SM: Who was your intended customer base for the 3-D characters when you set the $300 sales goal?
WH: It was our parents. We figured they could not turn us down. It was not a great form of validation, but it was a good form of invalidation. We found out just how hard it was at that time to build a full product and customer experience from beginning to end. We underestimated the degree of difficulty it was to collect credit card information and provide software download that had user support.
SM: Did you meet the $300 goal?
WH: We made the $300 goal the first month, and then $330 the second month. We were able to sell the software for $25, but it was harder than we thought it would be. All of us got more pushback than we expected. It was harder to sell the product to our friends than we thought it should be. The third month things became even more difficult because we started running out of friends and family to sell to. Our revenue goal was $350.
We were not sure how to make the revenue goal, so we had to be creative. AdWords by Google was just starting in 2003, so we looked into it and we realized that we could get a click-through for $0.05. For $5 a day we could get 100 people to come to our website. Out of those 100 people, we could probably get one or two to buy the product. We put $5 a day as a marketing budget in month three, which put 100 people into the funnel. Most of the 100 people saw the website and expressed no interest at all. Some of them had some interest. A fraction of those who were able to download the software and a fraction of that total was able to get it to run without crashing. Of that final group, only a fraction was interested enough in the product to actually try and pay for it. In the end only one in 100 converted to a paying customer. We made around $400 that third month.
SM: Do you still sell a product for $25 and acquire customers through AdWords?
WH: Peak sales have changed. It is not longer $25, and Google is only one of the customer acquisition channels. Interestingly, the 1% held about the same from the first month to five years later. Fundamentally the vision is the same but the details have changed.
The idea of the initial product was an IM add-on. The five of us thought it was a great idea. It was wrong. Customers did not mind switching to a new IM application, which we thought they would. Furthermore, they would have different interactions with people via avatar-based IM. Consequently, the buddy list people had for IM systems was different from that they would have with Avatars.
We decided to develop a standalone 3-D avatar software application versus an add-on. The pricing is no longer tied to the software; rather, it is an à la carte purchase of avatar clothes. What is interesting is that IMVU does not make the items which are purchased via the à la carte model. Those items are made by third parties throughout the world. Proceeds are split between IMVU and the developer of the item. There are dozens of developers who make hundreds of thousands of dollars a year doing this.
SM: What is your customer acquisition strategy today?
WH: Google is one but our most profitable is banner ad display advertising. Sexy avatars are a great way of advertising the product and have a high click-through rate. It works for IMVU. We also have a number of viral mechanisms for customer acquisition. The application itself is viral.
SM: Has the company grown organically, or have you financed it?
WH: I did end up raising money. The initial financing was me. A year later I raised an angel round. A year after that I raised $8 million via VCs, and the year after that I did a second venture round which raised $10 million. Our largest venture investors are Menlo Ventures and Allegis Capital.
SM: What is your revenue rate now?
WH: We are around a $40 million annual run rate right now.
SM: What do you plan do to going forward?
WH: Continue the curve we are on now. There is a lot of addressable market that our current strategy will let us target. We have a lot of confidence in our market. We understand the added value of customers interacting with avatars. I think you will see IMVU moving more into the social entertainment with avatars. We want to broaden the set of activities people can do with their avatars.
SM: This is a great story. I have really enjoyed listening to your learning experiences.