Philip Rosedale: Linden Lab's Capital Investment, Profit and “Small Bets”

Every startup needs to watch the rate at which it burns through capital. Not being that familiar with the financial side of Linden Lab, I thought this description of financing was quite interesting:

PHILIP ROSEDALE: …for all the excitement around Second Life, this has been a company that’s been well financed. Everything’s been done in a simple straightforward way. Interests have been well aligned all the way along. In other words, all the investors have had a very similar view of what we were doing, what the longevity of the project was, what kind of metrics and outcomes we were looking for. You know, it’s been a pretty comfortable process. As a technology entrepreneur, actually I hadn’t been on any other technology company boards in a startup sense. But I think the process we’ve gone through over the last... Well, we raised our first round of venture investment in March of 2001, and I think from then to now it has really been a pretty friendly environment. We’ve had our ups and down, but...

ROBERT BLOOMFIELD: You obviously have had access to capital given what you’ve been able to do—

PHILIP ROSEDALE: Well, the other great thing was that this was always a project where we took careful little steps and tried to see what we could achieve at each point, in my opinion, rather than overinvesting and then being wrong in a costly way. So the capital cost of bringing this company to profitability, in terms of investment, was in the neighborhood of like 20 million dollars. What’s nice about that is, it’s just fortunate to be involved in a project where the cost to reach profitability, more or less, was 20 million bucks. That’s appealing because you don’t have the highest levels of tension in that environment. That’s not a huge amount of money, in the technology world, to invest in a company. I’m really proud that we got from inception to basically to operational profitability without spending more money than that. I think it’s a delight now. And basically the same group of investors. I mean we had some great angels in the beginning, and we added a couple of venture capital firms, and basically that’s it. Benchmark and Globespan.

ROBERT BLOOMFIELD: Mmhmm. You talked about some of the wish list of things you’re working on and things that the company wants to do. Do you see a need for a lot of new capital to accomplish those?

PHILIP ROSEDALE: No. I don’t anticipate [that], really. We have been fortunate enough to be able to put money in the bank. Again, I think that we’re still in the early stages of this category, this industry. I don’t see a place where we would need to make massive investments way ahead of our operating capabilities or ahead of our cash reserves. So we’re not out looking for additional opportunities to raise money.

ROBERT BLOOMFIELD: I’ve heard this before, that the company is profitable on an operating basis, but I assume that the investors, that doesn’t mean they’ve gotten their return and them some yet. I assume they’re still

PHILIP ROSEDALE: Oh, yeah, more recently profitable.

ROBERT BLOOMFIELD: Yeah. So it’s more like a year by year thing, and you haven’t yet eaten away at the tens of millions of dollars you’ve brought in. Okay.

What we need to do as a company and what I think we’re doing and will continue to do is make small bets: introduce new products, new pricing, new features, small changes that serve one of those three constituents and then just see how that influences incremental use, see if people are really getting utility out of it. You know, if you go back to a feature like voice, same kind of thing. I mean there was a bunch of different uses going on. There was an interest in voice. There was inevitability to voice. I mean you’re going to have voice in some sense as an option in virtual worlds.

ROBERT BLOOMFIELD: Yeah. A lot of people were cobbling it together by [including other technologies]

PHILIP ROSEDALE: Yeah, that’s right. That’s right. People were doing some really cool things with like TeamSpeak. And so what did we do? Well, we had a small team of people build voice, and it turned out to be probably a good investment. I mean it’s certainly a great investment in terms of cumulative use, there’s a tremendous amount of use of voice now. I think it was a reasonable thing to do at the time that we did it, but it was experiment. If it had been a total failure and no one had used it, it wouldn’t have put us out of business. The number of people involved in it wouldn’t have put us out of business.

This perspective is pretty interesting in light of a pre-interview I had with Zero Linden before he appeared on Metanomics to discuss the OpenGrid Beta. We were talking about the unreliability of group chat in Second Life (and the limit of 25 groups), and he went on a fascinating riff about how Second Life seems to the user like a single product, but it actually has a large number of totally unrelated subsystems—groups being one of them. So that certainly makes the “small bets” approach a natural one. (It also makes a decentralized management still natural, which we discuss .

Of course, Philip also opens himself up to a pretty obvious follow-up:

ROBERT BLOOMFIELD: So you talk about these small bets. What small bets have lost?

PHILIP ROSEDALE: Oh, my gosh! So many.

ROBERT BLOOMFIELD: Mostly in the last whatever, 18 months or something like that.

PHILIP ROSEDALE: I think back on some of my own goofiest feature ideas. Well, I think, for example, this problem of improving the orientation experience; we’ve had a lot of blind alleys on that. There have been a lot of experiments where we’ve tried to improve the new user experience, and we’ve just backed out of it. We had a more sophisticated orientation island that we’ve taken mostly or completely out of circulation now. We put a bunch of time into developing the content experience in the HUD and the different elements of that sort of new user island experience. In retrospect, with the statistics at hand, it doesn’t seem to have helped people very much get started in Second Life. So we just backed out of that because it simplifies the experience a bit to not have that system there.

So I think of trying to improve the conversion behavior, the usability, the UI. We went back to allowing people to use the old UI as the default, with the Dazzle UI (as an option?), although in that case we didn’t lose work because all the foundational work and the option of using that new scheme is there, so we didn’t actually back up and lose anything. That’s a case where we just try different experiments, and some things resolve and are harder hitting than others. What else? There have been lots of smaller features. I remember there was a feature called ‘Talk To’ that was kind of a substitute for Instant Messaging. It was actually my design. I loved it. It just didn’t work. We actually took it out; it was so unused that we ultimately just shut it off so there would be less ‘stuff’ in the UI.

Christian Renaud, who has been immersed in the entrepreneurial side of the metaverse, provides his expert commentary on his Weblog. And be sure to check out Renaud's new venture at Technology Intelligence Group.