SM: In 1996, the Internet was in full swing. What was your next step?
WH: I started a company called Sandcastle, which sought to solve the problem of making highly responsive games run over the Internet. When the Internet was starting to become popular for consumer entertainment, video game programmers were adapting games for local area networks (LANs). They treated the Internet as a big local area network. That approach did not work very well.
The characteristics of the Internet are very different from those of a LAN. Games written for LANs can assume quick, easy communication. You couldn’t write an interactive application with that assumption for the Internet, especially not in 1996. Even today, people who develop software for the Internet based on the assumption that network communication is fast will still run into trouble. The way that software is generally more successful on the Internet is to make the assumption that things will be slow and unreliable and that fast speeds are a wonderful optimization.
When I was in graduate school at Stanford, my actual field of study was artificial intelligence. Many of my colleagues were in distributed systems areas. I had familiarity with the kinds of networking issues that were relevant for video gaming over the Internet. The company I started commercialized technology to make gaming over the Internet possible.
As it turned out, while that was an interesting problem and a valuable product for some people, it never had the chance of being a very big company. I raised one round of capital, and when I went to raise the second round of capital I received the same questions from investors. They all wanted to know how big the company could be. After I had that question seven or eight times I understood what they were saying. Even if everything in my business plan turned out to be correct, which it never is, the addressable market was not large enough. The company was not going to be able to grow to be large enough to get professional investors excited.
SM: Did you raise your first round of financing from angels?
WH: I raised it from Mohr Davidow Ventures.
SM: Did Mohr Davidow ask that question when they financed the first round of venture capital?
WH: Their first financing round was a seed round. They expected me to come up with the answer to that question before the next round. They wanted the germination of an idea. They made a bet that we would come up with something interesting, and they were prepared to lose money if we did not.
SM: Today if you go out to raise money as a seed entrepreneur, they will try to figure that answer out before they give you money. VCs have become more conscious of total addressable market (TAM).
WH: I agree with that. The bar has been raised. It is a very different situation from what it was thirteen years ago. The capital requirements for starting an Internet-based business today are significantly lower than they were at that time. The ability to get something off the ground and prove it is a viable idea can be done for less than $5,000. Seed round investors of today are like seed round investors of decades past.
SM: Today, you can build a company to its full potential for very little money. You could do a three times or a five times return on your investment with a business idea that does not need a $500 million TAM.
WH: Absolutely. You still need a plan for liquidity in the future, but starting is very flexible now.