SM: Who were your investors at There.com?
WH: The first couple of rounds were angel rounds. The first official investors were Black Diamond Capital Partners, which is a small private institutional fund. Sutter Hill Venture Partners was the first major VC.
SM: The period you are talking about is before social media took off. Once social media took off, the virtual world started getting more mainstream visibility. What was it about the investors you had that enabled them to see your vision?
WH: The investors who would be interested in investing in this segment had to be willing to take a long term, big-payoff investment. It is not the kind of category of investment that makes it through the usual scrutiny that institutional investors go through. You have to find a believer, and I found them. I had a very good team and very good technology, plus a pretty story. Take all of that and introduce it to a believer, and you have a great investment scenario.
SM: You also had experience as an entrepreneur, and VCs could see that you knew what you were doing. You were taking a bigger swing, but you at least had some experience.
WH: I was a reasonably fundable entrepreneur.
SM: What happened to There.com?
WH: There.com ultimately failed. It was a victim of its own vision. The expansive vision of creating a virtual world in which people could do everything in that they do in the real world is wonderful from the PR, recruiting, and morale standpoints. However, it has vulnerability from a startup perspective. If you have so much confidence in your long-term success, then you do not feel it is so incumbent upon you to have near-term customer validation.
SM: It sounds as though you burned through a lot of cash without validating a lot of the assumptions as you went along.
WH: Exactly. You are incredibly articulate! That is absolutely right. I found that five years later when I realized we were in trouble. I had believed when starting a virtual world company that people would want to invest in having a virtual life. I thought that was true, but it was just an assumption. It turned out to be false. Only a very small number of people actually wanted to invest in a complete virtual life. Most of the people who had that predisposition were already playing massive multi-player video games which were more entertaining than virtual worlds. The market was smaller than I thought, and in that smaller market the competition was better in the entertainment factor.
By the time I realized this, it was too late. We had spent $40 million, had 200 employees, and had written six million lines of code. We were committed to a specific direction. We had lost the ability to make course corrections. That was my fault and the biggest mistake I made. I committed the company to a direction at the cost of agility. That was ultimately the demise of that company.
SM: What did Second Life do right?
WH: I view Second Life in the same category as There.com, and I don’t think their successes are all that different. While it is true that Second Life is in business, that does not mean it is profitable. The fundamental problems of the category apply equally to Second Life.
SM: How do you analyze companies like Zynga and Neopets?
WH: Those are very different companies. I do not include Zynga in the virtual world category, but I would include it in the online social entertainment category. The virtual world category is a metaphor in which you transplant your real life in the virtual world.
SM: Essentially, it is not a component of your entertainment. For your assumptions to play out, it has to encompass all of life.
WH: That’s right. You have to jump in the deep end with both feet and invest in learning and building a virtual life. You need a house, a job, a car, and everything else. It is an enormous, complex thing to take your life and translate it to a virtual life. The pure-play virtual worlds have that metaphor. Companies that are in social entertainment categories don’t have that learning curve or time investment requirement.
SM: The TAM is much larger if it is a much smaller piece of your online entertainment.
WH: I would say exactly the same thing. They have smaller products but a much larger market.