Season 2, Episode 2 Raising a Seed Round with Against Gravity CEO Nick Fajt

In this episode of "Acquired," hosts Ben Gilbert and David Rosenthal delve into the world of startup fundraising with Nick Fajt, co-founder and CEO of Against Gravity, creators of the VR social club Rec Room. They discuss the journey of securing a seed round, emphasizing the importance of stamina in the burgeoning VR market. Against Gravity's approach to product development and user feedback is highlighted, showcasing their rapid iteration and user-focused strategy. The episode also touches on the significance of selecting the right investors who align with the company's long-term vision. Additionally, they explore the broader VR landscape, the unexpected success of platforms like PlayStation VR, and the potential for VR to create profound social experiences. The conversation concludes with insights into the strategic decisions behind offering Rec Room for free and the potential impact of flagship content on distribution platforms.

• Ben Gilbert and David Rosenthal are the hosts of the Acquired podcast.
• The podcast focuses on technology acquisitions and IPOs.
• Season two introduces a format with multi-episode themes and miniseries across episodes.
• This season's miniseries is on startup fundraising.
• The episode features Nick Fajt, co-founder and CEO of Against Gravity, makers of Rec Room.

"Welcome to season two, episode two do of acquired, the show about technology acquisitions and ipos. I'm Ben Gilbert." "I'm David Rosenthal and we are your hosts." "This season's miniseries is on startup fundraising..."

The introduction sets the stage for the episode, introducing the hosts and the theme of the season, which is startup fundraising.

• The podcast has moved to a seasons format to explore themes across multiple episodes.
• The current theme is startup fundraising, which has not been deeply explored in the podcast before.
• The episode will delve into the specifics of fundraising rounds and their impact on companies.

"As we mentioned in December, we're moving to a seasons format where we can do multi episode themes and miniseries across episodes."

This quote explains the structural change in the podcast format, emphasizing the in-depth exploration of specific themes, which in this case is startup fundraising.

• Nick Fajt, co-founder and CEO of Against Gravity, joins the episode.
• Against Gravity is known for creating Rec Room, a VR social club game.
• Nick Fajt has a background at Microsoft, working on HoloLens and Forza Motorsport before starting Against Gravity.

"And we are super, super fortunate to have with us today the co-founder and CEO of Against Gravity, Nick Fight."

This quote introduces the guest, Nick Fajt, and provides a brief overview of his company and background.

• Pilot is a sponsor of the episode, providing accounting, tax, and bookkeeping services for startups.
• The philosophy behind outsourcing accounting is to allow startups to focus on their core product and customers.
• Pilot has grown significantly and is trusted by many startups, including OpenAI and airtable.

"Pilot both sets up and operates your company's entire financial stack... Pilot takes care of all that."

This quote highlights the services provided by Pilot, the sponsor, and their importance to startups by managing financial operations so companies can focus on their core business.

• Rec Room offers a variety of virtual experiences, including sports games, adventures, and social spaces.
• The game is popular among VR users on various platforms like Steam, Oculus, and PlayStation.
• Rec Room's development is community-driven, with many rooms created by users.

"So, against gravity makes rec room, which is a virtual reality social club where people from around the world can meet up in thousands of different rooms."

This quote describes the main product of Against Gravity, Rec Room, emphasizing its social aspect and variety of virtual experiences.

• Against Gravity follows a "ready, fire, aim" development approach.
• The focus is on rapid iteration and immediate user feedback.
• The company progressed quickly from inception to market presence with limited resources.

"One of the phrases that we use a lot at that company is ready, fire, aim, which really describes our development process."

This quote explains Against Gravity's development philosophy, which values quick releases and immediate improvements based on user feedback.

• Nick Fajt and his co-founders were part of the HoloLens team at Microsoft.
• They left Microsoft after HoloLens shifted its focus to enterprise applications.
• Against Gravity was founded with a focus on AR/VR and social experiences.

"So after some time, I was really excited about the AR and VR space... There's a tsunami out on the horizon. We should probably learn to surf."

This quote captures Nick Fajt's motivation for leaving Microsoft and starting Against Gravity, driven by the potential he saw in AR/VR technologies.

• Against Gravity raised almost a million dollars through a convertible note from friends, family, and former coworkers.
• The funds allowed the company to launch Rec Room and support it post-launch.
• The seed round included institutional investors like Vulcan, Mavron, Sequoia, and others.

"So early on, we did a convertible note with friends and family and actually quite a few former coworkers as well."

This quote details the initial fundraising efforts of Against Gravity, highlighting the support from personal networks and the transition to institutional investors.

• Rec Room raised funds through traditional equity and convertible notes.
• Convertible notes offer flexibility, allowing continuous addition of investors without closing the round.
• As institutional investors entered, terms needed to be adjusted.

"When you start getting to bigger rounds, you kind of need to do, but you can also raise smaller amounts with convertible notes, which is debt that converts into equity."

The quote explains the dual approach to raising funds—equity for larger rounds and convertible notes for smaller, more flexible fundraising.

"As we started moving into more institutional investors, we started needing to have some different terms."

This quote highlights the necessity to change fundraising terms as larger, institutional investors become involved.

• Initial funding stages involved raising money one check at a time.
• The friends and family stage checks were around $25k.
• A total of $1 million was raised through convertible notes, acting as a precede round.

"I mean, it was largely around 25k. There were some that were higher than that, but, yeah, generally, was it hesitate to call it a round, but million dollars of convertible notes?"

The quote clarifies the typical check size during the friends and family stage and the cumulative amount raised.

• Rec Room initially struggled with traditional investor presentations.
• They decided to showcase their product directly by inviting investors to experience their app.
• A unique in-app fundraising room was created for investor presentations.

"We were much better at building products than we were at building powerpoints."

This quote underscores the team's strength in product development over creating presentation decks.

"Just go download the app. It's free. And there's always people on there to play with you and let us know what you think."

The quote illustrates the hands-on approach to investor presentations, focusing on direct product experience rather than a traditional pitch deck.

• Investors had to demonstrate a genuine interest and understanding of the VR market.
• Engaging with the app and providing feedback were seen as signs of serious interest.
• This approach also served as a filter to identify knowledgeable and engaged investors.

"Qualification is something that is so important and I just think this was brilliant, like finding a way to pre qualify anyone you would talk to."

The quote emphasizes the strategic importance of qualifying investors by their willingness to engage with the product.

• Rec Room launched their product in 90 days, focusing on user feedback and rapid iteration.
• Early release strategy was feasible due to low user expectations in emerging VR markets.
• The team prioritized getting the product in front of users over perfecting it internally.

"It takes a lot of bravery to put out a product that doesn't look the way that you want and doesn't operate the way that you want and only has 10% of the features that you want."

This quote reflects on the courage required to release an early-stage product to gather user feedback.

"It's kind of mind blowing, I would say."

The quote expresses admiration for the team's ability to launch a VR product in such a short time frame.

• The VR market's emergent nature allowed for free user acquisition and low competition.
• In contrast to saturated markets, VR provided clearer feedback on product quality.
• Early user interactions in Rec Room were diverse and unexpected, providing valuable insights.

"I would say, like, if no one's playing your VR app right now, it's probably not very good."

This quote implies that user engagement is a direct indicator of product quality in the VR market.

• Investor interest varied, with some being immediate and others more passive.
• "Let's keep in touch" was often a soft no, and a quick follow-up indicated genuine interest.
• The fundraising process involved multiple stages, with a significant drop-off at each stage.

"Anything other than yes is probably no."

The quote captures the reality of investor responses, where anything less than a commitment likely indicates disinterest.

• Rec Room's pitch included a long-term vision and realistic expectations for VR market growth.
• They sought investors aligned with their strategic timeline and philosophy.
• Clarity and honesty in fundraising helped attract the right investors.

"You get the investors you ask for, and if you're honest about what your strategy is when you're fundraising."

The quote stresses the importance of transparency in fundraising to attract compatible investors.

• Sequoia Capital expressed interest towards the end of Rec Room's fundraising process.
• Due diligence focused on product analytics and team efficiency.
• The investment process with Sequoia was swift, reflecting their confidence in Rec Room.

"I think most of the evidence was in the product already."

This quote suggests that the product itself was the primary proof of potential for investors.

• Following the funding round, Rec Room aimed to maintain their successful formula.
• The investment allowed for an extended runway to continue their approach.
• Investor alignment with the company's philosophy was crucial post-funding.

"We tried to change as little as possible. We were like, look, this formula is working."

The quote indicates the company's intent to preserve their working strategies even after securing significant funding.

• Recognizing the current market position and being realistic about future prospects is crucial for startups.
• Open communication with investors about the realistic adoption timelines can foster trust.
• Being "well equipped to handle" future market changes is a priority for startups.
• A startup's readiness for market inflection points is essential for success.

Being super upfront and just recognizing, hey, we're going to be incredibly well positioned when the wave does hit.

This quote highlights the importance of honesty and preparation in discussions with investors, acknowledging the current market state while preparing for future growth.

• HoloLens started development in 2012, highlighting the long lead times in tech innovation.
• Oculus was founded after HoloLens began development, illustrating the competitive landscape.
• Product development can be influenced by existing technology, as HoloLens emerged from Kinect.

Yeah, I mean, keep in mind we had started working on HoloLens in 2012, and it took four years for us to get the dev kit out the door.

This quote emphasizes the lengthy process of developing a complex product like HoloLens and the early start of the project relative to competitors like Oculus.

• The transition to having an official board can change a startup's operations.
• Boards help startups maintain focus on long-term goals and vision.
• Raising money allows startups to tackle higher value, longer-term problems.

What the board has provided is when you're in that really tight iteration loop, you can occasionally get caught up in the details and the board is there to remind you, are we making progress towards this long term, multi-year vision that we've laid out?

This quote illustrates the role of a board in ensuring that a company does not lose sight of its long-term objectives while being caught up in short-term operational details.

• Raising funds enables startups to invest in projects with a longer horizon before seeing economic returns.
• Amazon's competitive advantage is partly due to its willingness to invest over long time frames.

Really, that is a lot of about what raising money as a startup, especially in a new market like you guys, is about.

This quote connects the concept of raising funds with the ability to work towards long-term, potentially non-immediately profitable projects, drawing a parallel with Amazon's strategy.

• Financial projections and market predictions are key to determining fundraising goals.
• Anticipating market inflection points, such as the release of an all-in-one VR headset, is crucial for timing product development and funding.

We felt like there was going to be this inflection point in the market for VR, and we felt like it was going to come once we saw a headset, which is kind of like an all in one.

This quote discusses the strategic planning behind fundraising, with the anticipation of market shifts being a driving factor in determining the amount of capital required.

• Deciding to release a product for free can be strategic, particularly in early markets.
• Focusing on community and user-generated content can be more valuable than immediate monetization.
• Raising funds allows investment in open-ended problems like abuse prevention and moderation tools.

We decided to release that product for free. So it was not generating any revenue.

This quote explains the strategic decision to release a product without immediate revenue generation, emphasizing the long-term community-building and engagement benefits.

• VR offers a unique form of real-time, immersive social interaction.
• Practicing social interactions in VR can help reduce social anxiety for some users.
• Social platforms in VR can foster a sense of well-being and meaningful connections.

There's something just so different about social in VR... It really feels like you're in the same room with somebody who maybe is on the other side of the world.

This quote captures the essence of social interaction within VR, highlighting the potential for VR to create a sense of presence and connection despite physical distances.

• The VR market has not met overly optimistic expectations, with 4-5 million high-end headsets in circulation.
• Accurate market predictions are challenging, with reports often being overly optimistic.

I think depending on which marketing report you read, it might have been, hey, everybody and their brother has three oculus in their home.

The quote reflects on the disparity between optimistic market predictions and the actual state of VR headset adoption, indicating the need for realistic market assessments.

• Technology does not grow linearly, but exponentially, making it hard to predict when a technology will become mainstream.
• Early stages of technology development can feel slow and require patience and long-term vision.
• The development of VR is compared to the early stages of mobile phones, indicating that major breakthroughs like the iPhone moment for VR are yet to come.
• PlayStation VR's success is attributed to its simplicity, affordability, and ease of use, suggesting that consumer-friendly products can drive technology adoption.
• Software developers can learn from the vocal user base currently engaging with VR, which can inform improvements and innovations.

"The tricky thing is these things grow exponentially. They don't grow linearly."

This quote emphasizes the non-linear growth pattern of technology, which can lead to sudden and rapid expansion once a certain threshold is reached.

"PlayStation VR is currently the highest selling of those high-end headsets."

This quote highlights the success of PlayStation VR in the market, suggesting that its approach to product design has resonated well with consumers.

• Technology waves are difficult to predict and can suddenly become the new dominant paradigm.
• The Gartner hype cycle describes the pattern of overinflated expectations followed by a crash and eventual stabilization of a technology's value.
• Past computing paradigms such as PC, internet, and mobile have shown exponential growth, but the next "trillion-dollar wave" is still uncertain.
• Machine learning, cryptocurrency, and VR have all been potential candidates for the next major technology wave at different times.
• Building meaningful products in emerging technology markets requires stamina due to the slow initial growth before exponential expansion.
• The importance of choosing the right investors who share the vision and understand the long-term growth trajectory of a company is emphasized.

"Nick, you had mentioned that these things happen exponentially and not linearly."

This quote reiterates the concept of exponential growth in technology and the sudden inflection points that can occur.

"I think your fundraising journey is so interesting. Right. Because that potential is there and it is growing exponentially, and that means it's going to grow very slowly for a long period of time."

This quote conveys the challenge of fundraising for a technology that grows exponentially, as it requires investors to have patience and faith in the long-term potential.

• Startups are about learning quickly and adapting to new information and user feedback.
• Founders with deep domain knowledge can bring products to market faster due to their understanding of the technology.
• Continuous learning and challenging assumptions are crucial for success in early markets where best practices are not yet established.
• Early interaction with the market and users helps in course-correcting and avoiding the pitfalls of developing products in isolation.
• The process of learning and adapting is ongoing, even after establishing a product in the market.

"I think any startup is really about learning."

This quote underscores the fundamental nature of startups as learning organizations that must adapt and grow rapidly.

"Your lifeblood is your user feedback."

This quote stresses the importance of user feedback in guiding the development and iteration of a startup's products, especially in new markets.

• Certain content, like the video game "Zelda: Breath of the Wild," can have a significant cultural impact and drive consumer behavior.
• The concept of bundling and unbundling in business is discussed, with some content being so compelling that it transcends these strategies.
• High-quality content can lead consumers to make seemingly irrational decisions, such as purchasing a console primarily for a single game.
• The discussion suggests that the value of "tentpole content" is likely to increase as it becomes a key differentiator for distribution platforms.

"I basically bought a $400 video game. Like, I bought the switch for Zelda."

This quote illustrates how powerful content can drive consumer purchasing decisions, even leading to significant investments for a single piece of content.

"There are some content that transcends that bundling and unbundling strategy, where people will do borderline irrational things to go and find this content."

This quote discusses the unique appeal of certain content that can motivate consumers to go to great lengths to access it, highlighting its importance in the market.