Rec Room Part II (with CEO Nick Fajt)

Transcript from https://podmenti.com/t/68cd8d79cb035503

Ah, okay, good to know.
So we should not ship tomorrow then. Don't do it tomorrow.
Please wait until Wednesday. 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 am the co-founder and managing director of Seattle based Pioneer Square Labs and our venture fund.
PSL Ventures. And I'm David Rosenthal, and I am an angel investor based in San Francisco.
And we
Are your hosts.
In twenty eighteen, we did an episode on the early stage Seattle startup.
Rec room.
Founder and CEO Nick Fite 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.
Earlier today, Rec Room announced in the Wall Street Journal that they had raised one hundred million dollars at a one point two five billion dollar 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.
They have had astonishing growth numbers over the last year where they grew revenue six hundred and sixty percent.
And now have over fifteen million lifetime users.
Two million of which are creators on the platform.
Oh.
And we knew them when. Indeed.
The background of all of this is that twenty twenty 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 forty billion dollars. The price was too high.
It 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 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. Love it. Yeah. And over so many different stages of your company. I mean the 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 uh in consumer entertainment, I'm sure.
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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 rec room crew.
It was February twenty eighteen, you'd raise this great seed round from Sequoia.
You'd also raised an internal
A from Sequoia that I think you didn't hadn't announced.
By 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 Recuer back then. And I was wondering if we could
revisit it this time of um
how you guys actually came together out of Microsoft and started this company. Um I think it'll be really good context for for entrepreneurs out there to understand.
Ma maybe that there's not always a big grand plan to become a billion dollar company from the beginning.
Yeah, I mean I think the 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 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've been working on it for
I don't know, maybe like four or five years. And it was right before the the first headset launched. Um, my team was really
Focused on kind of consumer products for HoloLens. So like video games, uh, essentially, like what kind of games are people gonna play on 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 it really went enterprise and and military.
And it left my team
that I was working with as uh
But you know, kind of irrelevant and a bunch of us got reorg. Um
So we we had this team, we we all like all loved working together and then the the team got
Where'd you get reorged to? I got reorged to the Microsoft Edge browser. Uh so
And I and man, it was so it was so difficult'cause 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?
Why can't we fix the first one? Like why is there another one?
So
Uh you know, I found I was g I was moving over there, um, and I was just so passionate about the AR and VR space, I wanted to stay in that space.
And so a as soon as I found out there was gonna be a reorg, I actually applied to like
Every company that was doing stuff. I applied to Oculus.
Um I applied to Magic Leap.
I applied to Google.
I think I applied to like
Unreal or epic, uh'cause I I knew their their engine was focused on it. Uh and I got turned down everywhere. So no one 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 Magic Leap. Magic Leap, not a not a fan, yeah. Um and I think there were a couple other people that felt like I did. So so shortly after this reorg, I I don't know, maybe like thirty to fifty people left.
um Microsoft and were just like, you know, I don't know what's next, but it's not going to be groov music and or it's not going to be the the calendar app, you know? And and and to set some context, Microsoft had been experimenting with what would become the holo lens for
Like
seven, eight years? I mean it was it was it pre-dated 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, twenty eleven maybe.
Yeah, super early. So very, very early.
Um, and I had been working on it for years, but I you know, I think when Microsoft first started it, they saw it as a successor to Connect, and then over time it was like, Well, you know, enterprise makes a lot more sense.
given the use cases we're able to light up right now and the expense. So I you know, in Microsoft's defense, like everything they did made a lot of sense. Like this was not ready to be a consumer product. It was way too expensive. And the 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, like it didn't make any sense.
So a bunch of the game devs left, you know, a couple of them formed various companies that kind of focused on VR and
uh Against Gravity happened to be one of them. So um me and and five other people came together uh 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 Rec Room was we didn't have the idea of Rec Room. We had no idea. We actually we we actually thought maybe we could leave
And like
Maybe Microsoft would like let us keep developing stuff for HoloLens.
Um, we couldn't get a dev kit. Um, not only did you not have the idea for Rec Room, you you had no idea. The the the plan was just we like working together, we're gonna get together, we're gonna do something. Yeah, so as I said, I think like thirty
or s more people left. And and a bunch of them were like
Uh, you know, I'm gonna form this company and we're gonna form that company. And then against gravity just happened to be one of those
off shoots.
The the name against gravity actually
it is is a demonstration of how little of a plan we had. The HoloLens headset internally was codenamed
Gravity.
It was it was so heavy, like a you know, they they were called like gravity A units, 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 um we were like actually still very excited to go build HoloLens software. We we just couldn't
Yeah.
some friends at Valve.
hooked 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 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
And the answer I'm well.
We'll do this. Um, so yeah, I would say there was like not a ton of intentionality though. It was it was more like, you know, maybe some egos were bruised and it was just like, Well, I guess we'll
We'll take a chance and and try something different.
So we gotta ask.
You know, we're gonna tell the whole story about um
You know everything since you're seed round and how you've gotten to here, but
To
Asked sort of an analysis question up front.
Do you think that
Figuring things out as you went.
In those early days.
Has that served you well in getting to hear in you know obviously
Most other VR companies that were started around then are
Certainly 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 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'cause I I there wasn't
you know, ever one early on that I think we were really, really attached to. I I think we had seen some challenges at HoloLens about like
You know, we 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 that some people were working on that was like a travel app, like
You go to like Machu Picchu or the Coliseum.

Yeah. There was like another one that was like um
I I think it was like called Holo Skype. And so you could like chat with somebody who was like maybe
hundreds of miles away and it was really cool. And there there was a a final one which which I don't think many people saw, but it was like a pet.
And it was like this like little virtual dog and you could teach it tricks and
Stuff like that. But none of this worked together. Like you we 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.
And and so that kinda highlighted for us like
Uh you know.
There's something about the app model.
like that doesn't work in this space. And so I think that got the gears turning a little bit of like
Yeah, maybe we could build like a Wii Sports version of it that we like.
You know, kind of express our idea, but I I I would say like
There was definitely no like
Grand world conquering plan. It was like how do we survive for a little while?
Well and and Nick, like the just to
put a fine point on what you're articulating here. W 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 how did you come to that and and what does it mean?
I mean very gradually, and I wouldn't say I came
to it. I 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 kinda help helped build where it where it is.
But yeah, so recroom backing all the way up.
Rack 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 s shows, you could have a family reunion in Rec Room.
You could have a book club, uh, you could have a live performance of Hamilton. Like all of these things have been done. So
Recrum is just this 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 a 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 m in the game, manipulating objects. And you can do it socially. So you can have up to forty 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 Ben, why don't you go build the moat? And like David, go build the castle and I'm gonna 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 three D 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.
Yeah, Roblox has a another app called Roblox Studio, which is where you go and build and it kinda looks like Unity or Unreal. And it's a really powerful tool set. 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.
Rec room, you're just kinda like building
Minecraft 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 PlayStations 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.
Um 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 lists that people are discovering, you can follow creators to see what
content they've created, um, and get notified when they build new stuff. And then um
We've started letting users monetize in their rooms. So we have an in-game currency that users can uh they can charge.
currency inside their rooms and if they amass enough of the currency
Uh we we'll we'll actually pay them out for the currency.
And so we've got, you know, like fourteen, fifteen year old kids in there who are earning six, seven grand a month.
in in Rec Room and you know, we're we're trying to scale that up. We think that can be like a lot, lot bigger.
But I think it just gives you an idea of like the accessibility of the creation tools are you know, it's it's really anyone
Can go in and and
you know, realize the idea i that's in their head and they can really easily distribute it.
Well, it shows up in the numbers. I mean classically the internet
was, you know, a hundred percent of people consumed
And then 10% of people commented and then one percent of people created. And that 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
Old moniker. But like you look at
Two million of the fifteen million users that you have
our creators on the platform, it's just a 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 I um you and I went in and played and you showed me the maker pen and I got to like
You know, build my own little
world, but like it's remarkably easy to use tools like that to to create.
It's certainly a lot more
Accessible. And I think if you're the generation that grew up
living on the internet.
living 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 to give a recap, I think of the the previous episode, like we we raised a seed round
in twenty sixteen, we had launched the app and it was doing pretty well for like a VR app.
Um and so we were able to launch a seed round around that. And then a couple months later
Um after working with our investors.
We had a good track record of
Evolving the product and finding growth. And so we were able to raise a uh an A round from um 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 a as we kinda planned out what was next.
Uh when we chatted, you know
We had just rounded out holiday twenty seventeen.
We had seen a lot of growth, like probably from October to
December.
twenty seventeen, the the app like five X'd
So like
We actually we were doing really well. Um it was kind of a weird situation. We
We had had all of this growth, but then we were looking out over twenty eighteen and we were like, Man, there are no headsets on the horizon. Like, are there any
tw headsets in twenty nineteen. It was like, man, like normally where w people are shipping us dev headsets.
you know, twelve months ahead of time and they're like, Hey, we're gonna do this and
The holidays and like get ready.
We just had nothing.
We were like, you know, like this growth is good, but it this is not
This is not a venture scale business.
And w and your growth was basically capped by the number of V Hards 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, right? A hundred percent. So
To give you an idea from like December
twenty seventeen for the next twenty four months.
VR did not grow.
Like at all.
So your your your market
No growth. Z zero percent growth. Totally.
I think we were fortunate by like
We
sobered up and realized it.
Like January.
So I I uh the credit to the team, I think
I think it would have been really easy to be like, Oh, just five X, like we're world beaters, like we're amazing, keep doing what But I think it was, Well, we just five X and that's it. Like this is not
There's nothing on the horizon for us. There like this is
Jock J's here. So we need to figure out some path for more growth.
And 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 ten or fifteen of them.
Um, and we were good at building rooms. Like I, you know, we we really enjoyed it. It was really fun. We were building these like little quests where we're like, you're gonna go, you know, battle space aliens with like laser blasters, or you're gonna 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're like, Okay, well this is just not gonna
work anymore. Like we we have to do something very dramatically different. And so the the two
ideas that I think we seized on or
The community was so creative. Like
the community was a really bending and breaking rec room to do other things. Like we'd hear stories where people were like, Oh yeah, we went to
Like I just invited a bunch of my friends to go play d 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 uh last we chatted.
Two people had actually gotten married. Yeah. Yeah, totally. Yeah. They have you know, so there but there wasn't like
It wasn't really the systematized, like, creative
community. We we were sort of like
People are hacking the game to get it to do things that
That we hadn't intended.
We're 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
To 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
Like all right.
We've gotta find growth outside of VR.
There was an app called VRChat.
that had had really started scaling kind of around the same time outside of VR had really found this like
pretty devoted audience on on PC and we were like, Okay, 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 we might be able to do it as well.
So we really started to like lean into user generated content and and screens. That was kinda what we went. At least you went to IOS next, right? That was your first flat world experience. Our first flat world experience was actually on PlayStation.
Huh.
So PlayStation and and um PC.
'Cause you had gotten a bunch of uptake from
uh the P S V R that was probably your big growth
That was the big seventeen. Yeah. PS VR was the big twenty seventeen growth spurt.
And then we were like, Okay, well we're already on PS VR, like
What would it mean to make it work on PSVR without the headset?
And kinda like the same question for 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 c community was not happy about it.
It was a big departure from what we were doing and I think there was a like a lot of
Hey, we want this to just be
what it was. Like we don't we don't want this to evolve in the way that
You're you're doing this.
And 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 it
You know, th 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.
It and
Like
That is a magical thing that we wanna preserve. Like we wanna 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 dump like one big community. We're just gonna like dump everybody into the same rooms together regardless of interest or intent.
Um, and that was challenging. Like that was probably not the right move.
The other challenge was like our user generated content tools were really
You know, they were in their infancy.
And so the rooms that people were building were like
Not very high quality.
our our belief was like look if we can shine enough light on them and there are the right incentives, like maybe eventually we can get them. But the moment that we s we made the shift, like it was probably pretty abrupt. So I think the thing that we learn like I think for for
Yeah.
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 we're just gonna we want feedback from the community.
And I think we probably realize like
No, there's probably like some metabolism like that the community can
You know.
evolve in this i at this speed and we probably pushed it too hard.
Then
So y 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 twenty seventeen to like all the way through twenty nineteen it was like
No one wanted to do any VR stuff.
But the but the VR users were like
Very passionate.
And so 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 ten years from now.
Because
We 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 there was no revenue coming in. So we were like okay
Like
I think f if you're a startup you have
to lifebloods. It's either revenue or growth. Like
And we didn't have any revenue and we weren't gonna find any growth in VR. So it was like, Okay, well we're either gonna make this a thirty dollar 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, okay, if we were to turn on monetization, how long would it take to find something that worked? How much could could we actually cover our
our burn and get to like a zero net burn.
You know, would our investors be on board with that? What does the calculus look like when you're sort of
Examining that as a potential.
I th I I mean it it it w it's not an unreasonable
question. I think once we looked
The really bright spot for us was the user generated content. We were like
This is gonna 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.
They will be happy. We will be happy. This will be
Yeah.
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 we're cash flow neutral. Like
We're just not heading along that path.
Um so I think we we were just more comfortable being like
Okay, hey, we think the the promised land is really this user generated content ecosystem where
Where we're rewarding our best creators
you know, for the amazing work that they're doing.
That just looked different.
Um so I 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 uh a vision of what the promised land could look like. Like I'm wondering, like, were you looking at something like an Instagram being like
Yeah, like if you can get this UG C flywheel going, or or maybe even Roblox at that point in time, which it it was starting to spin 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.
You're 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's 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 y your app. Like you you shouldn't need to spend a whole
bunch of money on marketing because
Yeah the the the
The creators will you you can have creator led growth, basically.
So we were looking I I think Twitch was like a really
Interesting one for us to to look at there. Yeah.
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That Ben and David sent you.
This may
When it actually happened might come a little later with when you introduced Rec tokens in the economy, but
One thing I know you guys
Did you get it?
that I think is 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 new beh doing these new behaviors and doing them well, but you had to incentivize them to do it.
And so it
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 the economy has evolved
So uh David's referencing a thing called rec tokens, which is is basically the in-game currency that we we use. And you can use the in-game currency to buy
uh things to like kit out your
um avatar. So you can buy shirts and hats and gloves and
You can also buy virtual food. We sell a lot of virtual food. Like
Root 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, 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 bul or like and you know, light bulbs are bad.
Yeah, totally. So people are doing all all kind all kinds of really interesting stuff with it. It's it's a pretty flexible system.
But like if you look at where it is today, like it went through a number of
Uh different stages of evolution to get
to that point. Um 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 leveled up or you
You made a friend or some action we cared about here's an item.
We then started
We're like, Okay, we're not gonna give you items anymore, we're gonna give you currency instead.
And then here there's a store with
With the items.
So you started getting used to like okay, well I've got the currency and like
What do I wanna buy and currency equals this much item.
And then we
unlocked inability to buy the currency.
And then we turned off the ability to earn the currency.
Except the ability for you to earn the currency then shifted to, okay, well, you know, you maybe not you 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 finding value in what you do. And that's not entirely true. Like there is still we do print a good amount of currency every day to like
Stimulate demand, right? Um you know, so we the little rec room fed in the Yeah, exactly. Yeah.
Quantitative easing in rec room. Yeah. So we're I mean, we do print an amount of currency as well,'cause
Yeah, w we we do see behaviors we wanna reward. We're just probably a little bit more careful about the way that it
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
Uh
basically exclusively a hard currency. And soft currency is currency you earn, hard currency is currency that you buy. Yeah. So if you looked at like a
gaming textbook of like how to build an economy.
Recom did
All the wrong things.
But you should never be crossing the streams of your hard and your soft currency.
You shouldn't you should never shift one to the other.
I think we just have this idea of like, okay, this is where we want to get to, like
Creators are making money.
Like.
That's
That's the end goal.
Here and like
What are the
Like
If that's Charizard, like
We're a Charmander. How do we like evolve into that thing?
I uh can I ask a this is a derivation, but a team question.
Once you realize you're gonna do this and as you're doing it, are you like, Ooh, we should have like an economist?
at our company. Like how how do you
Yeah.
Is it a PM? Who who who owns this? Clearly not, since you broke all the rules. No, we we we've had um
We we really have like focused pretty hard on having generalists tackle as many of our problems as possible. So the the team behind this, it was like
There's an amazing designer um that had worked in in mobile gaming for a while. There was a an amazing
Dev lead that worked with me, um
At Hollowlands.
And you know
him and her worked on this l this problem over probably two years. Like
Okay, how
Like we have this currency we have this economy that doesn't match at all the goal that we want. Like how do we keep evolving it?
Without
And I think it was largely informed by our
choice early on to like, okay, here's screen players, here's user generated content, and that
That did not work. Like it was too much too fast.
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.
But they they will be excited for each of the changes that we make.
And I th they were just really thoughtful about it and they they they carried it out.
you know, very intentionally over over the course of probably about two years.
Hm.
And then shifting to kind of the 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 do they decide, you know what, this is a job for me and I I I'd like to make some cash on it.
It's probably a scale question. You know, the the currency
It's kinda like I guess if you went to like a thrift store.
And you were like, I'm gonna trade in some clothes and they're like, Well you can have this much in in store
credit or this much in cash. Yeah. It kinda depends on like what those
Numbers. Um
GameStop back in the day, and probably currently. GameStop kinda the same deal. Yeah. Um and so
You know, if if you go in and you're like
Hey, we'll give you sixty bucks or three hundred dollars in store credit at GameStop. You're probably like, Well, I'm gonna buy
A couple more games, give me the three hundred bucks. If if you add
you know, two zeros to the end of that. Like you can have
You know.
thirty thousand dollars in in in store credit or you know
Six grand, you're like, Well, six grand sounds better, you know? Unless you want to be a real entrepreneur and start arbitraging and reselling. I mean, it depends it honestly, 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.'Cause they can
Distribute those tokens to
There.
Users by incentivizing behavior? They can do they there's some element of that. They can basically place free gifts inside their rooms and and they can pay for the gifts in advance and stuff like that to to try and drive
activity towards their their rooms. Uh so yeah, it it really comes down to like, you know, what do you value?
Um and 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 they can kind of like ruin your economy.
And so it's You mean like billionaires? Yes.
And the the challen like and it's the same like a state
tax sort of s 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 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,'cause like, well, they don't
You know, it's just like
the game genie has been turned on and now everything's free.
And so really what we're trying to do was like, Okay, well, hey, some of these users are gonna have Scrooge McDuck sized 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
Yeah, like a
A fun name for an estate tax.
No, we we do not have

It is fascinating though. I mean very quickly, even with the most
s sort 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 uh it you have to very carefully. Ben's gonna quit acquired and and your new side gig is gonna be scamming record. I mean, 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 wanna be a bank, you don't wanna create a security, you
You wanna adhere to a
you know, know your customer laws and s 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 scam along the way here?
Um
As well. So
That's why we have a
fairly large team focus on that problem and
Yeah.
To date it's it's it's worked pretty well.
That's cool. So what is
Three.
You know, these these three kind of like major, major things you figured out.
Since our last episode of
Multi platform
U G C flywheel and creating this economy.
What is the trajectory of the
the business and the company look like through this time. Like obviously you you'd raised
Between the seed and the A it was about fifteen million dollars from Sequoia, right?
Initially.
How are you how are you living during those that trough of those trophesarrow years, you know, where
You didn't have revenue coming in.
Fundraising more was
Probably gonna be a challenge.
Yeah, I mean I think
Again, you know, going back to the roots of of Recrim 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
We're 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 bounced to the next, hopefully Facebook.
So I think the people that we had hired to to date were like
I love Rackrim.
I 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 I think
because we had sort of an unconventional founding, we had hired kind of unconventional
backgrounds that were like
I'm willing to see this through the
The likely tough times
Um, so we had no attrition during this point at all, uh, which was really cool.
Like nobody left.
Everybody was like, All right, I understand the challenges and like
This kind of
It's painful getting yelled at by the the community, you know, during these transitions, but
Like
We really do think it's in their best interest, like we really do think.
If we want this thing to still be around in five or ten years, like we have to go do this stuff.
Um and so it's it's worth
getting some some yelled at on Reddit if it means
A couple of 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
And when you say the temporary pain, if you think about the true the VR true believers, obviously haven't a flash us too far forward today, but like the Oculus Quest Two is out, by all reports, that's doing very well. We uh PSL Ventures, we have a portfolio company, Big Box VR, with a game called Population One. They're seeing it.
You know, that it's been phenomenally successful. I think you you know Che Chin, the CEO well. It's a great game.
Yeah.
They built a lot of good stuff. They built um they built Smashbox. Their engine is awesome. They're great.
Yeah. And so like
we we 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 in a major consumer way. And when you were thinking in the in the long term best interest of these users who are VR diehards, were you thinking like, look, the long term
for Rec 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 were you 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
twenty eighteen that had built VR things and then pivoted to
We're not gonna try and do cross platform, we're just gonna like
VR is done.
We're moving to
That was never a conversation for us. We were just like, We really love
VR
Man, we
We really hope it's a thing. There's 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

You know, we don't know and we we can't really affect that ourselves.
But we we never talk like
we never talked about like, Oh well, we're just gonna do a hard pivot out of VR.
Even though almost everyone that
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 Sass. Yeah. Yeah. We're just we're just totally doing a a totally different thing. Um, and we we really wanted to like
see the VR journey through.
We we just knew like, okay, if we exclusively focus on VR, either this is gonna be like
A six person team for two years.
Uh while we wait.
Or we can go try and find growth somewhere else through user generated content.
And through
other platforms and and we think we can actually ultimately build a much larger business that
you know, at the end of the rainbow it it'll have a much larger w reward for VR users as well,'cause 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 like a lot of
VR hardcore users that were like
Okay, well
Like I I kinda didn't like this to begin with, but
You know, there is something nice about me just being able to hop into Rec Room like really easily and not move my coffee table out of my way. And I can just check and see if users are in there. I can just check on my room real fast. And like I can new now do that without like
Or or like honestly, because all the headsets were getting old, we had a lot of users that were like
My entire social life is in Rec Room and my controllers broke and I can't get HTC to fix them. But I can still hang out with my friends because like I can still make it in here.
And so I think there were a lot of benefits that people started seeing from it. It it definitely was not
apparent when we first did it, I think there were a lot of people that were like
Uh I don't know that this is the right move.
There's also another dynamic
That I I wanna talk about. You that you
You explained to me a a a little bit ago.
That maybe you could talk about here, which is

You know what?
We're gonna fork this.
And there's gonna be the VR version of Recrium, and then we're also gonna make the flat screen version of Recrium.
That would be fine, but
But
The
experien what you can do even in a flat screen environment
When
Your platform is architected for VR is so much more and you explained it to me sort of as the difference of like
In a video game in like Street Fighter or whatever, like you pun you hit a button and you punch.
In Recuer, you punch, you know, or you jump or whatever, like
Yeah.
I think yeah, if you look at screen
games, if you look at mobile games, or you look at like keyboard and 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.
Um
But there 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 Recrim, because we started in VR, the
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 a headset and you do a backflip, like that can happen, right?
Can can players lie down? Well, yeah, defin definitely. Like
Can players like
Juggle? Yeah, of course. And so
We ha we s 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
Crawl under this thing and like
You know, while crawling, you know, you need to pull out a lighter to like light this

And
So it was like well, okay, if we're gonna make this work on mobile or if we're gonna 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 gonna work.
Right.'Cause we don't know these things in advance. We we just need to build an avatar that's really, really flexible and
And like
You as the
you know, controller of that marionette, 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 schema 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, uh all all sorts of wild stuff.
Which is so different than like, you know.
Almost everything out there. Like Fortnite, like you know, Fortnite's great, it's amazing, but like
You hit a button, you jump.
You hit a button, you shoot you hit a button, you dance. Like that Well, yeah, I mean what we're getting at here is there's there was a reasonably easy path that's like fork it.
squash it down to two D and then use the same input system that
You know.
Works on the
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 chasm and taken, you know, door 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. Like I think our original
idea was like, Yeah, let's just jam all this into like buttons. And then at some point it was like, Oh my God, we've got like
forty buttons and alt buttons and shift and control buttons and like I was really adamant that the game on screens be third person for a while. Like
That was an example of like really bad design on my part.
uh because it made it really impossible for creators to like
Build a world that was cohesive.
'Cause maybe they build like
uh 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 it note and read this really tiny writing and I can't do that because I'm in third person.
So that was like a dumb move on my part.
But you can see what happened. Like I remember you sh you were showing me you're like, Well, here's the um
And this was in what, twenty early twenty eighteen. It was like here's the view. If you want to stream on Twitch, it goes to this like third person view so that
You know, it's not this like I wanna vomit because I'm seeing through someone else's headset. Uh it's a it's a third party sort of camera up behind me.
view. And you could imagine like, well, we should translate that. I 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.
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Nick, I have a question for you. 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
get 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 b basically like treating this as a float?
Yep.
Um, I mean, honestly, the way that it played out i is is kind of like w when we first introduced the system, still the majority of the currency was coming through like our
sort of items. So yeah, basically it was like well yeah, mostly what people are buying is government services. And
And so like we that wasn't a huge consideration for us. Um, you know, you you can see like as more and more of our economy shifts from
Like a rec room specific, like we're selling shirts to users selling shirts. Yeah, you you really do get a float on this. Like in in
The the benefit of like the 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. Like
It's a ri it's hard to grow your revenue by being like, I am going to continually
come up with new services and new items and like 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.
Um you just get a much more scalable catalogue. And so
You know, i 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.
Hm.
It's fascinating.
So
Speaking of
Bye.
summer early twenty nineteen to summer twenty nineteen.
You're seeing some green shoots. It uh the you're starting to get through the
Trofazaro. What are green shoots, David? Green shoots.
So.
By yeah, so uh if I'm going here, like I'm looking at
Or
our summer twenty nineteen 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 hadn't grown since since 2017.
At least in user base, we were really we grew a l lot on the engagement side.
Um but the user base stayed around the same.
Uh, so we were like, Okay, we found growth outside of
VR and we actually raised a series B
in in April twenty nineteen. And largely it was like
Look, we took this.
VR
We 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 B. It was like
Yeah, and I I was like showing people the the mobile build and like praying it
Wouldn't crash while I was like doing it. Um'cause you know, we had basically taken like a PlayStation app and like, we're gonna run it on an iPhone and that should work fine, I guess. And was that did Madrona lead that round locally? That was index, actually. That was index. That was index, yeah.
So 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 uh it would be interesting to ask them like what their what their thesis on it was. I think the the interesting thing that they were seeing was
This is an app that has been around for years and is still
Growing.
And it's
Taken some like
Interesting.
turns like the this user generated content 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, you know, more
uh more ways it can evolve. So I think it still was that story. Like at that point our revenue was really
De minimis, um
Yeah, our revenue was y barely existent.
I think I think we we like I think we had like one month of revenue.
I think we were m we we were we made like twenty grand in a month, you know, I think we were.
Um yeah.

You you had you had a twenty twenty-one revenue multiple on your fundraise on that. Yeah, something like that. Or a twenty twenty one 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. Um but yeah, at the time it was largely a
You know, I think we had
interesting engagement numbers. We were we were like soaking up a lot of minutes, but
In terms of like a business, it was it was you you really had to squint to see it. So kudos to to Index for squinting pretty hard.

So then so I think I 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
you were generating a 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 the cost of supporting the service of Recroom is is relatively small. It's like okay, well we need this these services
Like we need
Azure services and we need, you know, maybe this networking middleware, and then we need
Uh moderation teams.
So you're like, okay, what's that cost? You're like, Well, wow, this scales really nicely.
And so like, you know, 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?
you know, years down the line.
So yeah, the the business is
The business is growing really nicely.
I think that there's really, really interesting dynamics from the user generated content side just because
the the the revenue can grow really nicely without much input from us
And then if you look at like the way
Like w we have slightly lower margin on that.
Revenue.
You know, versus us selling some of it out to creators.
Totally. But it it's really like
We're happy to pay that out because those users are so
um valuable. They create so much value for us. They do such a good job of evangelizing the app and going and finding new users.
Um
I would rather spend money on that all day long than than buy more ads and
On Instagram.
highlight here you that you just did is one
The beauty of this model is
You don't really need to spend much, if anything, on
User acquisition, right? Because you're as you 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 we've st we started doing
some paid advertising it like maybe two months ago. And so we're like experimenting with it. I mean, I think there's probably some number
greater 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 w the worse
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. 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 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 kinda like the PGA.
And like maybe we can get you into this like cartoon golf game,'cause 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 kinda related. It's fun, trust us. Yeah, and so you're paying incrementally more and more to attract these users that want your thing less and less.
And and so, you know, I think there's there's definitely an amount that makes
sense to spend in for performance marketing, but like
I think this is how a lot of people get in trouble. It's like they're they're gonna force performance marketing to work. And like the the only way you force it to work is like you you spend on those users that don't really want your thing.
Um 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 subcommunity that really vibes with the content that you've created. And it they don't need to even love.
every part of Rec Room. They just need to love the thing that you built. So like we can have these kind of subcommunities that are
Like I love very specific parts of YouTube. They're very different than
I bet what you guys love, certainly what Jenny loves, like the
That's great.
Yeah.
I 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 make sense for them. And that's what we want to happen in Recrim as well. Like we want you to go

Build your little sub community.
And if you're a user, we wanna help you find your tribe. So like when you come in, we wanna 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 the a great realization that Dan Lewis opened me up to when when we had him on for the convoy episode was he's like, look, we got the reason we need tons and tons of load and tons and tons of truckers is because
Like there is one
trucker 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 subscribed, you're in this territory of like most of the time it's probably suboptimal and it's probably too expensive of a transaction. And you you can just sort of see that playing out in the world of games where
You know
Or I suppose the met the world of metaverses, where the the more people there are on the platform and the more sort of um
uh flexibility there is in the system, the more opportunity there is for people to find their tribe. It's why the internet is so great. There's incredible marketplace liquidity on the internet. Yeah. I mean I think and that that's that's the battle that's
about to be fought is like what is the long tail of your met verse, right?
Mm.
So the the other aspect that we've already touched on is um
You know, while 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 Rec Room and then they spend those tokens over time to creators who then over time either cast them out or don't.
You guys are generating flu. It's the same deal with um
You know Roblox. It hasn't been covered enough about why
You know, people say Robux is unprofitable, their revenue numbers are still it's like no no no. It's accounting. Very, very profitable. Yeah. Very, very cash flow generative. Yeah.
So this like all shifts.

the business pretty, you know, uh 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 twenty million.
From Madrona.
And that's that's like eight months into the pandemic.
That was eight months into the pandemic. And and you know, look, the pandemic had been
It it w it had definitely driven activity for Recrim. Like the moment lockdown happened, you can just
You can just see the jump.
And Rack Room 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 Recroom. Uh so these were just a bunch of things that we were really excited about. And it just showed the flexibility of the the platform.
Um so we did that.
uh raise in November
And then
Uh we launched on Xbox in December and then Quest Two
You know, back to the point about like
VR like
You know, platform shoes and
Oversized denim jackets. Like it goes in and out of style, man. And like it's coming back into style.
Um
And you know, Quest too, like Oculus, I g I have to give them props. Like they they build a an amazing headset at 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 of years. So we're really excited about that space.
Do you see this six hundred and sixty percent growth in twenty twenty
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 could assign it to one variable. It was kind of like
All these variables kind of clipped at once. Like we launched on Xbox and we were like the number one free app on Xbox for
Several weeks around the holidays, which was very
double your user base like in one week just by being launching on Xbox. Xbox was hu a 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 was 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 s we start paying creators and you just see like all the incentives 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 of hours to play video games, and that's largely what they're doing with it.
And so
We saw all these converging factors and it was really like
Well hey, the business is doing very interesting things.
during the last months of the year here.
But like I guess
The 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 twenty seventeen and and it's like twenty twenty one and it's like okay well now it it'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 um
the whole dynamics, I imagine, must just have been so different going from a 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. We're building this thing that
No you don't need to raise money and
And
Case in point.
couple months after your last raise, your insiders are like
Let's have a lot more money at a much higher valuation. Like what what did that
What what has that felt like? Like did you see this transition coming as a CEO or or has it been surprising as it's kinda 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 Recrum has been surprising and
And you know, when I look back at
uh 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.
And the 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 Recom is, is like I don't need to be very right about like
what's VR gonna do this quarter because like our business doesn't depend on that. And I don't need to build
like the best room in Rec Room this quarter to drive growth because like users are publishing, I don't know, twenty five, thirty thousand rooms a day. So like there's plenty of content there.
Um, and I don't need to worry about like what's our next
revenue generation

tools for users to go figure that out and they're they're experimenting.
And
And so like when we were fundraising, I think there's a lot of
Times I
Like most of our fundraises, 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 to like
enter 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
I we very rarely burned it down, like
I 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 we were always raising
You know.
Pretty far out from from
You know?
Day zero.
And then I assume this fundraise felt very different. This fundraise did feel different. This was not like a hey, it would be nice to have more cash. That this was uh this was the first time you didn't approach an investor, but an investor approached you. Is it fair to say that?
I mean they're they're insiders, so constant communication. No, I think that's accurate. I mean
The dynamics of this round
Or really
I think it was a it was an internal gut check for us of like
Do we think we can build
Something that's gonna 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 gonna take from a capital perspective to get this to a standalone business? And then if it's really gonna endure, like what is the scale that it needs to get to?
And you know, I think we just kinda worked backwards from there. We were like, Okay, it's gonna take
A lot of money. It's gonna take a lot of time.
It's gonna 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
business that can be built here, but it's just gonna take money.
in 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 trouts of VR unhappiness.
Like
The same thing might happen here, like
metaverses might be hot this year.
They might
Right. Trout next year for two years. Roblox is a forty billion dollar company on the public markets today. A year ago it was a four billion dollar company. Totally. Um and so we were like do we wanna
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 we we asked ourselves was like
Okay, what
What does it look like to
What 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
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 gotta 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 and that's okay.
Well I
I can tell you I mean I
There are a lot of things about Recrum that are probably idiosyncratic and like
Th there are many things that we did that I I would
probably advise like other st start ups not to do. But we we've always been
kind of vague around use of proceeds.
Like in past rounds.
We we're kinda 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 along. Yeah, totally. And and you know, we'd kinda point to the past of 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.
Um so we I mean we were always upfront about that and I 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 were 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. Yep.
So for for this particular one
Yeah, I I think there was there was more a 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 and
I I think you know we
I spent time like I I basically like write little
notes to myself over the years of like here's how I'm feeling on this day and like here's what I'm thinking and
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 l 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 was gonna be like a
fifty percent increase and it's like a ten X increase like
So you're you're probably out ahead on an IRR basis, even though it took longer. Yes, exactly. Yeah. It's just like I I you know, I think we don't
You do a good job of thinking about nonlinear growth.
Like humans.
Yeah.
And so
This was an opportunity to like
Okay, how do I
protect myself against my own
biases of and inability to predict, like, okay, well having a lot of money, hiring great people.
making it clear to them what the problems are and then
Stepping back.
This money lets us do that.
I it also puts you into a league.
uh uh that I think helps with the recruiting in a lot of ways. Like there's certain dollar amounts, like 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 is definitely a fear that many people in Seattle have.
Like I think if m 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 th this w 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 sixty seventy people, do I have that right?
We're like about ninety now. We're we're higher on a lot.
Cool.
Well, David, do we want to move on to powers?
Yeah, that's what I was thinking. Um
So
long term listeners to 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 Ben and me analyze companies as we we decide what we go through the seven different powers of uh 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.
So
Maybe I maybe I'll jump in first.

We we did that L P show on Roblox and I'm trying to like remember exactly what I said there'cause I don't see why it would be a lick different in 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 yeah, we're on the spot.
Well, okay, so I'm I'm gonna go first, uh
Selflessly to give Nick a break to think, selfishly to take the incredibly obvious one of network economies.
It's not just a network economies, but it's a networked economy.
economy with the layer of rec tokens in your own currency as well. Um
And
The
Value.
That's
Like the way to think about
Network effects, network economies.
is you know, it's it's
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
Coefficient, one might say. What's the coefficient? Exactly. Yeah, yeah. Thank you, Ben. What's the coefficient?
For
Something like
Rec room.
The coefficient I think is actually really
quite high.
Because you have such a high
conversion 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'cause he's had a long time to think.
Uh
You just wanna go last.
We talk about scale economies a lot. I mean I think that's
That's what we l especially for our creators. We're we're like you know
the the bigger rec room is, the more people you're theoretically reaching. And so you're 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 while they're growing to try and get the value from that. You're like, okay, now it's it's achievable for me to chart.
If I wait a while, maybe it won't.
um 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 I we should ask this before. Do you do any highlighting of creators uh to the user base? Oh a hundred percent. Yeah. We
We select like featured rooms every week. Um, we're we're constantly looking for way like I I would say if you come into Rec 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 or
Editorial.
A combination of established creators that you know this stuff is awesome.
And new creators to kinda keep constantly seeding the ecosystem and giving new people a chance.
I 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 it can be like
A scene from one of your favorite movies or you know, can have
like some cinematic flair to it or, you know, something like that.
And we we actually do like a
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 like take your
Your trophy and give a little speech. It's called the Roomies.
Um and one of the ones that we we highlight is like
the the emerging creator. Like who
Who haven't we never seen in a contest before that has really impressed us? Because
Yeah, like two contests later, those people are like the masters of of Rec Room tools and they're teaching classes in Rec Room about how to use these tools and bend them to their will. So yeah, I mean we're we're really on the lookout for that like young nascent talent for sure.
And we've hired actually a a a quite a few people that have like work at Rec Room today were people that were in the community and we were like
Good God, they're building like amazing stuff. That's so cool. Like
I wonder if they would come and give us feedback on like the tools that 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 in Rec Room. So Rec Room has been
Like we we keep an eye on it, one, because it's like valuable for the ecosystem and two, it's like a great source of hiring.
Right.
The only last one that I was thinking about was do you guys
think you have switching costs
Like
Apple Podcasts has switching pots.
costs over David and I. Like if we were to move and be like, okay
We're done with podcasting. We're gonna be YouTubers now. Like
that we would never do that because we've sunk so much into this uh investment wise it would take us years and years and years to rebuild the same sort of
not all the audience, but frankly, like understanding for the medium on a you know, something that's not podcasts.
Does the same thing happen to creators in Rec Room?
Oh, I I think so. I mean I think
I think
There's
The way that you build in Rec Room is just so unique.
And it lets a group of people that
Otherwise can't create create.
Um, like every other tool like Unity or Unreal or even Roblox Studios, just feels really, really different from Recroom.
And so I think it's hard to
transfer those skills over.
Um, that non transferability though is also the thing that like lets all those people
Who who couldn't otherwise create, create.
But yeah, I think once you uh especially once you build up your audience, like if you have
tens 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
That notification engine.
Yeah.
The last one I wanna uh we would be remiss if we didn't at least ask you.
I suspect I know there.
Well.
I'm gonna I'm gonna ask you first.
Is there an element of counter positioning here versus Roblox?
relative to the age of your user base.
Remind me what counter positioning is.
Maybe counter positioning is if
You you are doing something in your product or business.
that if your competitor, if your established entrenched, you know, incumbent and competitor did it, it would torpedo their business.
Or at least be value destructive to them such that it's not economically worth them chasing you into the thing that you're doing.
Yeah, I you know, I don't know if that's true. I mean I think Roblox
Like they 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
From doing that.
I think we we think of Rec Room as like fairly distinct from Roblox.
Like Roblox has
sort of more of like a two sided marketplace where there's like two kind of independent groups, like creators and and consumers and
Those groups are separated by probably like a twenty
Y your age gap. It's like there's nine to twelve year old
players and then the creator base is is probably like, you know, mid twenties, thirties, maybe older. Like you're you're coding. You're
You're using a game engine.
And Rec Room kind of just sits in between there. We're like
Hey, we just want like
Teens who basically
Wanna
play games or create games and you can do both of those in the same session.
Um, so I think that the difference between us is maybe more
Maybe like in
Like look, Instagram is very different than Photoshop, right? Like
Photoshop has a more powerful tool set, but
You know, the people that are looking at the content that are produced in Photoshop and the people that are working in Photoshop, it's not the same group, but Instagram, it's probably closer like, well, you know, I could be a creator, I could be a consumer.
Tools are pretty simple. I think we kinda sit more in that category.
I love that analogy.
That's funny. I thought you were gonna say difference between Instagram and Facebook and the networks in the ages, but but yeah, no, I like I I like that I I like that analogy even better.
Well, I wanna jump into a section here that's the uh 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, uh this could be that the company got acquired or that the company
shut down or, you know, you decided to some sign some big partnership.
Anything happening. 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 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 and like
twenty nineteen.
I don't need to come up with a counterfactual for that one. I think there's other companies out there that have proved that.
that that for me.
So I'm really happy we made that choice. It was tough though. Like ah that was really, really tough. Um
That was tough for the community. It was tough for the team too,'cause I mean, I think
You know it's
uh you the team is really sensitive to like what the community thinks of rec room. It's it really means a lot to them. And so if we ever make any changes where the community is not happy, like
Man, I f I feel it like in my stomach, like
I I wake up with it every day. It like really pains me.
Um and there were there were a couple of months of that for sure.
Mm-hmm.
I mean you were you were in a little bit of a Kobeyashi Maru situation where like
The
If you had buried your head in the sand and gone VR, VR, VR
Like you would have died.
If you had
completely pivot and be like, we're gonna be an app, then you wouldn't nearly have the power that you have today as a business.
And you
decided hey there's 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 gonna work. Um so I'm happy that we
We did. Yeah, but you didn't know. No, we we we definitely we definitely did not.
And then, you know, at various points in Recroom's life when when it has been
um harder to find growth or harder to find, you know, investment capital. We have had
chats with with various folks about like
Hey, does it make s like d you never need to worry about financing again. Just come into the big
warm arms of the the big tech company and we can we can figure this out for you.
And
You know, I don't know what that looks like. I think the moment that you accept that y
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. Some large company is buying it for
a goal or an agenda that's not
hours. And so I think it really depends on what the company is.
to to figure out if that if that aligns.

lined up like hey, we think this is in everyone's best interests to
Uh
join uh powers with with it with it 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, we
Th there isn't a capital deficit that we need to go solve.
Um we can just go build.
That's that I was gonna say, I think that's one of the things that um
I hope in a few years when we all
look back on this period and
History.
You know, we may be laughing a little bit at at the exuberance in the market.
that you know, certainly lots of people talk about. Uh and I don't mean with regard to
Yeah.
I think your valuation is incredibly well deserved and you've been on such a journey and like the business is great. If you're listening to this podcast and you're thinking about raising money, like now is
Not the worst time to do it. Yeah. Now now's the time. But I do think I I hope that this will be a really good enduring outcome of it, which is the
You don't have to sell your company anymore. Like if things are working.
And even even if like
If you think things can work in the future, you don't have to ever sell because you can raise money in the private markets. That's been true for a while.
But you can also be public now. Like there are Ben and I've talked about this a bunch as a theme on the show.
There's so many more.
Five to
twenty billion dollar tech companies out there and will be out there than anybody ever realized.
Whereas I think before this era it was kinda like
Okay, great. You're gonna sell your company for a lot of money to a big tech company.
Or you're gonna be one of the very, very few that can be a enduring standalone big business.
And I just don't I don't think that dichotomy exists anymore.
Hm.
I think 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 Facebook involved, like having a subscale ad business just sucks. Like you're just gonna have a bad business.
And
Yeah. I mean like the
And it's a testament to what Google and Facebook.
built those are like
unassailable businesses, right? Like and and having
you know, one tenth of their scale is worth one one hundredth of the value they have, right? Like it's just you you're
Yeah.
Pushing the
That's the
Sisyphus pushing a boulder up a hill, you're never gonna make it, right? Like it's just never gonna happen for you. And I think with more companies, especially on the consumer side, going like, Hey, we are we are not gonna use an advertising model. It's just gonna be uh this different exchange of value.
You you can
Often building.
you know, better businesses at smaller scales.
And they're not as subject to like winner take all sort of mentalities. I think that's that's what you see in the gaming space. There's like a lot of very big profitable games.
Um, there's not just like one game.
Uh, but it's not as true in the social media space. There's
There is like one
One ring to rule them all.
That's a real that's a really great point, especially as social media heads into the world of microtransactions and a little bit away from advertising. I mean a 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 n the next sort of platform where everyone spends time and interacts with each other.
You know I'm I'm probably like
under educated on this, but I my impression is that
The market in China is less advertising driven, like a hundred percent. Ten cent.
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. Um
Yeah.
Yeah. Yeah. There's definitely a lot more uh medium sized companies shooting up, but yeah. Yeah, to to what to attribute is uh
It's kinda like your comment earlier, five things are happening all at the same time and it's kind of hard to to have attribution.
Um, before we move on, Nick, I wanna ask you sort of one
I think'cause 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.
And is there something
y 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.
Hm.
That's it reasonable question. I guess I've never
Maybe examined it as deeply as I should.
I

I mean
Look, I think anybody
in my shoes is trying
Two
Like the larger these things get, the more
incentives, like the more people that have incentives in 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 Rec Room and the investors who
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.
Like
Do we take the chips off the table or do we double down? Well, doubling down has been the right choice for

And so I think it's just like that's the
That's the decision that we've gotten comfort with for
X many rounds so far.
And so it's not to say that we'll we'll we'll never get comfort with with
You know?
maybe tying up with a big company, but
I 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 well.
Could
disappear in six months.
And and I definitely worried about that more.
Like in the early stages of the company where I was like
Man, it feels it feels like this could all
disappear like I can't believe we got here.
And and then now now that I've seen like the team really persevere through some
Some dark times. I'm like okay the
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
Like they need to believe in what you've built more than you believe in what you've built to make the price work. You know. That's essentially what needs to happen. And like
I'm pretty bare or I'm pretty bullish. And I think like I think that's just that's just the challenge that you run into the think the longer you go.
Right.
Well thanks for answering that. Sure.
I did I appropriately like dodge your question. No, it was perfect. It was great.
Uh, but I'm not going to be able to
That was great.
That's a great uh it's a great segue into playbook, uh which
You know, I think we've touched on a lot of themes here.
That don't need to be rehashed, but there is one that I really want to
highlight here and I I I can't
I can't say i 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 in 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?
Um
Uh like that this is one cohesive world that's like 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 Rec Room is recognizably Rec Room. I think it's the element that gives you economic control.
So people often will ask me, like, well, are you going to do anything with NFTs? Or like there a couple of years ago, like ICOs were all the craze. Like, are you guys going to make a cryptocurrency? And
My statement to a lot of people were like
Look, the value of those uh entities is that they are decentralized. Like that's the value. And the value that Recroom derives out of its economy and its things is they are centralized.
That's the value. So like
We would be throwing that away for a buzzword, right? Like
We don't need decentral like
In fact, we don't want decentralization. We want centralization because it's like paramount like I if you think about the economy transition that I was telling you about, like imagine going through that with like
Like a cryptocurrency. Like you'd never be able to do it, right? Right. Lobbying fifty percent plus of the community to be able to flip to your new yeah. I would be subject to like whatever
Stupidity I put down in my white paper five years ago. Like and
Like I I guess that's the
That's the thing that I would I would
Tell most of the
people like m maybe other people are really good at forecasting.
Like
I am not and like that's
We we just like face that.
that decision head 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 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 we have a lot more levers to like
try and shift the game or the economy or the the
you know, the ranking algorithms to favor activities or or actions we care about.
Yeah.
Makes a lot of sense.
Well, the other one that I I I do think is worth just highlighting here because it it it so dramatically affected the trajectory of the business is
The realization you had that you were your growth was governed by someone else's growth.
And 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 you know it is intended for ultra high growth businesses, like you become a business that needs to go seek growth. And you know, I don't I don't 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 where they can sort of look and say, uh it 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
Like
I had never heard
Of like
a series A round. Like I I had never heard of
I didn't know how you pitched investors. Actually probably like w one of the
The best stories that I think I've I've got is like
Madrona who led our our B round.
I went to pitch them for a seed round.
They were like
This was not very good. Like this this was bad. Like I didn't I didn't make it to the next meeting.
And I emailed them back and was like, Can I come back next week? And like I've worked on my pitch and like
And they were like, No, like that's not how this works at all.
But I mean like that's how dumb
Was they David? They were not David. No, this was before I met David, I think. No, this is um
It was so funny because when when Nick and I did meet later, and I didn't know Nick had had talked to other folks had
And then I told everybody I was like, Oh man.
This company's had people like
Wait, are we talking about the same person here? Like I so I think the learning curve was was sharp. We we we just started at zero. Like let's
So w our first couple of interactions with with Venture um did did not go very well. And so we were also looking for publishers. And so publishers, if if you're not familiar, like in the game space,
They'll basically pay you per project. So
You're like, Hey, this is a project I wanna work on, it's gonna cost me
ten million dollars to do this thing, they're like, Great, we'll front the money.
You're talking about electronic art, it's activated. Yeah, totally. There's a bunch. Um
We'll we'll 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
model because you 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 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 SQL 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.
Like fifty fifty, 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 gonna be forced to grow and
I I think w you're more like look, it is a framework for thinking.
If you were to the the
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 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, it's not about bunts, 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 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
venture can be right for you or it can be wrong for you, depending on what your
What your goals are.
And I think we realized pretty quickly we were 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 recommended gonna look like.
Hm.
I don't think anyone has ever articulated that as well as you just did on this show.
Mm.
It actually is really, really good and I think uh

I think people get a logni a lot of cognitive dissonance looking at
The venture market and
financing. Whether like
There's no plan. How 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 the key point there, which is if you're
Financing a project in the context of a movie or a traditional game studio, what now yeah, you need a plan. Like, because there's a set amount of money.
And you need a set, you know, return on that afterwards.
But that's not what
Venture is about Venture's 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 a time, like oh shoot, okay, VR market dried up.
All right, what are we gonna do? We gotta find that growth. Well, we're gonna go to screens, you know, et cetera, et cetera.
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Okay, Nick. So the way we're gonna do grading, since we're not like grading a transaction here, is to speculate. You know, what what is the what is the A scenario for Rec Room look like three years from now?
And uh I think there's an obvious F scenario. Like you know, we we we could there those are like less interesting'cause like lots of numbers could go to zero and anything multiplied by zero is bad.
Um, but like what's the B minus scenario? What what sort of
Worries you on
ca like stagnation, or how do things sort of like just plateau?
But
Before we get there, let's talk about the the AA plus. Like what in the world happens for this thing to just go gangbusters? I think there's
I think if you look at the video game space, there's a couple of video games that have
Transcended video games.
Right, 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 Rec Room.
Is is like
We have grown into a space
Where
Recrim 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 meterse 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 a valuation or we've IPO'd or
We've made X number of dollars. It's really like what
What is the lasting impact that
The
The brand and the product that we've built has
Uh you know, beyond
the gaming space. I think that's really what what I focus on.
And would that primarily be attributed to this sort of like
uh creator led growth strategy going well.
I think it's 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
Two X that.
Do 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 the true test of whether you're a platform is are other people building a business on top of your business. That's
You 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 Rec Room?
Love it.
And then the B minus.
What keeps you up at night? How how could things sort of just
Hey, this is this is the top.
Uh, 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 we defeated these challenges. And I think if you spend too much time thinking about
the battles you
One.
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 and
You know?
Their homecoming game. Like 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 the
And I think it's especially challenging as you 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
Oh man, we get really content with like
patting ourselves on the back and like being so proud of what we've done.
I I any time you're raising money, I think it's a

Temptation. You're like
I can view this as an endpoint, like
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 gotta keep experimenting, you gotta keep growing.
I love it. Love that.
All right, well.
Carve outs.
Nick.
Uh mine is someone sent me
Invent and Wander, which was like a collection of writing from Bezos, and it was it 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 nineties, 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 it's really easy for people to forget like
There was a decade when that business was like
the smaller unloved stepchild of like eBay.
Where everybody's like, Well, eBay is like eBay is like the really good business. Like look like eBay has the superior model. It's a marketplace, not the market retailer. Yeah.
And
Like
Uh I r I remember that. I rem and I r I remember like
like nodding along reading this articles of like, yeah, obviously like
Amazon, how anachronistic like
You know, managing your own inventory like that's crazy.
And then you you look at what they built it in today, and I think they just
They just
slogged it out over years and years and years.
I think that's how 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? They don't make any money to like, oh my God, it's way too powerful. Shut it down. Yeah, it's it's it's crazy how quick it can switch. And I I think Bezos just it's clear he ha he has had this idea in his head.
the entire time, um, especially looking back at these old writings, just very impressive.
That's awesome.
Love it.

Uh my carve out is
So appropriate for this episode on so many levels.
It is my new favorite YouTube channel.
Called Resonant Ark.
You guys heard this? Nick of it. I haven't. Oh, you're gonna love it.
Okay, so it's like
They do a whole bunch of stuff on there. They're way obviously way better at video production than we already acquired, but um they're like uh somewhat like like so nerdy, super, super, super deep dives on video games.
And um what got me hooked, I'd I'd sort of casually watched it for a while, but what got me so hooked was um
They just did.
A massive five part series.
It
Episode is like three hours long.
about Final Fantasy eight, which like I remember playing as a kid the day it came out and then like got it the day it came out then played several times as an adult.
It's such a if you've played this game, you know it's a very controversial game, unlike all the other Final Fantasies. And they just like
These guys go to town like fifteen, twenty hours worth of content digging into this game. It's awesome.
Squall Leonhardt, uh the main character, right?
Yeah. All right.
I didn't realize it was the first Final Fantasy with uh
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 uh someone who listened to our Bitcoin episode and had some some feedback and we were catching up and they reminded me you should watch this video.
And um
It's called How the Economic Machine Works by Ray Dalio.
Either of you ever watch this?
Yeah.
Maybe did a while back.
It's unbelievably succinct. It's unbelievably digestible at any level.
You know, you're both
you know, f four notches above the in uh economic understanding necessary to 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
Or you're always experiencing it. And then on top 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
you know, wealth redistribution has, uh and and when each of these different things are appropriate.
It's just like a
Crazy succinct.
way to understand
Like
how to 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.
uh in here in the US. And um and you know, where might we be in the accommodation of these these three factors in our current one? And it's uh it's old too. It's from like twenty twelve or something. So it's not c it's not written for people pining to understand right now, which I think
gives it a little bit more authority.
And so uh
Um, I highly recommend it. We'll link it in the show notes. Well worth your time.
Well
With that.
Nick.
Thank you so much for joining us. Thanks for having me. We're
What do you want to plug? What should listeners go check out?
Go che go check out Rackrim.
Yeah. Yeah, you I was see you uh we told you you could have just made reclaim your carve out, but Yeah, yeah, go check it out.
Send us feedback.
Like the the app is
Far from done. Um, and so we're we're always interested in people's feedback.
Awesome. Well, Nick, we we hope to have you back for for part three someday. And I don't want to foreshadow what what event that could even happen, but let's just say the in the far future.
What about um Nick, what what about if people want to uh
Uh get involved in recruitment uh
More deeply they want to they want to work with you, they wanna
Get in touch with you, partner with you guys, what uh what's the best way to We are hiring. Yes, for sure. So um
So we would love it if you so go to recom dot 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 the really, really big tech companies. I think you see that
There's like all the talent and startup ambition in 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 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. Yeah. Who would enjoy their life more um on the startup journey.
I mean, I wouldn't want a lot of them higher highs, lower lows.
Uh but definitely like a much more
rewarding journey when you're you're you're sitting at the
the end of a five year journey and looking back, I think there's like a lot more.
There's a
It it will certainly make your life much more interesting. I'll take it from Nick and I, both both former Microsoft.
So
You you could you could do uh
You know, uh this is another thing that Dan Lewis brought up during our convoy episode, but I just have to say it one more time. Like you always
overweight the risk of joining a startup.
You always think, Oh my gosh, this is so risky. But like your downside is wildly capped. Like you could just go get your old job or probably a better one. And if it goes well, God forbid, like who knows what unforeseen doors that opens in your future. Oh, for sure. And
Like
I think when most people are calculating
Like what is gonna happen at a startup or what is gonna happen to me at Microsoft.
Like they're using the law of averages.
And so I just asked them, like, okay, are you average? Like do you think you are an average person? Like some serious jujitsu. Wow. I love it. Well, I mean like look it I I think then the math makes a lot of sense. Like if you
Yeah, if you
If you feel like you're you're gonna be subject to that law of of averages
Um and you're gonna h score in the middle. Like Microsoft's a great
A great spot. If you do think you're in the top
twenty five or or
You know, the top ten percent.
Like your upside's really capped at Microsoft. Like it
There is 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, y your career is capped in some way, I 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 uh
Also applies to starting a company for most people. Totally. Totally. Yeah. No, no, go f I mean. If you don't start a company, go work at records. Exactly. I I
I think
I mean t to go back to Bezos, the 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 what am I gonna feel in five years?
When I look back on this choice and people tend to regret
the decisions that they y you know, they didn't jump at, not the ones that they let pass.
Yeah.
Totally.
It's a great framework. You're like stealing all these future potential carve outs. All right, listeners, we're gonna wrap here.
We told you about the Slack, go check it out. Acquire.fm slash Slack. We'll be talking about this episode. If you want to be an LP, that's at acquire.fm slash LP, and you should.
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you should follow us from your favorite podcast player. And uh if you like this episode and you have a friend or coworker that you think, hey, like I 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.