a buzzword. We don't need decentralization. In fact, we don't want decentralization. We want centralization because it's paramount. If you think about the economy transition that I was telling you about, imagine going through that with...

1:35:30like a cryptocurrency like you'd never be able to do it right right lobbying 50% plus of the community to be able to flip to your new yeah I would be subject to like whatever stupidity I put down on my white paper five years ago like and like I guess that's the that's the thing that I would I would tell most people like maybe other people are really good at forecasting like I am not and like that's we we just like face that that decision had on and so we're like, okay, how can we build optionality into the business so that when we're wrong, we're not trapped in a corner. And so centralization in that one big world gives us a lot more control over being when we're right and when we're wrong. We have a lot more levers to try and shift the game or the economy or the ranking algorithms to favor activities or actions we care about. Yeah, makes a lot of sense. Well, the other one that I do think is worth just highlighting here.

1:36:24it's so dramatically affected the trajectory of the businesses, the realization you had that your growth was governed by someone else's growth. And by being captive to one platform and betting on that future, to the extent that you make the decision to become a venture-funded business where the capital you're taking is expensive, and it is intended for ultra-high growth businesses, you become a business that needs to go seek growth.

1:36:49and I don't want to put on you that capital was sort of dictating that to you. I think that was a goal of yours too, but it does strike me that there's a lesson in there for other entrepreneurs when they can sort of look and say, in the business that I'm starting, am I in control of my own growth or is my growth governed by someone else? When we first started the company, I had never heard of a series A round. I had never heard of I didn't know how you pitched investors. Actually, probably one of the best stories that I think I've got is like, Madonna who let our B-Round, I went to pitch them for a seed round. They were like, this was not very good, this was bad. I didn't make it to the next meeting and I emailed them back and was like, can I come back next week and I've worked on my pitch and they were like, no, that's not how this works at all. But I mean, that's how dumb.

1:37:46Was they David? They were not David. No, this is before I met David. It was so funny because when Nick and I did meet later, and I didn't know Nick had talked to other folks and I told everybody, I was like, oh, man, this couple of years, people were like, we're talking about the same person here. I think the learning curve was sharp. We just started at zero.

1:38:11So our first couple interactions with venture did not go very well And so we were also looking for publishers and so publishers if you're not familiar like in a game space They'll basically pay you per project. So you're like, hey, this is the project. I want to work on it's going to cost me $10 million to do this thing. They're like great. We'll front the money You're talking about electronic arts activism. Yeah, totally. There's a bunch What we'll front you the money and we'll pay you for this very specific project and at the end of the project We want X percent like we want to get paid back and then we want X percent of the excess capital that this thing brings in and That can be the right decision for a lot of games But because of the way it's financed it really does finance a very specific type of game You are not going to build a services game that has like an uncertain roadmap with that

1:38:57Model because you have to know up front like hey two years from now I'm gonna ship this thing and the moment it ships I have to step away because I actually can't finance it anymore like the publisher has only financed it for these two years And so that's where you get these like discs that ship and then the moment it's out the door you're like okay, we're on to the sequel for that thing Because you have no way to finance the continued growth and iteration of the project and even if you could like the economics are really not in your favor You're like you're probably splitting the revenue right

1:39:24like 50, 50, maybe worse with the publisher. Probably worse. Yeah. It's like a movie. It's like a band of contractors that comes together, has a budget, burns it down, and then there's no more dollars left and it's not like you could do anything anyway. Yeah, totally. And so I think as a result of interacting more and more with the venture space, like, you know, a lot of people are like, oh, well, if you take venture dollars, you're going to be forced to grow. And I think you're more like, look, it is a framework for thinking. Like if you were to, the returns they're chasing are very specific and it will force you into a very specific way of looking at the world and making decisions which is not a bad thing. It's just like you are gonna swing for the fences like that's the the game you're playing is like it's about home runs not about bonds. It's not about singles like it's about home runs and so you're playing home run Derby like you so I think that's just the the way to think about it is like there are ways to finance any type of of project just understand that if you have specific ambitions

1:40:21Venture can be right for you or it can be wrong for you depending on what your what your goals are and I think we realize pretty quickly we're like look we don't have a two-year plan We want to work on this for a long time like a publisher's never gonna be the right choice Venture has to be the way we're financing it and this is the things that they're gonna expect in terms of like growth and margin and okay, so like how do we feed that back into the the decision-making of like what is recommend to look like Hmm I don't think anyone has ever articulated that as well as you just did on this show

1:40:51It actually is really, really good. And I think to rabbit hole for one quicksack on it, because I think it's something really important there. I think people get a lot of cognitive dissonance looking at the venture market and finance things where they're like, there's no plan. How did you guys have no plan and raise all this money? Like what do you need the plan? You need the plan. But you had to keep point there, which is if you're...

1:41:15Financing a project in the context of a movie or a traditional game studio and now yeah, you need a plan like because there's a set amount of money and you need to set you know return on that afterwards But that's not what ventures about ventures about the long-term Asymmetric uncapped upside potential and the way you can oftentimes the way you can best realize that is Exactly by not having a plan and by it to be like oh shoot okay VR market dried up All right, what are we going to do? We got to find that growth. Well, we're going to go to screens, et cetera, et cetera. 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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1:42:41So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com slash acquired to get started. Okay, Nick. So the way we're going to do grading since we're not like grading the transaction here is to speculate. What is the what is the A scenario for a rec room look like three years from now? And I think there's an obvious F scenario like, you know, we could there.

1:43:08Those are less interesting, because lots of numbers could go to zero, and anything multiplied by zero is bad. But what's the B-minus scenario? What worries you on stagnation, or how do things plateau? But before we get there, let's talk about the AA+. What in the world happens for this thing to just go gangbusters? I think we look at the video game space, there's a couple video games that have transcended video games.

1:43:36Right, like they are part of popular culture. Minecraft, Fortnite, Roblox, Mario, like these things, like everybody knows what these things are, they have impacts well beyond gaming. And so I think that's what the a scenario for Reck Room is, is like we have grown into a space where Reck Room can have a positive impact, well beyond gaming, it can have an impact on what digital entrepreneurship looks like. It can have an impact on what the future of digital events look like, what the future of the metaverse looks like. So that's the space that I'm most interested in is it's not really a financial outcome and it's not really like evaluation or we've IPO'd or we've made X number of dollars. It's really like what is the lasting impact that the brand and the product that we've built has beyond

1:44:33the gaming space. I think that's really what would I focus on? And would that primarily be attributed to this sort of like creator-led growth strategy going well? I think it's probably like how high up can we keep ramping those incentives for creators? Because right now we're like, okay, we're paying out X. And X buys us this style of creator spending this amount of time on their thing. If we can 2X that.

1:45:02Do they quit their job and then focus on this exclusively? If we can 10x that, do they quit their job and convince five other people to quit their job and form a team to build this content? So I think it's like, how high up that ladder can you build? Look, if you're a platform, the true test of whether you're a platform is, are other people building a business on top of your business? That's, you're only a platform if that's true. And I think the question is like, okay, well, how big is the business somebody could build on top of a record? Love it. And then the B minus.

1:45:30We'll keep you up at night. How could things sort of just hey, this is this is the top. I mean, I think the B minus is like it's so easy to get complacent. Like it's so easy to be like look at all the things that we've done. Like we're we crossed X like we defeated these challenges. And I think if you spend too much time thinking about the battles you won, you know, you don't want to be that guy that like peaked in high school and is like still talking about like how they ran back some kickoff and you know.

1:45:58their homecoming game. I think it's really easy to become that as a startup where you're like, we did this thing. It is, it so is. Yeah. So I think it's especially challenging as you grow as well, like continuing to find people that want to push the boundaries of what's capable here, like keep taking ownership. And so I think the B-minus scenario for us is just like, man, we get really content with like patting ourselves on the back and like being so proud of what we've done.

1:46:28Any time you're raising money, I think you have that temptation. You're like, I can view this as an end point. Like, look at the success that we've achieved. It's this number on that number. Or you can view it as like, okay, the game just started again. Like, we just put all of our chips onto the table, like, time to play. And so that's what we need to do to avoid that B minus one is like, you know, you got to keep experimenting. You got to keep growing. I love it. Love that. All right. Well, carve outs.

1:46:57Nick Mine is someone sent me Invent and wander which was like a collection of writing from Bezos and was sort of organized by Walter Isaacson and it's Bezos over I don't know like two decades and the consistency and like the long-term thinking that You can just see it through the writings it's like this guy was writing about this in like the late 90s you know and you're just seeing it play out today. I think looking at the writings of Bezos over a long period of time just gives me a new respect for like the vision and the determination that that guy has exercised over over just such a long period of time I think it's really easy for people to forget like. There was a decade when that business was like.

1:47:49the smaller, unloved stepchild of like eBay, where everyone is like, what eBay is like, eBay is like the really good business. Like, like eBay has the superior model. It's a marketplace, not the retailer. Yeah. And like, I remember that. And I remember like, like nodding along reading this articles of like, yeah, obviously, like Amazon, how an acronymistic, like, you know, managing your own inventory, like, that's crazy. And then you look at what they built it in today.

1:48:19And I think they just, they just slogged it out over years and years and years. I think that's how many of the tech companies go is like, for a long period of time people are like, oh, this valuation is crazy and like, this doesn't make any sense and why are people wasting money and they don't make any money to like, oh my God, it's way too powerful. Shut it down. It's crazy how quick it can switch. And I think Bezos just, it's clear he has had this idea in his head.

1:48:46the entire time, especially looking back at these old writings, which is very impressive. That's awesome. I love it. That's a good one. And to the list, my carve out is so appropriate for this episode on so many levels. It is my new favorite YouTube channel called Resonant Arc. You guys heard of this? Nick, have you done it? No, you haven't. Oh, you don't love it. Okay, so it's like, they do a whole bunch of stuff on there. They're way, obviously way better at it.

1:49:14video production that we are required but they're like somewhat like like so nerdy super super super deep dives on video games and what got me hooked I'd sort of casually watched it for a while but what got me so hooked was they just did a massive five-part series each episode is like three hours long about Final Fantasy 8, which like I remember played as a kid the day came out and then like got it the day came out then played several times as a new adult. It's such a, if you played this game, you know, it's a very controversial game unlike all the other Final Fantasy's and they just like, these guys go to town like 15, 20 hours worth of content digging into this game. It's awesome. Squall Lee and Hart, the main character, right? Yeah. I remember Final Fantasy 8. All right.

1:50:07I didn't realize it was the first Final Fantasy with the different director at the helm from all the previous ones, which is why it was so different. The more you know. All right, mine is a YouTube video that I finally watched that I've had on my To Do List forever, and then I was catching up with someone who reminded me that I should be, it's actually someone who listened to our Bitcoin episode and had some feedback, and we were catching up, and they reminded me you should watch this video. And it's called How the Economic Machine Works by Ray Dalio. Either if you ever watched this.

1:50:37I don't think I... Baby did a well back. It's unbelievably succinct. It's unbelievably digestible at any level. You know, you're both... you know, four notches above the economic understanding necessary to understand this video. But it's basically a 30 minute primer on the economy. He's like, we got three big things that happen over time. One, you have productivity growth. Two, you have short-term debt cycles, and you know, clearly we're experiencing that right now, and then you're always experiencing it. And then on top of that, you've got the long-term debt cycle. And he sort of explains like recessions, depressions, all the different levers that the Fed has, that the government has, that

1:51:14you know, wealth redistribution has, and when each of these different things are appropriate, it's just like a crazy succinct way to understand, like... How does zoom out from our current conversation around oh no, it's a bubble and say like well actually like what tends to happen over like several hundred years out of an economy especially ours in here in the US and You know where might we be in the combination of these three factors in our current one and it's a it's old too It's from like 2012 or something. So it's not it's not written for people pining to understand right now, which I think gives it a little bit more authority and so

1:51:52I highly recommend it. We'll only get in the show notes. Well, worth your time. Well, with that, Nick, thank you so much for joining us. Thanks for having me. Thanks for having me. What do you want to plug? What should listeners go check out? Go check out Rack Room. Yeah. Yeah, I would see. We told you you could have just made Rack Room your carve out. Yeah, go check it out. Send us feedback. Like the app is far from done.

1:52:21And so we're always interested in people's feedback. Awesome. Well, Nick, we hope to have you back for part three someday. And I don't want to force out of what what event that could even happen, but let's just say in the far future. What about Nick? What about if people want to get involved in record more deeply? They want to work with you. They want to.

1:52:40get in touch with you partner with you guys what what's the best way to so we are hiring yes for sure so um so we would love it if you so go to recroom.com there's a bunch of jobs listed on there there's new ones being posted every week we would love to have you as part of the team I think we've found there's so much untapped potential especially in the Pacific Northwest with the really really big tech companies I think you see that there's like all the talent and startup ambition in the San Francisco space and there's like all the talent up in Seattle but like there's not as much of that spark and I think there's so many people at a Microsoft or an Amazon or a Google or a Facebook that would enjoy their life more. Who are listening? Who would enjoy their life more on the startup journey? I mean I wouldn't want a lot of them higher highs, lower lows but definitely like a much more rewarding journey when you're sitting at the

1:53:37the end of a five-year journey and looking back, I think there's a lot more. It will certainly make your life much more interesting. I'll take it from Mick and I, both for Microsoft. This is another thing that Dan Lewis brought up during our Convoy episode. I just have to say it one more time. You always overweight the risk of joining a startup.

1:54:00You always think, oh my gosh, this is so risky, but your downside is wildly capped. You could just go get your old job, or probably a better one. And if it goes, well, God forbid, who knows what unforeseen doors that opens in your future. Oh, for sure. And I think when most people are calculating what is going to happen at a startup, or what is going to happen to me at Microsoft, they're using the law of averages.

1:54:23And so I just asked them like, okay, are you average? Like do you think you are an average person? Like, because. It's a serious jujitsu. Wow. I love it. Well, I mean, like look, I think then the math makes a lot of sense. Like if you, yeah, if you, if you feel like you're, you're going to be subject to that law of averages and you're going to score in the middle, like Microsoft's a great, a great spot. If you do think you're in the top 25 or, you know, the top 10%, like your upsides really capped at Microsoft's.

1:54:53there's only so fast you can grow there there's only so much responsibility you can get over such a short period of time and so like that's not true at startups and so if you really feel like you know your career is captain some way I you know I think people I tell them like hey the risk is really worth it like you really can find a lot more responsibility and a lot more ownership and have a lot more impact on a product Ben and I would be remiss if we didn't also throw in also applies to starting a company for most people. Totally. Totally. Yeah. Sorry. No, no. Go. I mean, hey, you don't start a company. Go work a record. Exactly. I think, I mean, to go back to Bezos, the regret minimization function that he uses, which is like, hey, when I'm looking at any decision, and I think about, you know, what am I going to feel in five years when I look back on this choice? And people tend to regret the decisions that they, you know, they didn't jump at. Not the ones that they let pass.

1:55:47Yep. Totally. It's a great framework. You're like stealing all these future potential carveouts. All right, listeners, we're going to wrap here. We told you about the Slack. Go check it out. Acquired.fm slash Slack. We'll be talking about this episode. If you want to be an LP, that's at acquired.fm slash LP and you should. And frankly, if you are not subscribed or soon to be called following as we are finding out, subscribed is going to be a reserved word for paid podcasts and following is what happens when you follow free podcasts.

1:56:15you should follow us from your favorite podcast player. And if you like this episode and you have a friend or coworker that you think, Hey, like I thought of them during this episode, share it with them. We would love to have them join the acquired community with that. We will see you next time. See you next time. See ya.