There are numerous myths in entrepreneurship that have to be reexamined to mitigate the havoc that they could wreak on a fledgling business. Especially in a field as rapidly changing as technology, these myths in entrepreneurship must be adequately accounted for and deconstructed to ensure smoother sailing ahead. Dr. Diane Hamilton is joined by Rizwan Virk, the author of Startup Myths and Models: What You Won’t Learn in Business School. Dr. Diane and Rizwan tackle some of the most harmful myths in entrepreneurship that could potentially do damage to the business you’re building. Ensure that you’re going down the right path with the help of Dr. Diane and Rizwan.
I’m glad you joined us because we have Rizwan Virk here. Riz is the Founder of the startup accelerator, Play Labs at MIT. He’s also the author of the book called Startup Myths and Models: What You Won’t Learn in Business School. We’re going to talk about video game startups and so much more.
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Myths In Entrepreneurship With Rizwan Virk
I am here with Rizwan Virk who is the author of Startup Myths and Models: What You Won’t Learn in Business School. He’s a successful entrepreneur, video game pioneer, and venture capitalist. He’s also the Founder of the startup accelerator, Play Labs at MIT. He’s a graduate of MIT and Stanford, and also the author of Zen Entrepreneurship: Walking the Path of the Career Warrior, Treasure Hunt: Follow Your Inner Clues to Find True Success. Also, The Simulation Hypothesis: An MIT Computer Scientist Shows Why AI, Quantum Physics, and Eastern Mystics All Agree We Are In a Video Game. That’s a great title, by the way. It’s nice to have you here, Riz.
Thanks for having me on.
First of all, you’re welcome. I had The Matrix vibe from that last title. I’m fascinated by everything you do. I was watching a video you made about the accelerator Play Labs at MIT. I want to start there. I do want to get into your book for sure. Give me a little backstory on how you got to the Play Labs.
I started off as an entrepreneur, fresh out of MIT. I had the impression of what I call the overarching myth of startups, which is that you come up with an idea, you pitch it to some investors, they like it, you build a product, and customers adopt it. Everything goes well and then the company goes public, and everyone is fat, rich, and happy. One of my favorite graphs is to show what people think success is like, but the reality is that it tends to have lots of twists and turns along the way. It’s rarely a straight line. As an entrepreneur, I ran into many challenges in my companies initially. After initial amounts of success, we raised venture capital financing, and then we’d run into all kinds of different problems.
I started to think about what are some of the lessons that I learned there. Later, when I became a video game entrepreneur, we had the number one grossing game in the iTunes App Store back in 2010. The game is called Tap Fish. Mobile gaming is no longer a new industry but I started to notice that these startup markets, particularly with the video games, went through waves. I became an investor in a number of different video game startups. Some of which your readers may have heard of like Telltale Games, which has Game of Thrones and The Walking Dead game that is well-known, and Discord, which is a popular chat app. In fact, if your readers don’t use it, their kids probably do. It’s used by a lot of gamers. I started to get involved with virtual reality and augmented reality. That led me to want to have a forum where I could teach some of these lessons to groups of entrepreneurs at once rather than going one by one.
It was around the time I sold my last game company that the MIT Game Lab asked me to come and do something there. When I was a student at MIT, they taught us video game classes, but now they have a whole lab dedicated to building video games because it’s a popular area. I went back and started this accelerator for playful technology companies using video game technology, which could be virtual reality, augmented reality, 3D modeling, or even digital currency like blockchain, and in any industry. It was a summer-based accelerator that we ran for a few years. I’m taking a break from it to focus on my writing, but we may start it up again soon.
I know 1/10th of what you forgot when it comes to software creation. I have interviewed Richard Stallman, Jürgen Schmidhuber, and a lot of interesting people. My son-in-law to-be has created an app that has something to do with gaming. I wish I could explain it in-depth, but I can’t. I know that there are a lot of companies that are looking to do some of this gaming because it’s popular. Yet, I was thinking when we’re talking about AI, virtual reality games, and different things that are coming out, I was wondering what happened to virtual reality. I can remember when I took my kids out and they have these cool simulations of these virtual reality goggles you’d put on. I can remember shooting at my kids in the store and I’m thinking, “I can’t wait until they make this better,” and then it went away. It’s back now, but it’s different. What was that big gap in time, and why didn’t it do more?
Virtual reality is an interesting technology that is also going through many different waves. It was that first wave probably back in the ‘90s is what you’re talking about. They never made the technology small enough to be a consumer-based device. A second wave kicked off when Facebook bought Oculus for a couple of billion dollars back in 2014. Suddenly, what happened was a lot of venture capitalists started to invest in VR content companies on the consumer side, but then that also had a bit of a peak, and then it went down into a valley. In Startup Myths, I talked about how startup markets evolve through different phases. They start off as a nascent industry. It gets super hot and then it starts to mature. What happened with VR was that a lot of those bets didn’t pay off because a lot of consumers were using the headsets often. A friend at Facebook has said that, whereas with smartphones, someone would use a smartphone 100 times a day. With VR, people were using it once a week maybe, so the usage patterns weren’t quite there.
Even before this whole pandemic, VR had started to make a little bit of a comeback on the consumer side with the Oculus Quest, which is a standalone headset that you don’t need to plug into a computer. There are other headsets like that as well. One area where VR made an impact has been in training for enterprises. Anywhere where they can dictate, “Put on the headset because it’s cheaper.” Training you to operate a forklift, for example, in VR than have you crash. Training and education is one area where it has made an impact over the past few years and then it turns out, the Oculus Quest headset was sold out. We’re still waiting for more, so there’s a whole new resurgence. Especially with this pandemic and people staying at home, virtual reality may be a way to have interactions and conferences without having to travel. We’re about to see yet another wave of VR companies.
I’m all up for the Holodeck from Star Trek. Is that ever going to happen, something where you can have a room? It doesn’t make any sense because I don’t know how you’d have the three dimensions of movement or running into a wall. Is there something like that sensation that they’re working on?
That’s the eventual goal of all of this technology. You’d mentioned The Matrix vibe in my last book, which was called The Simulation Hypothesis. Part of the reason I wrote that book was a few years ago, I was playing virtual reality ping pong. As I was playing it, the responses were realistic. It felt like I was hitting a ball that at the end of the game, I decided to put the paddle down on the table. Of course, there is no table. It’s virtual reality, and then I leaned on the table and I almost fell over. That’s when I realized, “The actual responsiveness of the technologies is getting to the point where we might be able to fool ourselves into not being able to distinguish between the virtual world and the physical world.” That ties to something like The Matrix where if you remember the movie when Neo, Keanu Reeves’ character, woke up, he had the wire into the back of his head. That’s how they beam the actual game.
I thought about what are the different stages of technology that we would have to go through to get there, including brain-computer interfaces, which is sending information directly to the brain and pulling information out. I estimate we’re about 100 years away, give or take, in order to be able to build something like The Matrix, so maybe not quite the Holodeck. Although holographs are also proceeding quite a bit. In terms of technology, there’s a field called light field display. The idea is that if you measure the light going off, say, a cup to your eyes versus the eyes of somebody across the room and you know exactly how the light bounces off the cup, these holograms can try to reproduce it. We’re starting to blur the distinction between what is a physical object and what is a digital object, so it’s possible to have something like the Holodeck. Some Japanese researchers found that they could give you tactile sensations by using a little bit of radiation in the gloves.
I don’t know if I like that.
It was a small amount.The pandemic has opened up new ways to implement the use of virtual reality. Click To Tweet
A little bit like a CAT scan?
It’s less than that. It’s like using some electrical stimulus. The idea is if we can simulate the light, how it bounces off an object, and if eventually we can give you what the tactile sensation feels like, then we could see something like the Holodeck at some point in the future, but we’re still away off from that.
It’s interesting because one of my books is on perception and I write about curiosity, and all these things tie into all the stuff I’m interested in researching. As you’re talking about inserting tech directly into the brain, I love the idea of The Matrix being able to get knowledge fast. How much of it, if we do that, is dropping you at the top of the mountain instead of having you hike up and having the experience? Do you get the same feeling when you get it all given to you rather than working for it sometimes? I’m going to be curious to see where that all leads, but I love the idea of instantaneous learning.
Downloading information into the brain is an interesting area. It also touches on a lot of philosophical areas like false memories, things that were in science fiction.
Arnold Schwarzenegger’s Total Recall.
I interviewed Philip K. Dick’s wife. He’s writing the simulation hypothesis and he felt that we were in a computer-generated reality like The Matrix.
It’s more likely than not. I lay out a bunch of reasons why the physical world around us is not necessarily the real world. We’re getting impulses into our brain, which are showing us certain things. I go through different weirdness in quantum physics and look at the technology and the software side. Also, if you look at the world religions, all along they’ve been telling us that the physical world around us isn’t the real world. Sciences said, “That’s not true,” but we’re getting to the point where we can’t find this thing called matter.
It gets back to this idea of this distinction between what is data and what is the physical object. If you look at a table, molecule and atoms, you’re talking mostly empty space. It turns out when physicists get to the bottom level, they can’t find the thing called matter. All they find is information. They find properties of it. That’s all you can say with any definitiveness at that level. In the end, it could be that these are all pixels of information that are being rendered in our brains.
We maybe are the brains in the jar from Star Trek reference. It reminds me of The 6th Day with Schwarzenegger where he’s got the virtual girls sitting on his lap. He says, “If all your senses tell you it’s a hot girl sitting on your lap, then what difference does it make sometimes?” It’s going to get to the point where if you analyze it, do you want to know that you’re in the matrix? I don’t think I’d want to know.
That was the idea of the blue pill and the red pill in The Matrix.
Which one was the one when you found out? I don’t think I’d take that one.
You take the red pill. If you take the blue pill, then you wake up in your bed the next day. There was even a character in the movie who after he had woken up, decided he didn’t want to be there anymore. They’re going to put him back in the matrix that he will forget all about it because you would have preferred that. I personally would prefer to know if we’re inside a video game the quests, achievements, and ways that we level up.
If it’s good and you could do something about it, then I’d like to know. If you’re stuck in that sloppy water or whatever it was they had to live in, I don’t know if I’d like that as well. It is interesting to look at all of the AI, Artificial Intelligence, virtual reality, and different things that companies are working with. In your book, you write about some of these startups, the things that they have to do, and what they haven’t learned to succeed. Having been the former MBA Program Chair at the Forbes School of Business, I know what they learn in business school. I’m interested to know in your book what they’re going to learn that they wouldn’t have learned in business school.
I went to Stanford business school a number of years ago and I found that a lot of what we learned was tailored towards companies that have some kind of cashflow already. You learn about discounted cashflows and how to make projections. I remember in one case, the professor had written the textbook on decision modeling. It was a textbook about how to do complex spreadsheets, and we went through the entire long set of spreadsheets. On the right-hand side, you have values 1, 2, and 3, and you look at them and say, “This one is better.” That’s how we make decisions.
I remember raising my hand and I said, “What if you change the value all the way on the left?” He says, “You’ll get a different set of outcomes.” I said, “How do you know what numbers to plug-in?” He said, “In some cases, you have to look at history.” The problem with startups is that the past doesn’t equal the future, so we don’t know what numbers to put into those spreadsheets. The second part is you have to rely on your gut a bit, which is what entrepreneurs often have to do. I felt that a lot of what we learned in business school was interesting, but it applied to either financial markets, managing money, or becoming a manager in a big company where you could try to reduce things to science.
This book is about some of the things that happen in the startup world where not only does the past not equal the future, but a lot of times, entrepreneurs are making decisions thinking that the present is going to equal the future. If you’re in a hot market like we were in mobile games back in 2010, it was a relatively easy market to get into. You could spend $0.25 per user. There weren’t that many games. Now, there are over one million games in the App Store, so the market has changed.
I know guys who sold their companies back then like we did, we sold to a Japanese company, and guys that held on. Some of those guys that held on weren’t happy because now, it’s a more difficult market. You end up paying several dollars per user and you have to spend millions of dollars to get users for your mobile game. Whereas back then, we spent $25,000. Not only does the path not equal the future, but the present doesn’t equal the future. These assumptions are built into the way we make decisions. I wrote the book as a series of myths and new models that could apply to startup markets. I used to like the supply and demand curves that economists would draw. They’d say, “This is how the market evolves. This is how things change. When prices change, we find an equilibrium.” The problem was that there weren’t any good models for the startup world, so that’s what led me to write this book.
You bring up some important points. My work in curiosity found that there are four things that keep people from being curious, and you mentioned one of them, which is assumptions. That’s a big factor in what people do. That’s what leads to status quo thinking, so I love this. You talk about the startup model. I want to talk about that. What is the startup model that you’re talking about?
The book goes through a few different models, but one in particular, I call it The Startup Market Lifecycle. It shows how a new market evolves from garage inventors to a multibillion-dollar industry with multiple multibillion-dollar companies. I found the model myself applying in enterprise software with the internet and then with mobile games. It was after the last recession in 2008 when Apple introduced the App Store that allowed third-party developers to make apps, then I saw this model happening because it was a repeat of what I had seen in other markets.
Some of this tends to be true even if you go as far back as automobiles. I grew up in Detroit and I used to always wonder why are there all these makes and models like Oldsmobile and Buick? It turns out they were all garage entrepreneurs who created these car companies that then got acquired. Back then, you could create a car company in a garage. Now, if you try to create a car company in a garage, maybe if you’re Elon Musk, you could spend $180 million of your own money plus another $300 million of Department of Energy money. You could start a car company, but you can’t do it the way it was done back then.
That’s the reality of a mature market. It costs more to get into that market, so I lay out the stages of the market. The nascent stage is when they’re hobbyists who are playing around with the technology, and then that goes into what’s called the growing phase. That’s when a lot of venture capitalists start to invest in the market because everybody starts to say, “This is the next big market,” and they put money in. There’s this unique thing that happens in the tech space, which I call a super hot market where things go crazy and valuation goes through the roof for a period of time.
It happened in the dot-com days, the mobile game industry, and many different industries, but it only lasts a short period of time. What happens is the market starts to mature. During the super hot phase, everybody and their mother jumps in. Back in the ‘90s, everyone was like, “I have an idea for a website.” A few years ago, I remember everyone was coming to me saying, “I have an idea for an app.” It was the same kind of thing, but when the market starts to mature, a lot of those guys who started companies don’t succeed.
Even if they got some angel funding, those companies start to go out of business, and things start to consolidate, what happens is that you can tell which phase of the market you’re in by looking at multiples of revenue, for example. In business school, everything was about multiples of cashflow. Remember, it’s a startup world, nobody has cashflow until they’re already a successful company. You can look at multiples of revenue, and 3 to 5 times revenues is a typical multiple for the growing phase. In the nascent phase, there aren’t any multiple. Nobody’s acquiring anyone or if they do acquire the company, it’s just for an acquire.
During the super hot phase, you could have multiple ten times revenues. Back in mobile gaming, there was a company called ngmoco, which sold for $400 million to a Japanese company and their revenue was around $30 million, so it was 10x. There was another company that sold to GREE for $100 million that had less than $1 million in revenue. You’re talking about 100x multiples. In that stage, it’s more of strategic buys, and there’s not a lot of rationality going on. When the market starts to mature, as it was starting to happen in mobile gaming in 2012 or 2013, you start to recognize it’s hard to become a leader and the cost is more expensive.
There was a company that GREE, a Japanese public company, bought called Funzio in 2012 for $200 million. That seems like a lot of money, but the revenue was already $50 million. It was only 4x multiple on revenues at that point. A company that I had invested in had a Star Trek game that did well over time and ended up selling that game for 1x revenue because it wasn’t based on revenues. It was based on cashflow. Mobile gaming is a $30 billion-plus market. It’s the biggest component of the mature video game market, which is a $100 billion market. It is even bigger than Hollywood in terms of total revenues, but there are multiple public companies.
I saw it grow from just a couple of guys in the garage. We built our first game for $25,000. You have Fortnite and Pokémon GO. Not many people know this, but the company that made Pokémon GO had raised $30 million before they released that game. To build a game and be successful, you need way more money just like if you want to start an auto company. That’s one of the models that I go through in the book, which is how these markets evolve, and how multiples go up and then they go down. Overall valuations go up. If you were to add up all the valuations in the market now of mobile game companies, it’s way more than what it was back in 2010, 2011, and 2012. Also, if you add up the market size, it’s $30 billion. It’s way more than it was back then. While valuations and market size are going up, it’s harder for an entrepreneur who’s operating with limited resources to get in there and attack that market.
As you bring up resources and raising money, it’s challenging to do this finance. You’re talking about how much money is required. Forgive me for not giving gaming examples, but just startup examples because a lot of people might be able to relate to them more in case they don’t do gaming. How long does it take to become a TikTok? How long does it take to raise the money to get to the level where you reach that level of success? If you’re investing in something like that, if you want to help raise funds for that, how do you know you’re not getting into a Theranos?We're starting to blur the distinction between physical and digital objects. Click To Tweet
Those are complicated questions. As much as we’d like to say this is the science that can be taught, there’s an art to it as well. A lot of what the book is about is that there are these pieces of advice, for example, that people give out in raising money. One of them is to talk to as many investors as you can. You may have to talk to 40 to 50 investors to find an investor that might fit your startup. The reason I call it a myth is there’s a kernel of truth to it, but you also have to understand under which conditions it’s true and which condition it’s not.
It turns out a lot of times, your first investors are people that you either have a relationship with already or they are already wanting to invest in the market that you are in. What’s important is not to talk to 100 different investors, but to find the investors that are more likely to invest in you and to narrow down on what you’re looking for. There was an entrepreneur named Gary Sangha, who started a legal tech company called Intelligize a few years ago. He went to the University of Pennsylvania and he was a lawyer. He didn’t have a lot of contacts in the VC world. It turns out his first investor was a venture capitalist who was also an alumnus of the University of Pennsylvania.
The same thing in my case. I had graduated from MIT, so he said, “What’s your tribe?” You can find investors that are in that tribe, then you’re more likely to be able to get the initial investment. In terms of how long it takes, there are different rounds. There’s what’s called a pre-seed round, which could be a small amount of money from friends and family, anywhere from $25,000 to $500,000. That used to be called a seed round, but now a seed round tends to be several hundred thousand up to maybe $1 million or $2 million in Silicon Valley.
That’s before you get your series A and all that, right?
Exactly. Usually by series A, you need to have a product that’s been released and show some kind of traction on that product in the marketplace. Some seed investors are starting to say that as well. They don’t want to invest in a company that has a product that’s still being developed. They want to see some amount of traction in the marketplace. Startups have a high failure rate, so that’s where investors are constantly looking at ways. How do we reduce risk and still generate a good return down the road?
I’ve seen some of these companies done well, but they keep getting more serious funding. They go way past B, C, and D. They keep going and they eventually want to go IPO, but then they just go to another series. Is there too far to go? Is there a point where you need to sell out, go IPO, and do something?
Yes. Part of the reason why I came up with this model is for entrepreneurs to make a decision about when to sell the company as well. Most successful tech companies get sold. Of course, people in the general public don’t know that because they know Google, Facebook and Twitter. These are public companies. It’s probably 0.1% of companies that make it to that stage. Whereas most of the other companies that are successful, let’s say 90% fail, 10% or 9.9% are successful by being acquired by bigger tech companies like Microsoft or Google, and then 0.1% might go public.
What started to happen though with the dot-com days, everyone was going public without any revenues, and that ended up being problematic. The crash of 2008 though is when it became hard for companies to go public. What started to happen was companies that were already successful, instead of going IPO, they were holding out as long as possible. This is true even at Facebook and Google. Facebook ended up having to go public because they had over 500 shareholders, so the SEC didn’t give them a choice. They consider you public at a certain point if you have too many shareholders.
What was happening was that a lot of the early employees were selling shares of Facebook to other people, so that was increasing. Even though it’s still a private company, it was a successful company that everybody knew about, so other people wanted to get in. I even bought some shares myself back in 2008 through a private sale. At that point, there became too many shareholders for it to go public. Since then, this phenomenon of unicorns, which are companies valued at $1 billion that are still private, incidentally is a term defined by Aileen Lee, who was a classmate of mine at MIT many years ago. A little known trivia fact, I lost to her in the election for class president a long time ago.
Companies are doing these later series. I’ve been telling entrepreneurs, “A good way to cash out is to sell some of your stock in a series C or series D.” There’s a whole new market for things called private secondary sales, which is you don’t sell the company and don’t go public, but you’re still able to sell some of your shares because you have investors that are wanting to get in the company. The company has real revenue or has a number of users. One of my investments that’s gotten to that stage that I talked about was Discord. Many people know Slack in the business world, but Discord is the chat in the gaming world. They have something like 40 million users.
They’re a unicorn that has been publicly announced because they’ve done a series. I don’t even know what series we’re at, D or E at this point. When a company gets to that point that some of the early employees are able to sell their shares and cash out a bit or some of the early investors as well, they may go public someday and they may not. That’s the trend nowadays. There are only many companies that are successful that there are all these investors that want to get in. I talked about reducing risk. One of the ways to reduce risk is to invest in companies that are already successful. That means you’re going to be investing at $1 billion valuations or more depending on how successful they are, series C, D, or E. Whereas myself as an investor, I tend to invest in the early days of startups, and those tend to be risky and have a higher failure rate.
You bring up many things. You talked about secondary sales when you’re selling your shares. How do you find the people to sell to at that point? Are you selling to the same people who originally bought in? What message does it send if the creator of the company starts to sell shares?
If the creator, founder, or CEO is selling a lot of their shares, then that’s a bad signal. It means maybe they don’t have confidence that the value of the shares is going to go up. Founders can’t sell all their shares anyway, so that’s not a concern. The investors usually put stipulations on what you can sell. Usually, you’re selling a small percentage of your shares. You sell 10% or less and you still own 90%. It’s a way of getting rewarded for having built a successful company without having sold it, but it gives you the opportunity to keep building it. Some investors might see it as a positive at that stage. If you’re at that early stage, you’re selling your company, and you have no revenue or no users, then something’s wrong.
That’s negative signaling to investors that you don’t believe that the company is going to go up. At that stage, once you’re building it up and you have $100 million in revenue, there’s no reason that you should be able to sell a smaller percentage. In terms of who you sell the shares to, typically, there are these late-stage funds who are looking for series C, D, or E type of investments and their growth funds. They’re looking for returns of 2x to 3x. Whereas if somebody who invests in the seed stage is hoping they might get 10x to 100x their money back if the company is successful. At that late stage, it funds who are looking for a more modest return but little risk. They want all their advancements to be successful at that point.
You said you’d like to invest early, and if you do that and then they have more shares that they’re offering, are you getting diluted at all? Explain that process.
With each series, starting with a seed or series A or series B, what happens is that the investors buy additional shares in the company and they have a percentage that they’re trying to get. You might start off within the two founders owning 100% of the company then you could have VC come in and say, “I’ll give you $1 million for 20% of the company.” What happens is they put in $1 million and they get 20% of the company. We have what’s called a pre-money and a post-money valuation. In that case, the pre-money is $4 million and the post-money is $5 million. Why is it $5 million? It’s because they bought $1 million worth of shares and they own 20% of the company. The $1 million is 20% of $5 million. That’s the post-money valuation in that round. What that means is the original founders got diluted by 20%, but their shares are still their shares. It’s just that there are now more shares out there. To make the math easy, you might say there were $4 million shares beforehand and now there are $5 million shares, so the new investors bought $1 million shares, $1 each. That’s what got the post-money valuation of $5 million.
How did the original investors feel about them adding more shares? Do they have any say?
Yes. Usually what happens is that some investors like venture capitalists have veto rights over a new round, but of course, in the early days, you want the company to keep growing. If a company needs money, then you have to sell more shares to raise money. That’s why there’s not just a series A. There’s a series B and a series C.
How many series have you seen most people go to? What’s the highest?
E or F is probably the highest that I’ve seen. Usually at that point, the company should either be going public or it’s what’s called a recap. A recap is the recapitalization of the company, which means things didn’t go well. If it went well, then maybe the company is on the way to going public. If it’s a recap, it means the company didn’t do well. It’s out of money, and then you might start at series AA. You might say, “New investors will put in money but everybody gets diluted way down.” That’s not something you want. That’s called a down round. When that happens, that’s when the dilution is a real concern because then your shares or percentage go down dramatically. Raising money at 20% dilution is not a big concern because it means the company has more money to keep going and you still own the same shares you had. The percentage is a little bit less.
I’m thinking of a company that went through a lot of series funding and the CEO was hoping to get unicorn status and turned down offers. A lot of people are staying as employees because they have all these shares, so they keep thinking it’s eventually going to sell, but it’s not going to sell. Do you see that happen where the ego gets in there and they don’t want to take offers?
That happens often. In the Startup Myths and Models, the way I organize it is based on a series of myths and the Stages of The Hero’s Journey if you go to Joseph Campbell’s stages. I adapt them to startups, which is the call to adventure, equipping yourself for the journey, travel companions, road of trials which is about going to market, and acquiring the treasure, which is myths about selling your company. Finally, a trip to the underworld and the return. In acquiring the treasure, one of the myths is that at this rate, my startup will be worth twice as much tomorrow. It’s a common myth and it happens all the time. It happened back in the ‘90s.
I remember people turning down offers for $100 million that regretted it later on down the road because then the company ended up being worthless. In fact, that happens often and it’s happened in companies that I’ve invested in. Companies that were on their way to being quite successful. I could give you an example. Telltale Games had a Walking Dead game that did over $100 million in revenue. Its products were loved in the industry and everyone thought this is going to be the next big unicorn. The valuation got up to $300 million, somewhere in that range. They had a hiccup, ran out of money, and the whole thing crashed. Telltale is a company that everybody thought was going to be successful. It was successful in the marketplace if you look at its products and even revenue, but they ran into cashflow problems. We won’t get into the specifics of what happened to carve out. All the investors and all the employees ended up not making any money from that, which was unfortunate, especially since it was such a beloved game that people liked to play out there.
What keeps the competitor from copying the idea and taking it to the next level? Like Facebook after MySpace, “I’ve learned what you’ve done right and wrong and made it better.”
That happens often. One of the early myths in stage one, the call to adventure, is you have to be first to market. That’s a common myth that people think, but the reality, at least in the tech world, is it’s often the 2nd or 3rd mover who is successful that ends up defining the market. It’s rarely the first people. Going all the way back to the spreadsheet, the first spreadsheet was VisiCalc. One of my professors at Stanford was an investor in VisiCalc and they thought this thing was going to be the next big thing. It was Lotus 1-2-3 with a spreadsheet, and then eventually Microsoft Excel, which became the big winners in that marketplace. Whereas the product that was the initial success ended up not being the one down the road. It’s like the old saying that the pioneers are the ones who get the arrows in the back because they discovered the market, but others can quickly see.
There is a point at which if you were to try to go after Facebook now, it’s difficult to do. The market has matured. At business school, we learned about supply-demand curves. In my book, I have the multiples curve, which goes up and down then there’s the valuations curve, capital required curve, but there’s also the startup opportunity curve. The best time to get into a market may be around that time when it’s growing. It’s not too early. It’s not too late. Everybody’s not in yet. It’s not super high yet. You can get in there and you can do what’s called a fast follower. A fast follower knows there’s a market. They’re able to get in and assuming that they’re able to execute, it comes down to execution risk at that point, not necessarily market risk.
What’s trending? We forever have Candy Crush. Is it going to be gambling? Is it going to be sports? What’s the thing?
Do you mean in games?Many entrepreneurs are making decisions thinking that the present is going to equal the future. Click To Tweet
Games go through different cycles. What’s happened is because of the virus, a lot of people are staying home more. It’s one industry that hasn’t been too affected in terms of total revenues because people are probably playing games more now than they were before. One of the things that happened in the mobile gaming revolution, which I was a part of, was that there were a lot more casual players of games. Before that, you had to have a console, you’re playing Xbox, but you have Candy Crush and all these casual games. The big game for the past few years has been Fortnite. What you’re starting to see there is that it’s transitioning into a strange kind of virtual world. Also, Minecraft. Those are some of the big ones, but there’s this idea of creating these virtual worlds, and this idea has been around for a while. If you remember Second Life back in 2007, it was one of the first ones but it was only on the laptop.
That’s when we bought and paid for clothes, outfits, and things offline. They had their own sales. Was that Second Life?
Second Life was a virtual world where you had your avatar. We interact with other people like the Sims.
You could purchase like clothing, outfit, cars, and things within the game.
That’s right. You would spend real money, which I did, and people were buying not just outfits, but all kinds of things and land as well in the virtual world. It led to the beginnings of a virtual economy. Second Life is not popular anymore. Fortnite had the largest concert in the world, which I forgot how many millions of people attended this concert. There’s this blending of the virtual world and the physical world that’s starting to come about. The social distancing, working at home and remotely is adding to the idea that we’ll have more virtual interactions with people. That will make its way to games, but also gamification is making its way into non-game. I see emails that say, “You’ve opened 4 of 10 emails,” which is a technique that we use in gaming in order to get people to complete the collection. You have to do this many times.
I’m trying to get companies to work on developing curiosity, and if it takes gamification or whatever it takes. As you’re talking about all these things, I’m wondering how you can combine gaming or gamification of things in the working world to get people more curious to create something productive and not just go down a Candy Crush hole.
You absolutely can. There’s a whole area called serious gaming, which is about using either game themselves or gaming techniques to apply to other areas. We talked about virtual reality. I’m an investor in a company called VirZOOM, which is a bike riding or fitness application, but you put on a virtual reality headset, and you can meet people inside that game. Other companies have done where they’ve helped with phobias using virtual reality, etc. More often, you can use similar techniques within games to get people to do certain things, whether it’s running contests or to have certain incentives.
That’s what it comes down to. Do you have an incentive to work with other people? Do you have an incentive to compete? Are you trying to get to be a leaderboard? You look at social competitiveness as one way that gamification has been used. I remember examples of hotels that they would put 60% or 90% of the people in this room, but their towels down the floor that need to be cleaned or something. They’re using some type of social proof. You’re using gamification techniques. A lot of those can be applied within the corporate world as well, particularly around incentives and ways to get people to work together and do simulations, whether they’re virtual or not.
Off the top of your head, can you think of big companies that people know that does this serious gaming to get people to game to create products?
Off the top of my head, I’m thinking more of using virtual reality for training and education purposes. For training and education, it ends up being quite useful. I mentioned the forklift example, but it goes beyond that, which is also teaching people how to do certain tasks. By putting on a VR headset, you can go through and simulate that. One of the companies we had at Play Labs at MIT is a company called Wonda VR. They let you use a video on your phone that you can move the phone around and you can see a 360 panorama, and the whole thing. They use that to build training. It’s used for everything from training ticket takers at a stadium and what to do to other types of scenarios within big tech companies. I’m thinking that’s an area that maybe I’ve been more exposed to, but I’m sure there are other gamification techniques that I’m not involved with but are out there.
As a pharmaceutical rep, I worked for AstraZeneca for a long time. We did a lot of pretend sales presentations. I could see a lot of that would be great for that interaction without having to be in front of the doctor. You’re giving your presentation in that particular way. There are many things I could see being helpful for. Your book was fascinating to me. All your work has been fascinating to me because you have this great insight into some of the things that I wish that we taught more in business schools.
A lot of it that we don’t talk about and we don’t teach are soft skills in general. There’s a lot that can be added to our education. Hopefully, we can either learn it through technology or some other way and add even more to what we help people learn. You help entrepreneurs handle stress, you help startups knowing when it’s the right time and all these things in your book. If people are reading this and they’re trying to decide if this is the book for them, what’s the main message? Who’s the main person you’d like to read this? What would you like to say to them?
I’d like to say that doing your own company is like an adventure. Like classical adventures, you’re going to have ups and downs. This book is a way to help navigate those obstacles. Anybody who’s been an entrepreneur knows that it’s not just all roses. There are real challenges that come up and sometimes, we need the advice to help us. I view this book as my way of being able to be there for a larger number of people who are embarking on this adventure where they can pull down the book and go to that particular stage that they’re in. Hopefully, there will be some food for thought or some mental models on how to think about making decisions, which is sometimes the hardest thing to do on that journey.
If they want to invest and they’ve exhausted their friends, spouses, and co-workers tribe, where do they go from there?
There are Angel investors out there. AngelList is a good site. There’s a lot of seed venture capital funds. There are a lot of accelerators. We mentioned my accelerator at MIT that was specifically on gaming but it turns out there are accelerators now in every city. I grew up in Detroit and it turns out there are at least 3 or 4 startup accelerators in Detroit. What many of these accelerators do is they’ll invest a small amount of money, but they help you get your business and business plan together for the next day. There are accelerators for food companies and there are agriculture accelerators.
Who pays for these accelerators?
It could be investors. It could be, sometimes, big companies like Burke or Comcast that are paying for an accelerator. There’s a group called Techstars that has accelerators in many different cities, so it depends. There are many universities that are starting their own accelerators.
You do a lot with research out here, and it’s interesting to see what’s available to entrepreneurs. I appreciate you sharing so much insight. I know you have the site ZenEntrepreneur.com. Is there any other way that people can reach you or anything you’d like to share?
If they go to the site, ZenEntrepreneur.com, they can also download some free chapters or what I call bonus myths, which are myths that didn’t make it into this book but I thought were important as well. I can give them a flavor for the book as well. They can contact me on the website. You can also follow me on Twitter @RizStanford.
Thank you. This was fascinating. I have a million more questions, but I’ll have to have that for the next time. Thank you.
Thanks for having me on.
I’d like to thank Riz for being my guest. We get many interesting people. The depth and the breadth of everything we talked about is fascinating. There’s a lot of information if you go to CuriosityCode.com or just the Curiosity section on DrDianeHamilton.com. If you’re trying to find out more about Cracking the Curiosity Code book or the Curiosity Code Index, you can take the index right there on the site. You’ll get your results in about ten minutes as long as it takes you to take the assessment. It’s quick.
A lot of companies are utilizing this to train their organizations to become more curious. I’m training consultants to become certified. They get five hours of SHRM recertification credit, so there are a lot of different options. We’re going to have new information on the website about perception and the book that I’m writing with Dr. Maja Zelihic is on there as well. As far as if you’re looking to do an assessment about perception, the process that impacts perception in the workplace, which is key for a lot of companies in this global environment, and the process that you go through.
There’s a lot of information about behavioral health. In addition, doing a lot of virtual training, virtual speaking, and everything in a unique way as people are adjusting to the crisis that happened with COVID. A lot of people like to maybe not necessarily have in-person training or speaking type of situations. It’s adaptable there. All you have to do is contact me through the site or my email is Diane@DrDianeHamilton.com. You can always reach me there. I wanted to say I hope you enjoyed this and I hope you join us for the next episode of Take The Lead Radio.
- Play Labs
- Startup Myths and Models: What You Won’t Learn in Business School
- Zen Entrepreneurship: Walking the Path of the Career Warrior
- Treasure Hunt: Follow Your Inner Clues to Find True Success
- The Simulation Hypothesis: An MIT Computer Scientist Shows Why AI, Quantum Physics, and Eastern Mystics All Agree We Are In a Video Game
- Richard Stallman – past episode
- Jürgen Schmidhuber – past episode
- Wonda VR
- @RizStanford – Twitter
- Cracking the Curiosity Code
- Curiosity Code Index
About Rizwan Virk
Rizwan Virk is the author of Startup Myths and Models: What You Won’t Learn in Business School (Columbia Business School Publishing). He is a successful entrepreneur, video game pioneer, and venture capitalist and founder of the startup accelerator Play Labs @ MIT. A graduate of MIT and Stanford, he is also the author of Zen Entrepreneurship: Walking the Path of the Career Warrior; Treasure Hunt: Follow Your Inner Clues to Find True Success; and The Simulation Hypothesis: An MIT Computer Scientist Shows Why AI, Quantum Physics, and Eastern Mystics All Agree We Are in a Video Game.
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