In this episode of "Acquired," hosts Ben Gilbert and David Rosenthal delve into the world of startup fundraising with Nick Fajt, co-founder and CEO of Against Gravity, creators of the VR social club Rec Room. They discuss the journey of securing a seed round, emphasizing the importance of stamina in the burgeoning VR market. Against Gravity's approach to product development and user feedback is highlighted, showcasing their rapid iteration and user-focused strategy. The episode also touches on the significance of selecting the right investors who align with the company's long-term vision. Additionally, they explore the broader VR landscape, the unexpected success of platforms like PlayStation VR, and the potential for VR to create profound social experiences. The conversation concludes with insights into the strategic decisions behind offering Rec Room for free and the potential impact of flagship content on distribution platforms.
"Welcome to season two, episode two do of acquired, the show about technology acquisitions and ipos. I'm Ben Gilbert." "I'm David Rosenthal and we are your hosts." "This season's miniseries is on startup fundraising..."
The introduction sets the stage for the episode, introducing the hosts and the theme of the season, which is startup fundraising.
"As we mentioned in December, we're moving to a seasons format where we can do multi episode themes and miniseries across episodes."
This quote explains the structural change in the podcast format, emphasizing the in-depth exploration of specific themes, which in this case is startup fundraising.
"And we are super, super fortunate to have with us today the co-founder and CEO of Against Gravity, Nick Fight."
This quote introduces the guest, Nick Fajt, and provides a brief overview of his company and background.
"Pilot both sets up and operates your company's entire financial stack... Pilot takes care of all that."
This quote highlights the services provided by Pilot, the sponsor, and their importance to startups by managing financial operations so companies can focus on their core business.
"So, against gravity makes rec room, which is a virtual reality social club where people from around the world can meet up in thousands of different rooms."
This quote describes the main product of Against Gravity, Rec Room, emphasizing its social aspect and variety of virtual experiences.
"One of the phrases that we use a lot at that company is ready, fire, aim, which really describes our development process."
This quote explains Against Gravity's development philosophy, which values quick releases and immediate improvements based on user feedback.
"So after some time, I was really excited about the AR and VR space... There's a tsunami out on the horizon. We should probably learn to surf."
This quote captures Nick Fajt's motivation for leaving Microsoft and starting Against Gravity, driven by the potential he saw in AR/VR technologies.
"So early on, we did a convertible note with friends and family and actually quite a few former coworkers as well."
This quote details the initial fundraising efforts of Against Gravity, highlighting the support from personal networks and the transition to institutional investors.
"When you start getting to bigger rounds, you kind of need to do, but you can also raise smaller amounts with convertible notes, which is debt that converts into equity."
The quote explains the dual approach to raising funds—equity for larger rounds and convertible notes for smaller, more flexible fundraising.
"As we started moving into more institutional investors, we started needing to have some different terms."
This quote highlights the necessity to change fundraising terms as larger, institutional investors become involved.
"I mean, it was largely around 25k. There were some that were higher than that, but, yeah, generally, was it hesitate to call it a round, but million dollars of convertible notes?"
The quote clarifies the typical check size during the friends and family stage and the cumulative amount raised.
"We were much better at building products than we were at building powerpoints."
This quote underscores the team's strength in product development over creating presentation decks.
"Just go download the app. It's free. And there's always people on there to play with you and let us know what you think."
The quote illustrates the hands-on approach to investor presentations, focusing on direct product experience rather than a traditional pitch deck.
"Qualification is something that is so important and I just think this was brilliant, like finding a way to pre qualify anyone you would talk to."
The quote emphasizes the strategic importance of qualifying investors by their willingness to engage with the product.
"It takes a lot of bravery to put out a product that doesn't look the way that you want and doesn't operate the way that you want and only has 10% of the features that you want."
This quote reflects on the courage required to release an early-stage product to gather user feedback.
"It's kind of mind blowing, I would say."
The quote expresses admiration for the team's ability to launch a VR product in such a short time frame.
"I would say, like, if no one's playing your VR app right now, it's probably not very good."
This quote implies that user engagement is a direct indicator of product quality in the VR market.
"Anything other than yes is probably no."
The quote captures the reality of investor responses, where anything less than a commitment likely indicates disinterest.
"You get the investors you ask for, and if you're honest about what your strategy is when you're fundraising."
The quote stresses the importance of transparency in fundraising to attract compatible investors.
"I think most of the evidence was in the product already."
This quote suggests that the product itself was the primary proof of potential for investors.
"We tried to change as little as possible. We were like, look, this formula is working."
The quote indicates the company's intent to preserve their working strategies even after securing significant funding.
Being super upfront and just recognizing, hey, we're going to be incredibly well positioned when the wave does hit.
This quote highlights the importance of honesty and preparation in discussions with investors, acknowledging the current market state while preparing for future growth.
Yeah, I mean, keep in mind we had started working on HoloLens in 2012, and it took four years for us to get the dev kit out the door.
This quote emphasizes the lengthy process of developing a complex product like HoloLens and the early start of the project relative to competitors like Oculus.
What the board has provided is when you're in that really tight iteration loop, you can occasionally get caught up in the details and the board is there to remind you, are we making progress towards this long term, multi-year vision that we've laid out?
This quote illustrates the role of a board in ensuring that a company does not lose sight of its long-term objectives while being caught up in short-term operational details.
Really, that is a lot of about what raising money as a startup, especially in a new market like you guys, is about.
This quote connects the concept of raising funds with the ability to work towards long-term, potentially non-immediately profitable projects, drawing a parallel with Amazon's strategy.
We felt like there was going to be this inflection point in the market for VR, and we felt like it was going to come once we saw a headset, which is kind of like an all in one.
This quote discusses the strategic planning behind fundraising, with the anticipation of market shifts being a driving factor in determining the amount of capital required.
We decided to release that product for free. So it was not generating any revenue.
This quote explains the strategic decision to release a product without immediate revenue generation, emphasizing the long-term community-building and engagement benefits.
There's something just so different about social in VR... It really feels like you're in the same room with somebody who maybe is on the other side of the world.
This quote captures the essence of social interaction within VR, highlighting the potential for VR to create a sense of presence and connection despite physical distances.
I think depending on which marketing report you read, it might have been, hey, everybody and their brother has three oculus in their home.
The quote reflects on the disparity between optimistic market predictions and the actual state of VR headset adoption, indicating the need for realistic market assessments.
"The tricky thing is these things grow exponentially. They don't grow linearly."
This quote emphasizes the non-linear growth pattern of technology, which can lead to sudden and rapid expansion once a certain threshold is reached.
"PlayStation VR is currently the highest selling of those high-end headsets."
This quote highlights the success of PlayStation VR in the market, suggesting that its approach to product design has resonated well with consumers.
"Nick, you had mentioned that these things happen exponentially and not linearly."
This quote reiterates the concept of exponential growth in technology and the sudden inflection points that can occur.
"I think your fundraising journey is so interesting. Right. Because that potential is there and it is growing exponentially, and that means it's going to grow very slowly for a long period of time."
This quote conveys the challenge of fundraising for a technology that grows exponentially, as it requires investors to have patience and faith in the long-term potential.
"I think any startup is really about learning."
This quote underscores the fundamental nature of startups as learning organizations that must adapt and grow rapidly.
"Your lifeblood is your user feedback."
This quote stresses the importance of user feedback in guiding the development and iteration of a startup's products, especially in new markets.
"I basically bought a $400 video game. Like, I bought the switch for Zelda."
This quote illustrates how powerful content can drive consumer purchasing decisions, even leading to significant investments for a single piece of content.
"There are some content that transcends that bundling and unbundling strategy, where people will do borderline irrational things to go and find this content."
This quote discusses the unique appeal of certain content that can motivate consumers to go to great lengths to access it, highlighting its importance in the market.