In this episode of "Acquired," hosts Ben Gilbert and David Rosenthal are joined by Nick Fajt, CEO of Rec Room, to discuss the evolution of the virtual universe platform. Initially focused on the VR landscape, Rec Room faced a pivotal moment when VR growth stalled, prompting a strategic shift towards user-generated content and multiplatform expansion, including mobile and gaming consoles. This transition, while initially met with community resistance, ultimately led to significant growth, with Rec Room announcing a $100 million raise at a $1.25 billion valuation, driven by a 660% revenue increase and a community of over 15 million users, 2 million of whom are creators. The episode delves into the challenges and decisions that shaped Rec Room's journey, highlighting the resilience and adaptability of the team, as well as the importance of aligning with community, team, and investor interests.
"Don't do it tomorrow. Please wait until Wednesday. Yeah."
"I'm gonna send you the press release, so you just. It has the embargo at the top."
The quote indicates that there is a planned product release with a specific embargo date, suggesting the importance of timing in product launches and communication strategies.
"Welcome to season eight, episode four of acquired, the podcast about great technology companies and the stories and playbooks behind them."
The quote serves as the opening for the podcast episode, setting the stage for the discussion about technology companies and their strategies.
"Earlier today, Rec Room announced in the Wall Street Journal that they had raised $100 million at a $1.25 billion valuation from existing investors Sequoia and index ventures."
The quote highlights Rec Room's significant fundraising achievement and valuation, reflecting the company's growth and potential in the technology sector.
"Indeed, the background of all of this is that 2020 was a heck of a year for the entire metaverse category."
The quote emphasizes the rapid and transformative growth of the metaverse industry, with multiple companies experiencing significant valuation increases.
"And 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."
The quote signifies the continuation of Rec Room's story on the podcast, with Nick Fajt providing insights into the company's journey.
"Yeah, I mean, I think the founding stories you normally hear, it's like a very cleaned up narrative of, like, I had this vision or I was doing this Mundane task and this light bulb went off, and that was not true for us."
The quote provides insight into the organic and unplanned beginnings of Rec Room, contrasting the common narrative of founding stories with clear visions.
"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 was our choice. And I think it's led the rest of rec room to have a very improvised style."
The quote reflects on how the company's improvised beginnings have influenced its culture, suggesting that this approach has been beneficial in navigating the dynamic tech industry.
"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."
The quote explains the rationale behind the company's name and signifies a departure from their previous work on HoloLens to explore new opportunities in the VR space.
"So to give you an idea, from like December 2017, for the next 24 months, VR did not grow at all."
The quote highlights the challenges faced by Rec Room due to the lack of growth in the VR market, prompting the company to diversify its platform offerings.
"But eventually, if we can take these VR creators, if we can scale their creations, if we can get them monetizing a user base that's at a mobile scale, they will be happy."
The quote indicates the company's strategic decision to prioritize scaling the user-generated content ecosystem over short-term profitability, with the belief that it would lead to a more sustainable business model.
"Rec room is just this 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."
The quote describes the core functionality of Rec Room, emphasizing the importance of user-generated content and the creative freedom it offers to users.
"Our first flat world experience was actually on PlayStation. So PlayStation and PC, because you had."
The quote marks the beginning of Rec Room's expansion beyond VR, indicating the company's strategic move to reach a broader audience.
"The community was not happy about it. It was a big departure from what we were doing."
The quote captures the initial community backlash against the introduction of user-generated content tools, highlighting the challenges of introducing significant changes to an established user base.
"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."
This quote emphasizes the recognition of Roblox's success and the influence of other platforms with strong creator ecosystems. It highlights the importance of a creator class in driving platform growth and engagement.
"When you launched rec tokens, you got rec tokens for accomplishing specific actions that you guys set up in the environment, right?"
This quote points to the strategic use of in-game currency to incentivize and guide user behavior, which is a common practice in game design to enhance user engagement and retention.
"We do print a good amount of currency every day to stimulate demand. Right."
This quote reflects the dynamic management of the in-game economy, where the platform controls currency flow to encourage user activity and maintain a balanced economy.
"We really have focused pretty hard on having generalists tackle as many of our problems as possible."
This quote underscores the team's philosophy of employing generalists to address complex issues, suggesting a preference for adaptable skill sets over specialized knowledge in their development process.
"It's probably a scale question. The currency... it kind of depends on what those numbers are."
This quote captures the economic decisions users face within the game, illustrating how the virtual economy mirrors real-world financial considerations.
"One of the classic game economy problems is you will end up with users who have so much currency they can kind of ruin your economy."
This quote highlights the challenge of managing wealth distribution in a game economy and ensuring that it remains fun and engaging for all players.
"Nobody left. Everybody was like, all right, I understand the challenges, and this kind of is painful getting yelled at by the community during these transitions, but we really do think it's in their best interest."
This quote reflects the team's resilience and dedication, indicating a shared belief in the platform's direction despite facing community backlash during transitions.
"We never talked about like, oh, we're just going to do a hard pivot out of VR."
This quote signifies the company's commitment to VR, despite exploring growth through other platforms, showing a balance between innovation and adherence to original goals.
"We just need to build an avatar that's really flexible. And you, as the controller of that marionette, you need to be able to make this avatar do, like damn near anything."
This quote discusses the need for a flexible control system that can accommodate the limitless actions users might perform in VR, highlighting the complexity of translating this to other platforms.
"The cost of supporting the service of rec room is relatively small... The business is growing really nicely."
This quote explains the favorable economics of the business model, with low operational costs and potential for significant revenue growth driven by user-generated content and creator-led expansion.
"Yeah. Somehow there's worse and worse product market fit with every additional pinball that gets loaded in."
The quote emphasizes the idea that as marketing continues, each new set of users is less aligned with the product, leading to a diminishing return on investment in marketing.
"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."
This quote highlights the strategy of incentivizing creators to cultivate their own sub-communities, which can lead to a more engaged and satisfied user base.
"The reason we need tons and tons of loads and tons and tons of truckers is because there is one trucker load pair that is optimal."
The quote is used to illustrate the importance of having a large number of options on a platform to find the perfect match, which is applicable to both the trucking industry and online platforms.
"The pandemic had been, it had definitely driven activity for rec room."
This quote reflects on how external factors like the pandemic can unexpectedly drive user engagement and growth for a platform.
"This is our opportunity to untether ourselves from the emotions of the market and really take a long term play here."
The quote captures the strategic mindset behind the fundraising, focusing on long-term stability and growth rather than short-term market sentiments.
"The bigger rec room is, the more people you're theoretically reaching. And so the higher your potential reward is."
This quote explains the scale economies at play, where creators benefit from the platform's growth as it increases their potential audience and rewards.
"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."
The quote stresses the significance of maintaining autonomy and staying true to the company's and community's vision, rather than succumbing to the influence of a potential acquirer.
"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 few that can be an enduring standalone big business. And I don't think that dichotomy exists anymore."
The quote challenges the traditional binary outcome for tech companies, suggesting a new landscape with more diverse potential paths to success.
"I think especially on the consumer side with more, I think you've seen more consumer apps shift away from the advertising model."
This quote highlights the trend of consumer apps distancing themselves from reliance on advertising revenue, opening the door to different business models.
"Especially as social media heads into the world of microtransactions and a little bit away from advertising."
The quote points out the transition in social media towards microtransactions, suggesting a move away from traditional advertising revenue streams.
"The market in China is less advertising driven ten cent."
The quote implies that the Chinese market operates differently from the West, with less emphasis on advertising and perhaps more opportunities for diverse companies to thrive.
"The warm embrace of a big company is a very rational decision for founding teams to make, particularly economically."
The quote acknowledges the appeal and rationality behind selling to a larger company, which often offers economic security and resources.
"The value that rec room derives out of its economy and its things is they are centralized. That's the value."
This quote emphasizes the strategic decision by Rec Room to maintain a centralized economy, which is crucial for the brand and allows for effective management and change.
"Your growth was governed by someone else's growth, and by being captive to one platform and betting on that future."
The quote reflects on the risk of startups being too dependent on external platforms for growth, highlighting the importance of autonomy.
"When we first started the company, I had never heard of a series A round. I didn't know how you pitched investors."
The quote illustrates the initial lack of venture capital knowledge and the steep learning curve faced by many founders.
"We have grown into a space where rec room can have a positive impact well beyond gaming."
This quote describes the aspirational 'A' scenario for Rec Room, where the company's influence extends far beyond its initial scope.
"It's so easy to get complacent. It's so easy to be like, look at all the things that we've done."
The quote warns against the danger of complacency in startups, emphasizing the need for continuous innovation and progress.
"You always overweight the risk of joining a startup."
This quote encourages listeners to reconsider the perceived risks of joining a startup, suggesting that the potential rewards often outweigh the risks.