After working for a fat startup that died I was introduced to lean startups by Eric Ries, I even attended Eric’s fist workshop. Friday I was lucky enough to attend Eric’s first Lean Startup Conference . Where as most hate conferences this one was power packed - Kent Beck, Steve Blank, and Randy Kosimar riled everyone up enough to run out and begin their own startups if they hadn’t already. But a startup of my own was never dream of mine so I ran out trying to figure out how to apply the methodology at Playdom. And when you think about it, each social game is like a mini startup.

It’s a dynamic hits driven business

Social game companies have already shown that there is a business model behind virtual goods and games but as we all know, every new game is a new opportunity for success as well as failure. It’s just like Hollywood and as William Goldman says:

Nobody knows anything.

That doesn’t mean Hollywood executives are stupid, but refers to the fact that prior to a movies release, Hollywood has no idea how well a film will do. It’s the same for social games but where as movies are static, social games are highly dynamic. That isn’t to say you can interact with them but that they’re continually evolving. Testing features to see if it will improve monetization, engagement, lifetime value, etc. Startups do the same thing.

Search for a business model

One of the tenets of lean startups is understanding that a startup is in the search business. Not the search business like Google, but as Steve Blank says – for a business model.

A startup is the organization used to search for a scalable business model. It’s all about the search, not execution or maximizing profits.

Blank goes on to explain that because it’s a search, startups have different metrics than a traditional business. Where they think of balance sheets and cash flow, a lean startup worries about viral coefficient, lifetime value, etc. That certainly sounds a lot like the social game business.

Built to learn

As Eric points out, lean startups also differ from fat startups in that they’re built to learn not execute.

Many founders believe that early stage startups are endeavors of execution. The customer is known, the product is known, and all we have to do is act.

Eric takes a different approach. He believes that many early stage startups are labors of learning. The customer is unknown, the product is unknown, and startups must be built to learn.

In many ways the same is true for social games. The industry is still young and wide open. The majority of players are female, the game industry has never seen that before. The game industry has a good idea what guys look for, but women?

Currently the industry use game mechanics to engage players but is there a potential to employ other mechanics? Hint, hint…

Social games as lean startups

As Steve Blank explains, lean startups execute customer development and lean startup methodology. I get to do the same with social games at Playdom. Exciting times.

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More virtual worlds and virtual world projects are shutting down. Some may remember Google Lively died a year ago. More recently it’s been vSide, Metaplace, and now Project Wonderland. It really does seem to be the end of Virtual Worlds 1.0. I and a few others have even begun to ponder what will be part of Virtual Worlds 2.0 – rise from the ashes of 1.0? But it’s also a good time to review lessons learned.

Community is a chicken and egg thing

As the old saying goes, there is no shortcut to success. The strategy for most Virtual Worlds 1.0 revolved around a thriving community to interact with and supply content (User Generated Content – UGC). All you needed was an instant community, and apparently you get those by developing some cool technology like 3D scenes, avatars, etc. However at the same time user studies were showing that all that technology still wasn’t enough for typical users. It was essential that they capture a community – it was a chicken and egg problem.

How do you solve the chicken and egg problem, well virtual worlds tried to tackle this in various ways:

Google Lively
Google Lively launched hoping the Google name would bring so many users that enough would stick. But not that many stuck as this Google Trends graph shows.

It also didn’t help that the odd collection of avatars left users utterly confused as to the context of the world.

IMVU
One of the first movers in the 3D chat space, IMVU relied heavily on AdWords to drive early traffic. Being a first mover, IMVU also wasn’t paying much for those AdWords. Eventually they were able to tweak their product enough to find market fit and amass  a community. A community heavily based on flirting but a community none the less.

Metaplace
Founded by game design legend Raph Koster, Metaplace’s approach was to appeal to game designers. They built some powerful scripting tools, however that presented its own problem as Simon Newstead’s , CEO & Co-Founder of Frenzoo, pointed out:

3/ Built for the builders, but not for the mainstream users

This one is a bit clearer, there was a great amount of feature support and tools added for world builders, but less tools or attractions for your average every day user.  It seemed like a classic chicken and egg situation – not enough users for attracting game devs, and not enough games/content to attract users?  The existing games on the site were ok but not up to the same level as many great flash games now, and the social elements and avatar stickiness perhaps wasn’t up to many average users expect.  Perhaps MP should have jumpstarted some high quality gaming with internal development and showcase, and in parallel giving users something to get hooked on…

Of course IMVU’s strategy was the most successful, but it’s a little difficult to duplicate as the first mover advantage is gone.

Build community the old-fashioned way – around a product

Just as Google came out of Web 1.0, some virtual worlds will rise from the ashes and drive into Virtual Worlds 2.o. I think Frenzoo is one such world.

It started out as a fashion site, heavily sided toward user generated content. They made it easy to design your own 3D clothing and model it on an avatar. But that was about it when it started in 2008 – no virtual world or personal scenes. However I could create my own fashionable outfit. From day one it filled a need – how many girls dream of becoming fashion designers. It didn’t need the instant community to be useful, yet the more community it had the better an experience for the user.

Having already built a community Frenzoo then transferred them into a virtual world, complete with 3D scenes. It wasn’t a cake walk, but they applied age-old techniques of product and community management to make it a success.

That woke us all up! So the first couple days after the launch we we dropped everything to concentrate on fine-tuning the camera, angle and lighting settings and get our avatars looking better again.

They know their audience, they’ve cultivated their community long before transferring them into a virtual world. It’s the same strategy Japanese CyberAgent took launching the incredibly successful Ameba Pigg.

It can’t be just about the technology

Compare Frenzoo to Google Lively, IMVU, and Metaplace. The product they launched day one was mostly cool technology and they expected the community to magically form around it. When I first jumped into Google Lively I could customize my avatar and set up my own scene. I guess the “product” was self expression through 3D maybe? Everything else involved interacting with other people – the community. It’s the chicken and egg problem again. Trying to form an instant community around technology turns out to be pretty difficult and leaves you with some interesting issues as Simon Newstead points out in analyzing Metaplace.

4/ Who was the audience?

This is an interesting one.  When I spent some time on the site I was struck how there seemed to be two distinct groups of users.  Those older, technically proficient game dev types who loved being able to tinker and create world.  And then a very young tween/young teen female set with “HoT ChiCs” clubs and looking for 14yo boyfriends.  It almost seemed to confirm the 2d avatars suited the young female crowd and the game APIs suited the game devs.

Related posts:

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2. The end of Virtual Worlds 1.0, now onto 2.0
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Over the weekend I had the opportunity to attend the 2009 Screenwritng Expo. This was the smallest I’ve ever seen it. Maybe only 1,500 to 2,000 people and most of them were just there to pitch. It was still a good conference, but this was also the 5th time I’ve attended the conference and you begin to notice the same people and if not that, the same categories of people – actors, film students, mom and pops, recently retired, not so recently retired. It reminded me of other conferences, namely the startup and tech ones in Silicon Valley. Now I know must in tech would never consider themselves to be similar to those dreamers down South but I started to see some similarities:

• Most work very hard for long hours
• They believe they just need that one connection to make it big
• They’re all dreaming despite knowing that 99% of them will fail

We in Silicon Valley like to think what we do is serious work but as Eric Ries points out in his recent post, many of us in Silicon Valley are chasing a myth. A similar myth that anyone can write the next Million-Dollar Spec Script.

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Reading the post, Why Investors Make So Many Boneheaded Mistakes, I couldn’t help but think the same reasons investors make mistakes is the same for startups (founders, employees, and investors). We all think we’re being diligent, that we’ve checked the facts and this is the real deal, but as Michael Mauboussin points out in his book Think Twice: Harnessing the Power of Counterintuition our logic is often flawed. If you’ve ever worked in tech or at a startup, watch the video and review the 8 common mistakes investors make and tell me you’re not guilty? And if that isn’t enough, see what Eric Ries has to say about Ice Cream Gloves.

8 Common Mistakes Investors Make

• View Each Problem as Unique
• Tunnel Vision
• Uncritical Reliance on Experts
• Influenced by Peer Pressure
• Illusion of Understanding
• Assuming There’s a Definitive Answer
• Assuming All Risks Factored In
• Confusing Luck vs. Skill

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I’ve worked in successful startups and not so successful startups; established companies that make hundreds of millions in profit and some that make hundreds of thousands. What draws me most to a particular company or position is the opportunity to innovate. At one company that was my specific job – create new products. Over those years I’ve learned a thing or two about innovation, like you don’t join a startup to innovate. That’s for two reasons. First, most of the innovation was already done by the founders. They already had the idea, the spark and are now just trying to execute. To build their idea into a product. The second reason is that startups traditionally don’t care about profit. Profit is something to worry about after the IPO or sale to Google.

Think profit isn’t important to startups, just read the recent post on 37Signals blog – The bar for success in our industry is too low. Or watch this video from Watch David Heinemeier Hansson.

Startups keep a close eye on their burn rate, but have seemed to have lost track of classic business principles. The drive for profit not only keeps the lights on but adds structure to the innovation process. In startups I found the senior team was open to innovation as long as it was along the lines they were already thinking. They didn’t care to test much because they already knew. It isn’t that different in an established company but you have something in your back pocket – profit. Demonstrate that your idea can bring in a massive profit and they’ll listen a little more. They also tend to listen with a more open mind, they don’t feel like their job is to execute but to manage. They can also be incredibly risk averse, but startups can too despite the image.

If you’re still not convinced of the importance of profit I suggest checking out the Lean Startup from Eric Ries. He’s a big supporter of charging for a product from day one. And just remember, profit not only keeps your business alive but instills discipline, especially in the innovation process.

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I’m a big fan of a concept Eric Ries calls shadow beliefs. Of course they aren’t something to strive for. Shadow beliefs are shared assumptions that are widely believed in the start-up but never spoken. For example:

1. We know what customers want.
2. We can accurately predict the future.
3. Advancing the plan is progress.

They can also be unique to the start-up and company, but most of the time these shadow beliefs lead to executives and employees living in a reality distortion field. And reality distortion field is another name for a confirmation bias.

confirmation bias is a tendency to search for or interpret new information in a way that confirms one’s preconceptions and to irrationally avoid information and interpretations which contradict prior beliefs.

Yahoo! is a great example. It came to fame as a portal but lost that distinction years ago. However the company never could realize that inside the reality distortion field. Even when Jerry Yang took charge he called Yahoo! a start page.

We have taken significant but disciplined steps to refocus our business on our objectives to become the starting point for the most consumers and the must buy for the most advertisers and enhance Yahoo!’s long-term performance.

Problem was that most people start with search, and Google owned search.

Most companies are guilty of creating reality distortion fields. Some are small and some are huge. In very rare occasions they can be successful, as with Steve Jobs and the original Mac. Other times they can take down a company. Much of the reason GM filed for bankruptcy is do to their reality distortion field.

After Roger Smith, Confirmation Bias kept GM from viewing the threat from Toyota as significant, contributed to its decision to pull its electric car off the market, and more recently led it to ignore the impact of higher gas prices and a collapse in credit markets on consumers’ willingness to buy profitable gas guzzlers like the Hummer or tricked-out Escalades and SUVs.

At GM it was beneficial to your career to toe the line and ignore what customers were saying.

So the smart thing for those seeking promotion within GM was to praise the CEO’s wisdom and carry out his orders.

But many times employees simply get pulled in, they drink the Kool-Aid. I have a friend right now working for free while his start-up looks for funding. You have to be dedicated at start-ups but that can also slip into a reality distortion field.

Breaking through the reality distortion field

I’ve run into my share of reality distortion fields in my career. When I was younger and more naive I thought I could simply prove my way through them. If I presented a strong enough business need they would see the light. Of course they never did, that’s the whole point of reality distortion fields.

Having taken part in Lean Startup workshop I think Eric has found a great process for breaking through the reality distortion field. Acknowledging the shadow beliefs is a big step in itself but he goes beyond just that.

The first place to find reality is in your users. But don’t just listen to them, validate your what you’ve learned through Customer Development. And remember the best form of communication is through providing customers with new products/features. They vote with their time and money – money being the more important validation. Eric also dives into a few techniques to shrink the time between major iterations, which is another way of saying speed up the conversation and learn more. Learn more than your competition and you’ll win.

Eric also offers some internal techniques to keep free of the reality distortion field. One he took from the Toyota Production System, Five Whys. He of course tweaks the techniques for software companies and start-ups.

In the end I think it might be one of the most important of Eric’s teachings – breaking the reality distortion field.

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