For once, the entire office was in early. At eight o’clock the parking lot was packed with cars, and for good reason. The day they had all waited for was finally here. They were going live with a virtual world. Despite all of Steve’s misgivings, Peter had whipped and driven the engineering team to succeed where no one thought they could. They had nailed their final presentation to the studio with three days to spare. The studio had agreed to move forward, and then had burst into a flurry of action. This had included a massive advertising campaign that had seemingly appeared out of thin air. In reality, the studio was planning it months in advance. It was probably good nobody knew this; the increased pressure would not have helped the situation.
Finally, the studio has plastered the download file for the client on all eight of the studio’s websites, including two for new movies. This was Hollywood cross-promotion at its best, and they could only stand back and watch in amazement as the Southern California Army marched into battle. And everything they did was to whip up a frenzy and turn their customers loose at noon east coast time. In one hour.
When Steve walked in Peter and Brent were down powwowing with the web team. All the download requests from all those web sites were going to get routed to their servers, so everything had to be ready to handle the expected crush. Three servers had been dedicated specifically for this task. In addition, all those new clients were then going to pound on their actual virtual world servers demanding to be let in. Two more servers were dedicated for this task. In addition, their telecommunications connection to the outside world had been upgraded the past week to handle the greater load over the lines. They were going over every inch of the servers, but in reality there was nothing more they could do.
Steve walked past this bunch and sauntered into Paul’s office. Paul was making sure all the communications code on the virtual worlds servers were ready for action. He typed a couple requests in and then looked at Steve. “Well, ready for action? Nothing like reality to shine a critical light.”
“You think everything is going to hold together?”
“Sure. I don’t think we are going to get the action that everyone is expecting. It will be busy, but I don’t think this will be a rocket ship initially. Remember, this isn’t a video game that everyone has to have. We are trying to build a community, and that is going to take a while.”
Steve took a long look at Paul and started to realize how much he was going to miss him. “You’ve already checked out, haven’t you?”
“Completely. But I should point out there is no animosity here. I am leaving with quite a slug of options, so I want nothing more than for this to succeed. I just don’t know if everyone is prepared for the long haul. Everything that has happened to date is the easy part. This is where the hard part starts. Before, if we blew up or the software melted, it happened within these four walls. No one outside was ever the wiser. Not even our board, I suspect. But now, we are on display for the whole world to see. A misstep here and we completely lose containment. And everything has to work perfectly: development, deployment, service, marketing. And I don’t know if everyone realizes the grind has just started.”
“I agree, but with all the advertising being put behind this, I gotta like our chances out of the gate.”
Paul gave his little smile. “Well, let’s see if we are still getting that support a month from now. I suspect they will get us out of the gate strong, but the rest will be up to us.”
Paul suddenly bolted upright in his chair, and then looked at this watch. “And our first case of losing containment just happened. It’s show time. One of the sites must have put the download page up early because we are getting our first hits.” Paul’s fingers started dancing across the keyboard of the server. “Yup, we are definitely in action.” A second later Steve heard a cheer go up from down the hall. Paul looked up at Steve and smiled. “No going back. Have fun.”
Steve patted Paul on the shoulder. “I’m going to miss you. We never would have gotten here without you.”
“Get out of here. Go join the other lunatics.”
Steve walked down the hall and walked in on a jubilant pack. Smiles were abundant. Peter turned around to Steve. “The two movie sites went up half an hour early. We are already getting downloads from both of them. We are in business!”
“How many people are in the worlds right now?”
“Well, only employees. It is going to take a bit for people to install the client and then get onto the network. But we have our people in every space, and the servers will alert us when people start logging in.”
Half an hour later all the sites were live with the download, and the activity on the download servers increased. Yet the virtual worlds servers remained strangely quiet. The answer came soon after via a customer support email. The downloading was fine. The installation was not. Several people were complaining that they couldn’t get the software to run on their machines. They figured out the answer soon enough. One line of code in the installation routine was parking the software pieces in the wrong place on their customers’ machines. Quickly a new version was loaded up to the download servers. Twenty minutes later they had their first visitor. He appeared in the “home” virtual world, and everyone in the room burst out laughing. It was Vincent. His avatar came steaming up and stared right through the screen and then the word appeared in the chat window: Congrats!
Steve wandered back down to his office to work on the presentation to AOL. With what was hopefully going to be perfect timing, they had scheduled the meeting for one week after the launch of the studio’s virtual world. The communities would be teeming with life, and AOL would be properly impressed with the progress they had made to date. It was up to Steve to decide what value to put on that progress. Or, to be more precise, what valuation. But first, he needed to smoke out Vincent. As good as he was at feel-good moves like being the first avatar in the space, they had no resolution so far on whether he and his firm were returning for the second round. If they were, and they got AOL, then there would be twenty other firms pounding on the door to get into this round. If Vincent passed, that would immediately put a black mark on the company.
Something was bothering Steve, but he couldn’t put his finger on it. This should have been the time when the company finally got its legs underneath it and became a self-sustaining organism. They were over the chasm and now running on open ground. But there was that nagging feeling that Steve was missing something.
One of the problems he did know about was timing. One of the rules of fundraising was that you raised your round right before you launched your product, not after. The reasons for this were fairly obvious. The first reason was functional. Actually taking your product to market required gobs of money for sales, marketing, support and increased headcount. But the other reason was psychological. Before a product launched, it was all promise, hype and untold fortunes. After it launched, it was all bugs, patches and shortcomings. The former was certainly more conducive for pegging a high valuation, but here they were breaking the rule. The argument from their board was that a successful launch with an established brand was more important than promise. The double-edged sword to this was that if there was a problem, the destruction would be only magnified.
The other problem was one of leads. As before, the lead investor would set the valuation. It wasn’t going to be Vincent. It wasn’t going to be the studio; even they had made noises about investing if a major partner also joined. That major partner could very well be AOL.
AOL. It kept coming back to them. Their once sworn enemy had now become their friend. And their friend was about to become their bride. It was just the size of the dowry that was the sticking point. And whether they really wanted to get married. If AOL didn’t lead, they would have to scramble to explain why a major potential partner had not bellied up to the bar with their checkbooks.
Gears were spinning inside of Steve’s head. He could see the chess board, but he had the distinct feeling he was missing some of the pieces. It was time to smoke out Vincent. He swung around and hit the speed dial number on his phone. A moment later he clicked through to Vincent’s assistant. The voice came booming through soon thereafter.
“Steve. Congratulations on the birth! When you least expect it, it happens, right?”
“Well, now the real work begins. The problem with having real customers is they expect you to keep them happy. If we disappoint someone today, it will be on a dozen chat sites by tomorrow. One of the engineers pointed that out to me this morning. We have officially lost containment on our product.”
“That’s absolutely true. And speaking of engineers, I hear you are starting to lose some. How vital are the guys who are leaving?”
Steve wasn’t sure how much to divulge, so he decided on the prudent route: public information only. “Well, we have lost some as you know. I think the damage is fairly light, but we have to make sure this doesn’t snowball on us. Once it starts it is almost impossible to stop.”
Vincent didn’t say anything. “OK, so here is another question. Given where we started with the technology, and where we have wound up, how important is the composition of the engineering team. What I mean is, how many of them are really leftovers from previous decisions.”
Steve thought this was an odd direction to head in, but he also was interested to see where it was going to wind up. “Well, most of our engineers are in either networking or connectivity, so regardless of our steps those guys are vital. If there is any graphics involved, which I am certain our studio partners would insist on, then the graphics team is essential. QA is a no brainer. And the client and server teams make the whole thing happen. Frankly, there isn’t a lot of fat.”
“How about sales and marketing? Do you think we should be building out these functions completely ourselves, or should we be looking for partnering opportunities instead? I mean, the studio is doing a hell of a job pushing this world out, and even if we built that out entirely ourselves I still don’t think we could rise to that level of efficiency. What do you think?”
“I think it is vital for us to hold on to the core marketing and messaging, especially since we are little bit of the evangelists here. I mean, right now there is no company that knows how to get the positioning of this new technology better than us.”
“Yeah, I agree with that, but do you think the consumer ultimately really cares about the technology, or do they care about the content that the technology brings to life? If it is the latter, then I would argue that partners like the studio are better suited to this. If it is the former, then you are bang on. Anyway, wouldn’t you rather carry those dollars on someone else’s books than yours? I’m sure you are grinding away on the financials for the next round right now. And I will bet that those below the line costs are growing like bunnies on Viagra.”
Steve had to concede on this point. The numbers to take this nationwide and support it correctly were starting to make their financials sag and bend in the middle. The whole reason for partnering with someone like AOL was to defray a large chunk of these costs. But they had to build the financials as if AOL never happened. The worse case scenario. And it was bad. Really bad.
“Well Vincent, I won’t say that I wouldn’t mind having some of these costs wind up in someone else’s pocket. But we have to run our business as if someone never happens. We have to be able to stand on our own two feet.”
“Great, so how much do you think this next round is going to have to be to get on your own two feet?”
Steve looked over at the Excel spreadsheet on the monitor, even though he really didn’t have to. He already knew what the number was. It was lurking right in the middle of the bottom row of their cash flow statement. Cumulative cash flow. And in this case it was negative cumulative cash flow. $47 million dollars to be precise. From that month forward they went positive cash flow. Which meant that number would slowly work its way back up to positive. But the bottom of the barrel they were going to touch was $47 million. And the way they made that up was with an investment of $47 million dollars. It was twice what they thought it was going to be. Vincent was not going to like the dilution to his shares this was going to represent.
“Looks like we are going to wind up a little north of $40 million.”
If Steve didn’t know better, he could have sworn that Vincent growled. “Well, the bunnies have been more productive than I expected. That’s a little more than we were expecting, isn’t it?”
“True, but we are also accelerating our launch. We have to. And we have to support it with the sales, marketing and support that a true consumer product requires. Just look at the installation issues we had today. We are on the cutting edge of technology here, so there is going to be a lot of hand holding to get people into our worlds. But once we get people in there, we become highly efficient. Remember, our model is completely front-loaded. We assume that it costs us a little more to acquire new customers, but less to retain them. And the reason is costs less to retain them is we are more engaging so they spend more time on-line. And the corollary to that means is the more time they spend on-line, the more they are going to be worth to advertisers. But we always knew there was going to be this initial hill we had to climb to get to critical mass. It just has turned out that the hill is a little higher than we anticipated. But that doesn’t invalidate the rest of the model.”
“I just want to make sure that this hill doesn’t turn into Mount Everest. I don’t want to run out of oxygen before we make it to the summit. OK, gotta hop. Give me a call when you nail the numbers. We have to plan our attack on AOL.”
As Steve got off the phone, he only had one unanswered question: Why the hell am I pitching our own VC?