Rec Room Part II (with CEO Nick Fajt)

March 24, 2021

TLDR: The Rec Room company has grown rapidly from a seed stage startup making VR games to a $1B+ company with millions of users and a robust creator economy after raising new funds from Sequoia and Index.

Acquired

Rec Room Secures $100 Million Funding at $1.25 Billion Valuation Amid Metaverse's Explosive Growth: The metaverse category is rapidly expanding, with startups like Rec Room, Epic, Fortnite, and Roblox seeing massive valuations. However, good investors know when to let CEOs run their business their own way and offer support when needed.
Rec Room, a Seattle-based startup, has raised $100 million at a $1.25 billion valuation from existing investors, showing explosive growth with revenue increasing by 660% and now having over 15 million lifetime users. The entire metaverse category has seen transformative growth, with Epic and Fortnite currently rumored to be raising at a $28 billion valuation, and Roblox valued at $40 billion. Despite this growth, investors aren't always helpful. Tiny, a company that builds wonderful internet businesses and is Acquired's sponsor for Season 8, has learned that great CEOs and leaders want to be left alone to run their business their own way. Their motto is, 'We're not going to call you but if you call us, we'll pick up the phone and be as helpful as we can'.
Starting a Company with Passion and a Strong Team: Starting a company does not always require a grand plan. Sometimes, with a powerful team and a passion for a space, taking a chance and trying something new can lead to success.
Starting a company does not always require a grand plan for becoming a billion-dollar company. Sometimes, it starts with a group of people who liked working together, facing a reorg. The team may not have had a clear idea or product in mind but started with a passion for a space and eagerness to try something different. Nick and his team faced rejection from other companies but observed an opportunity while working on HTC Vive, which led to the formation of Against Gravity. Although their start was not intentional, it gave the company a specific culture, which served them well. Therefore, taking a chance and trying something new can lead to success.
Rec Room - A virtual world of endless creation: Rec Room's accessible building tools allow anyone to become a creator and collaborate with others to build unique experiences, while also providing the opportunity to monetize and earn real money from their creations.
Rec Room is a virtual universe where millions of unique experiences exist as rooms, created by users using simple building tools like Minecraft. Unlike other platforms like Roblox, there is no separate creator app. The entire world is connected, and the creation experience is very accessible. Users can collaborate on building, with up to 40 people in a room at once, even if they have no coding or 3D modelling expertise. Monetization is possible, allowing users to earn real money from their creations. With 2 million of its 15 million users being creators, Rec Room's accessibility and ease of use show that anyone can realize the idea in their head and easily distribute it.
How Rec Room Found Success Through User-Generated Content: Adaptable businesses are open to new ideas, even when faced with challenges. By embracing user-generated content, Rec Room was able to expand beyond VR and onto multiple platforms, proving the value of community creativity.
The company behind Rec Room struggled due to the stagnant growth of VR headsets. To combat this, they shifted their focus to user-generated content and screens, allowing users to create and publish their own content within the app. This move helped them find growth outside of VR and expand onto other platforms like iOS, Playstation, and PC. By embracing community creativity and user-generated content, they were able to pivot and overcome the limitations of their initial business model. This shows the importance of staying adaptable and open to new ideas, even when faced with challenging circumstances.
Building a Successful Community for a VR Platform: Building a community with passionate users requires strategic planning, investment in creators and incentives for new behaviors. Balancing the needs of both active users and the growth of the platform is essential for success.
Building a community with passionate users requires careful consideration and strategic decisions. As the VR platform grew, the company had to balance the needs of its active users while also growing their user base. By shifting towards user-generated content, they were able to invest in and reward their creators, which ultimately led to a strong business model with great network effects. Incentivizing new behaviors also played a key role in driving growth and engagement. While the pivot was a challenging and iterative process, it ultimately led them to a promising future, where they could provide a platform that served both the needs of their most passionate users and the need for growth outside of VR.
Rec Room's Economy: Incentivizing Behaviors, Rewarding Creators, and Stimulating the System: Rec Room's economy incentivizes creators to make money by rewarding certain actions and allowing them to buy and sell items and services. The team behind the economy thoughtfully evolved the system over two years, and for creators, it's a decision of how much to reinvest versus profit.
Rec Room evolved its economy system over the years by introducing avatar items, soft currency, hard currency, and then exclusively hard currency, which users can earn through creation. The goal was to allow creators to make money by incentivizing behaviors and rewarding certain actions. Users can buy and sell items and services in Rec Room, such as fashion shows and themed rooms. Rec Room also prints a small amount of currency every day for added stimulus. The team behind Rec Room's economy was made up of generalists who tackled the problem thoughtfully and intentionally over about two years. For creators, it's a capital allocation question of how much to reinvest versus pull out of the business.
Rec Room's Strategy for In-Game Currency and Future Growth: Rec Room has created Rec tokens to incentivize users and ensure long-term growth in the VR industry. With a focus on user-generated content and multi-platform reach, they are dedicated to seeing the VR journey through for a larger reward for VR users and creators.
Rec Room's in-game currency challenges have been addressed by creating Rec tokens to pull out piles of in-game currency from the system and incentivize users to stay aligned with the game's goals instead of dropping out. Rec Room's priority is ensuring long-term growth and success by creating a multi-platform, user-generated content ecosystem that will ultimately benefit VR users. Rec Room has an unconventional founding and hiring story with employees who love VR and see the challenges in the industry. Although painful at times, Rec Room believes that making tough transitions is necessary to ensure the longevity of the game. The company is dedicated to seeing the VR journey through and building a much larger business with a larger reward for VR users by allowing creators to reach multiple platforms.
Rec Room's VR Focus and Flexible Avatar Paid Off for Community: Rec Room's decision to keep everything in one world and prioritize VR created a strong community. False starts led to better design decisions and monetization opportunities as the user base grew.
Rec Room's decision to focus on VR and create a flexible avatar with infinite player actions led to a different control scheme from most games. While there was a reasonably easy path of creating a flat screen version, Rec Room's dedication to keeping everything in one world paid off by creating a critical mass of people at all times in a single universe. False starts along the way led to bad design decisions, such as making the game third person for screens, which made it impossible for creators to build a cohesive world. Monetization opportunities grew with Rec Room's increasing user base, including those whose social lives revolved around the platform.
Capchase Helps SaaS Companies Finance Growth Without Debt or Dilution: Capchase can help SaaS companies finance their growth without borrowing or giving up equity by using predictable revenue. This lets founders keep customers happy with monthly payments and finance happy with more cash to invest in the business.
Capchase helps fast-growing SaaS companies finance their growth without taking on debt or dilution by using predictable revenue. This allows companies to keep customers happy with monthly payments and finance happy with more cash to invest in the business. Capchase helps founders unlock tens of millions in financing to fuel their growth and avoid significant dilution. Additionally, building tools to let users create their own content is a more scalable way of growing revenue in the long-term, even if it may be initially harder. For Rec Room, turning on monetization across all the platforms led to significant revenue at high margins due to the relatively small cost of supporting the service and the ability to generate revenue through user-generated content with slightly lower margins.
Investing in creators for sub-communities: A more effective approach than performance marketing.: By incentivizing creators, platforms can create market liquidity and engagement, leading to profitability. Platforms like Rec Room can also generate cash flow by enabling users to support creators through buying tokens upfront. The pandemic highlights the potential for unconventional usage of such platforms.
Investing in creators to build sub-communities can be more effective for user acquisition than spending on performance marketing. By paying creators more, their incentives increase and they can find users who really vibe with their content. This creates a marketplace liquidity effect where users can find their tribe within the platform, leading to more engagement and profitability. The success of platforms like Twitch demonstrate the effectiveness of this approach. Additionally, platforms like Rec Room can generate float by users buying tokens upfront and spending them on creators over time, leading to cash flow generation. The pandemic also led to a spike in activity for Rec Room, with users utilizing the platform for unconventional purposes like group therapy sessions and family reunions.
Factors that Contributed to Rec Room's Success: Rec Room's success was due to launch on Xbox, VR industry growth, and COVID-19. It built a strong ecosystem by adapting and focusing on long-term planning. Consistent fundraising and optimization of the system is necessary for scaling and endurance.
The success of Rec Room can be attributed to multiple factors converging at once, including the launch of the platform on Xbox, the growth of the VR industry, and the COVID-19 pandemic. The company's success is also due to its ability to adapt and build a strong ecosystem where users create and share content. The CEO highlights the importance of building a robust organism that can withstand uncertainty, and the need for founders to focus on long-term planning and consistent fundraising. The recent funding round was a gut check for the company's ability to endure for decades and scale as a standalone business. Success is not built quickly, but rather through optimization of a system that exists.
The Importance of Flexibility and Honesty in Startup Fundraising: When raising funds for a startup, having a well-defined plan is important but being flexible and open to change is crucial. Being honest about the use of proceeds creates comfort for potential employees and raises capital to hire great talent and think big.
Raising funds for a startup requires a well-defined plan and milestones to achieve. However, being flexible and open to change is also crucial as plans don't always survive contact with reality. Rec Room's charm lies in its idiosyncrasies and honesty about the use of proceeds in past rounds. The recent fundraising has put Rec Room in a league that provides comfort to potential employees from bigger companies who are considering joining a startup. It gives the company an opportunity to take a long-term play and create a huge business in the metaverses space, which might undergo peaks and troughs in the future. The raised capital allows Rec Room to hire great talent, solve bigger problems and, most importantly, think big while protecting themselves from biases and inability to predict.
Leveraging Network and Scale Economies in Rec Room: In Rec Room, creators can benefit from network and scale economies as more users generate more value. High switching costs and counter positioning strategies can help protect the business model and support growth.
Network economies and scale economies are important for creators to take advantage of in Rec Room. The more users that join the system, the more value each user generates, leading to a multiplier effect. Rec Room highlights both established and emerging creators to keep seeding the ecosystem and provide opportunities for nascent talent. Switching costs in Rec Room are high due to the unique building tools and notification engine that allow creators to reach a broad audience. Implementing counter positioning strategies could be valuable in keeping competitors from copying Rec Room's business model and torpedoing their growth.
How Rec Room's pivot led to success and preserved community feel.: By prioritizing community and adapting to the market, Rec Room found success and avoided sacrificing their values by rejecting acquisition offers.
Rec Room chose to pivot away from VR to focus on being a platform for both playing and creating games aimed at teens, rather than bury their heads in the sand or pivot to become an app. This decision was tough, but ultimately the right one and has led to their success today. The team is very dedicated to their community and making decisions that keep them happy. They also chose not to sell to a large company, as it would mean giving up their agenda and possibly ruining the community experience. The current market allows for companies to stay private or go public without having to sell, leading to more $5-$20 billion tech companies than ever before.
The Rare Case of Building a Standalone Big Business in Today's Economy: Selling to big tech companies is a rational decision. Direct supported models are replacing advertising. VR/AR may change the winner-takes-all mentality. Value is created through a single world across platforms with a fluid economy and social experience.
Building a sustainable, enduring, standalone big business is rare in today's economy, and selling to a big tech company is often the most rational decision. The advertising model, once dominant, is increasingly being replaced by direct supported models, creating more opportunities for smaller companies to thrive. Social media space still tends to follow a winner-takes-all mentality, although microtransactions and the rise of VR/AR may change it. The decision to stay independent is often driven by the founders' personality and past experience of betting on themselves. Having one single world across platforms and creating a fluid economy and set of social experiences is crucial in creating value in business. It offers liquidity and the perfect match between creator and user in one single place.
Centralization for Economic Control in Rec Room: Control your growth by finding the right financiers and focusing on options to avoid getting boxed in, rather than chasing every investment opportunity. Centralization may be key for economic control.
Centralization is key for Rec Room's economic control, providing leverage to shift the game, economy or ranking algorithms. Nick learned that it's important to have control of your own growth instead of relying on someone else. They looked for publishers who finance a very specific type of game, splitting the revenue 50/50 or worse. Venture dollars offer a framework for thinking, but Nick emphasizes that it will force you to swing for the fences and play the home run game, not bunts or singles. Optionality is crucial for the business so that they aren't trapped in a corner when they make wrong decisions. Decentralization is a buzzword that may not benefit the brand's recognition and economic control.
Long-term growth and asymmetric upside potential for venture financing.: Venture financing is for high-potential growth, not set ROI. Rec Room must incentivize creators to build a business on their platform to positively impact entrepreneurship and digital events. Complacency risks B-scenario; innovate to avoid it.
Venture financing is not for projects that require a plan and set return on investment, but for long-term, high-potential growth with asymmetric upside potential. The A scenario for Rec Room in three years is to have a positive impact beyond gaming, influencing the future of entrepreneurship and digital events. To achieve this, Rec Room needs to focus on ramping up incentives for creators, allowing other people to build a business on top of their platform. The B- scenario is the danger of complacency and resting on past achievements, rather than continuing to innovate and grow.
Lessons from Bezos and Dalio for Long-term Success in Startups.: View success as a new starting point, keep experimenting and growing, understand the economy, and leverage Bezos' long-term thinking and Dalio's primer on 'How The Economic Machine Works' for sustainable growth in startups.
To avoid getting content with past achievements, startups should view success as a new starting point and keep experimenting and growing. Jeff Bezos' long-term vision and determination, evident in his writings from decades ago, offer important lessons in long-term thinking. Tech companies often face criticisms of overvaluation and wasting money before eventually becoming too powerful to shut down. Additionally, it is crucial to understand the functioning of the economy and the levers available for managing it. Ray Dalio's 30-minute primer on 'How The Economic Machine Works' provides a succinct and digestible way to understand the economy and the factors that shape it.
Why Joining a Startup Might Be the Right Choice for You: Take control of your career and embrace the potential rewards of working for a startup. Assess your value and impact, and use the regret minimization function to make informed decisions. Explore opportunities at recroom.com.
Joining a startup can lead to a more rewarding journey with greater responsibility and ownership. It may seem risky but the downside is capped and the potential upside is huge. The law of averages doesn't apply if you believe you are in the top 25% or 10% of talent, and you can have a greater impact on the product. It's important to use the regret minimization function when making decisions and consider what you will feel in five years when looking back on your choice. If you want to get involved in Rec Room deeply, they're hiring, and visiting recroom.com is the best way to find out about available jobs.

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