Venture betting: lessons for egaming entrepreneurs

Three years ago I decided to launch Amuso.com with a mandate to innovate new formats in eGaming. Three months ago I decided to wind it up. This is one entrepreneur’s story from start to finish and back again.

The story of Amuso.com actually starts a little further back on the campus of Harvard University, former stomping grounds of Bill Gates and Mark Zuckerburg. I arrived there for my first year of business school and asked a simple question typical of B schoolers at a crossroads in their careers: “I want to start a business, but where do I start?”

Professors at Harvard have an answer for everything. In this case, the advice was to join a big company in an industry that I loved. “Three things will happen there: First, you will spot an opportunity. Second, you will find a kindred spirit who gets it. And third, you will gain credibility.”

Since I left university seven years earlier, I knew that my heart lay in the entertainment industry. The idea of “selling dreams” appealed to me as an escape from every day life but at the same time a pursuit that is uniquely human, tapping into the creativity that sets us apart in the animal kingdom.

So true to my calling, I travelled to the entertainment industry capital of the world, Hollywood California, and met with executives from every major studio, playing the Harvard card to open doors. But the doorway was about as far as I got as I got when I discovered that a degree from Harvard was not worth more than the paper it was written on to Hollywood executives. In showbiz, probably more than any other industry, it is not what you know but who you know and newcomers were directed straight to the mailroom.

The new wave of entrepreneurs

I soon discovered, however, that digital media offered completely different dynamics. In the world of online entertainment the rules had not been defined, or rather, new ones were being written every day by a fresh generation of producers — Chad Hurley of YouTube, Sean Parker of Napster as well as innovators like Ruth Parasol and Russ DeLeon, founders of PartyGaming. The internet makes entrepreneurship possible on a scale bigger than any time in history because the barriers to entry are so low and the speed to test new concepts is just so fast.

So I set my targets on Yahoo, the biggest company I could find in online entertainment, a business that touched every vertical of the industry, and London, a place where capital outstripped opportunity by a large margin. I joined the corporate development group, run by Simon Levene, a guy whose brain power seemed to run on nuclear fission. Typical of groups like this, I was handed a sweeping assignment to define the opportunity for Yahoo in online games. I took the liberty to invite every partner and potential partner to tell me what they do and how they do it better than the competition, summing up my findings in a well received report that promptly found its place on a dusty shelf.

Along the way however, I had found my opportunity sitting at the crossroads of skill games and popular TV brands. More specifically, I reasoned that 10 million players across Europe lost about £50 a year playing skill games. Meanwhile, 500 million social networkers were creating and sharing social media content. Developing new game formats that combined the business model of skill games with mainstream content seemed to hold the promise for a “multibillion pound opportunity”.

This checked one of four boxes in a classic list for new ventures drafted by professors at Harvard. Venture capital [VC] worthy startups were not the fruit of chance but rather came about from the alignment of four factors: People, Opportunity, Context and Deal (POCD). The opportunity must be in the billions because VC’s reason that of 10 or so active investments, half will go bust, two or three will breakeven and one or two lead to major exits. These probabilities are time tested industry maxims, and when you apply them to a portfolio, each startup must show vast potential to make the risk-adjusted value worthwhile.

The other elements that must come together are People (How good?), Context (Why now?) and Deal (How much for what?). I had found my goldmine in egaming and by this time partnered with a former Yahoo product manager to bring our project to life. This would be my first commercial startup. My personal litmus test to make the commitment was whether professional investors would back us up. A few months after taking the plunge, we had two top European VC’s on board with a deal that valued our Powerpoint vision at more than £2 million.

I found that “People” was rightly placed at the top of the list in bringing about this remarkable outcome. There are specific experiences that establish credibility ““ although in our case nobody questioned whether or not we had been at Yahoo for three months or three years ““ but also psychological factors at play that motivate entrepreneurs to cast aside doubts and step into the void. For example, I have stumbled upon research that shows that a disproportionately high percentage of entrepreneurs have lost a parent early in life. This was true in my case, and perhaps explains my willingness to “pursue opportunity without regard to resources currently constrained,” as the gurus at Harvard define entrepreneurship.

Launching Amuso

In any case, cash was no longer an issue and so we charged ahead and launched Amuso, bringing popular TV game shows to the web in skill game formats for anyone to play for cash. The next three years saw us sign up formats ranging from the official Miss World Beauty Pageant to The Weakest Link. This was helped by the recessionary context that saw traditional revenue streams dry up on both the production and distribution sides and a willingness to test new business models like ours. More than anything, the ride felt like sailing where we set in one direction with talent contests and then tacked to another direction ““ quizzes ““ to sustain our growth as the winds seemed to change. Along the way, we registered 200,000 users and cleared £100,000 in monthly revenue.

As in sailing however, startups are vulnerable to sudden freak waves. Ours came in the form of a third party software failure that took down our payment systems in the middle of a major marketing campaign, directly ahead of our next funding round. The wave that washed over us wreaked havoc on our key performance indicators, inflating our Cost per Acquisition and amputating lifetime value. Although we realized later that the same trouble capsized at least two other operators, the eye of this storm made clear that our POCD alignment was fundamentally weak ““ like frayed rope ““ to leave us so vulnerable.

We had assembled a team of strong generalists through trial and error that never seem to gell as a cohesive team, perhaps because we were spread across two countries and languages from the start. The opportunity was always more conceptual than practical, and largely product driven rather than stemming from customer demand. The context remained in our favour for partnerships, but activating these proved unpredictable while our monthly cash burn was very real. Finally, after three years of sailing and four funding rounds, our ownership stakes had been diluted to the point where any captain has to ask if it is still worth the all-consuming sacrifice.

Putting theory aside, Sir Ronald Cohen once said there is only one reason businesses fail ““ “they run out of cash”. Over the course of our run, I realised that I applied the wrong litmus test from the start. The right question is whether a business can turn a profit, not whether it can raise funding and it is possible to test almost any hypothesis on a low cast basis. This collision of theory with reality hits at the core of the startup ecosystem in egaming. Seasoned operators are not looking for a magic alignment that aspiring newcomers can present for funding, or rather the POCD elements are a necessary, but not sufficient condition. Potential for egaming startups is measured in immediate return on investment. This highbar probably explains the lack of startups in the industry ““ why a Betfair only comes along once in 10 years, because entrepreneurs are often unable or unwilling to bootstrap it to positive ROI territory.

At the same time, it is an objective lense that underlies the fundamental strength and resilience of egaming startups that make it.

Moving forward

Bruce Dunlevie of Benchmark Capital says: “Good judgment comes from experience. But experience comes from bad judgment.” In the case of Amuso, we took the lessons learned and decided to wind up the company and sell the assets to the BBC and other parties on September 22. The next day I incorporated Jackpot Studio with a sharp focus on branded game applications for quality lead generation in mature and emerging gaming markets. I have been fortunate to assemble a strong team of stars whose talent and dedication became apparent to me only after working together. The opportunity is large in theory, as well as practice, and the context is a clear and pressing need. Finally, we have enough projects in the pipeline to fund current operations on a lean but profitable basis, responding to resource constraints with creativity in pursuit of our next billion pound opportunity.

Barak is the managing director of Jackpot Studio, producing TV branded game applications for lead generation in mature and emerging gaming markets. Prior to launching Jackpot, Barak co-founded Amuso.com and led business development at Yahoo! and Sony Entertainment. Barak served with distinction in the paratroops and has an MBA from Harvard Business School. Barak@jackpotstudio.com