How Not to Die as a Company

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0:35Step into a local croc store and step into your new look. Try it. Style it. Make it yours. Because the right pair doesn't just show up. It shows off. First day fits, handled. Walk out ready for whatever's next. Visit your nearest croc store today. From Entrepreneur Media, this is Problem Solvers. a show that solves entrepreneurs' toughest problems. I'm Jason Pfeiffer, editor-in-chief of Entrepreneur Magazine, and each week I take a problem that you're probably dealing with and get tactical solutions from people who have been there and solved that. So let's get solving. Can you tell me what you think this story is about?

1:17Like just thematically speaking, like what is the problem that you had to solve?

1:21Siqi Chen:The problem trying to solve is not dying as a company. This is a founder named Siki. I'm Siki Chen. I'm the CEO and founder of Runway, we're a next-generation finance platform for growing companies. And this is the fourth time I've been CEO, third time I've been a founder. Glad to be here. And today, Siki is going to tell us a story. A story about, as he said, trying not to die as a company. This is a story, by the way, from a previous startup of his called Sandbox, where he was CEO, which did the impossible. It nearly ran out of money. It was desperate for cash. It was overlooked by every VC firm and for very good reasons.

2:03And then it bet the whole farm on a crazy idea and succeeded. I'll be honest, when I got on a call with Siki, I knew only the basic outlines of this story, but I was not prepared for how rich and detailed it is. This is not just a story about how not to die as a company. It is really a story about how venture capital works and how to understand investors and how to take calculated risks and how companies evolve and what it takes to succeed. And at its heart, there is also another interesting question, which is this. In business, what is the difference between a stupid idea and an incredible one?

2:45Because Sikhi will be the first to tell you, when he first heard this idea for Sandbox, the company he would eventually become CEO of. I actually thought it was a really stupid idea for a company. Right now, get up to 15 % off Select Storage Solutions. Put heavy-duty HDX totes to good use, protecting what's important to you. The solid, impact-resistant design prevents cracking, and the clear base and sides make items easy to find even when the totes are stacked. Find Select Shelving and Tote Storage up to 15 % off at The Home Depot to organize every room in your home, from your garage to your attic.

3:23Visit homedebo.com. How doers get more done. Tomorrow morning is knocking. Stock your fridge now. How about a creamy mocha frappuccino drink? Or a sweet vanilla? Smooth caramel, maybe. Or a white chocolate mocha. Whichever you choose, delicious coffee awaits. Find Starbucks frappuccino drinks wherever you buy your groceries. So, all right, no more preamble. are you ready to hear this stupid idea that nearly died, but that taught Siki a lot about how to survive as an entrepreneur? It all starts back in 2016, when Siki gets a call from his friend Steve Zhao.

4:01Siqi Chen:The pitch to me was, my friend calls me up and he says, hey, Siki, I'm thinking about starting a new company. He's been an entrepreneur. He ran this casual games company, Hong Kong, for a number of years. And we knew each other since college. And he said, hey, have you heard about escape rooms? And I go, yes, I understand a concept. I've never been to one. He's like, did you know it's like a really big market? It's like an$8 billion a year market. And I was like, get out of here. There's no way. And I did some research like turned out he was right. And he said, okay, you know what the problem with escape rooms is?

4:33I'm like, what? He says, the problem is that you can only play it once. So what if we did escape rooms, but with VR. And I said, that is probably the dumbest pitch I've ever heard. Hearing that frustrates many people who cannot get investors. And they're like, nobody will take my idea seriously. And then people say, that's a dumb idea and I invested in it. Can you unpack that? Why do you invest in a dumb idea? Because people overvalue the idea. Like ideas are like assholes. Everyone has one. Uh-huh. And the reason why I invested in this person is because they proved to be a competent entrepreneur and operator whom I respected.

5:18And so at the earliest of stages, people invest in people, not in the idea. so what you're really saying is i heard a dumb idea but i know a really smart person who is in the process of identifying an opportunity in a market and if they don't quite figure that out they're going to figure something else out and that's why i'm investing yeah and i think in this

5:42Siqi Chen:case and i think in many cases too what a really disruptive idea or is oftentimes indistinguishable from dumb or a toy. And if it didn't seem dumb, it would have been obvious to everyone and it would have already been tried and done. And so one of the traits of a good entrepreneur is an immunity to shame. Because you have to live with what people think is a dumb idea for a really long time and still go and do it, right? Airbnb seemed like a really bad idea for quite a long time and many people said so on the record. and sandbox is certainly one of those examples all right so to recap it is 2016 sickie gets a call from a friend who has a really dumb idea and sickie says yeah dumb idea but really smart person who i trust who i think can figure this out and so i will invest what happens from there is wild we are going to take a short break and when we're back how sickie gets involved in this company, and then how it finds its way through a thicket of massive problems that nearly bleeds it to death.

6:56Coming up after the break. All right, we're back. Before the break, you heard the setup. It's 2016. Siki Chen gets a call from his friend Steve Zhao, and Siki invests in Sandbox. This was good timing. In 2016, Siki actually had a company called Hey Inc. And he sold it to Postmates and then became the VP of product growth at Postmates. Then the Postmates team went on a fundraising tour in Asia, which took them through Hong Kong. And Hong Kong is where Sandbox had built its first ever VR escape room. So this means that Siki can go and check out the Sandbox escape room experience, which he thought would be so stupid.

7:40But you know what? He was very impressed.

7:43Siqi Chen:You can be in this room and effectively have this holodeck type of experience with full body motion capture with your friends. So you're in this physical space. And in VR, you see your friends as these virtual characters. And you can actually high five them, shake their hand, have them jump up and down. None of which I was expecting, but that was the experience. It's the Dark Trek holodeck. Okay, that's cool. Hardware, they operated the store, they built the game. It was super fun. I was sweating. They have like fans. And I came out at an experience and I said, that is the coolest experience I've seen since the iPhone.

8:17Siqi Chen:And that is the moment where I decided I need to quit Postmates, move to Hong Kong and work here at this really dumb company instead. Which is a validation of the thing that you said a moment ago about investing in the dumb idea because it was a dumb idea at the very beginning. But look at that. Steve turned it into something pretty cool. Arguably still is a dumb idea. right enough it's uh many things remain dumb ideas but yeah the difference between a successful founder and one who isn't is people willing to go and see that dumb idea through for a very very long time okay so you go to hong kong and what happens so i go to hong kong there i think there was maybe 15 people in the company.

9:08Siqi Chen:I joined as chief product officer. And one of the things I did immediately is I put together a financial model for the first time, which is what led to this company. And the reason why I did that is because it's an enormously complex business, right? You have to build hardware, you have to operate a retail store, you have to build content and games. You have to build technology infrastructure, and then you have to build a booking system. It's a pretty big operation. And in particular with retail, it's a very capital intensive operation. So you might drop a million dollars on a store, and then you have to hire people.

9:52Siqi Chen:And so cash flow is really important for our ability to scale. So putting on a financial model is critical. And what happened is I put together this financial model and discovered that basically we're going to be out of money in three months. And I just moved here, right? Not good. It's now also my problem to solve. And we decided that we needed to raise money pretty urgently. And we started that process. and this is where our real story begins because now you are going out you originally an investor in what you thought was a dumb idea now need to go out and raise money from other investors who you need to convince this is not a dumb idea and you cannot get anybody to pay attention to it can you no and so there's a number of things that made us difficult so this is 2000 early 2018 and we're in the middle of what's called a vr winter right so there was a vr period when vr is like relatively hot as a category when oculus was first acquired and then uh the first oculus came out and no one really bought it and so there was like a big boom bubble in vr and then it became a category people don't want to invest in.

11:13So VR is kind of dead. And this, we should note, happens all the time. There is an emerging technology. It is very exciting. Investors are taking a bet that this is the next frontier of growth. And so there's a rush. There's a rush of founders getting into the space. And then there's a rush of investment into those founders. And it either goes amazingly or it's a bust. And then everybody starts saying, I am not putting any more money into this stupid space that I have wasted a lot of money in. And this is the space that you have just joined. So you are in the VR world during VR winter. Nobody wants to invest.

11:55Yeah. And usually it's a tiny issue, right? Like the internet was, was that way after the bubble, but it became big.

12:01Siqi Chen:And so, but yes, that is where I found myself, but wait, it gets worse or better. You know, when you think about venture, there's certain categories of businesses that are more or less venture investable. So generally, for example, until fairly recently, Andreessen changed that with Speedrun, but generally games aren't really a venture backable category because games are content, right? And content tend to not be as sustainable and scalable as a category. Right, because most, So many game makers will have a single hit, like a Candy Crush or something, and then be completely unable to replicate it.

12:43Siqi Chen:Yeah. It's a hits-driven business, right? And even when you do have a hit, who knows how long it can be sustainable. So that is one issue. So games are generally not an investable category. Another category that you don't really want to invest in is hardware, because those are very capital-intensive businesses, right? I'm laughing because you're just listing off all the things that this business is. So you've got VR, which nobody wants to invest in. You've got games, which is traditionally an uninvestable category. And then hardware. This is basically the combination of the business that you have joined.

13:16Siqi Chen:But wait, there's more. Ah! So generally, as a VC, you don't want to invest in retail businesses. Poor wall. Another one. Right. That's not generally a VC uninvestable category. Because it's just so hard to scale and to multiply revenue on? Capital intensive, slow growth, low margins. You have staff, you have rent, right? And also, people generally... My network is in Silicon Valley. I moved to Hong Kong. And generally, people in Silicon Valley don't invest internationally. In fact, Andreessen has never invested in a company that was founded as a foreign company. they for a long time they believe that there's something special in the water of silicon valley sandbox er was a very first company andreason's ever invested in that was not founded in the united states interesting although you're skipping ahead there and to the punchline of it so we're going to learn how to get there and just for the one person who may not know what you mean when you say andreason you're talking about andreason horowitz which is also known as a16z in case you ever say it like that which is founded by mark andreason and ben horowitz and a leading Silicon Valley tech investment firm.

14:29That's right.

14:30Siqi Chen:So that's what we know about raising money. And there I was trying to raise for a VR company, making hardware, making games, offering a retail business, founded out of Hong Kong. The chances, I felt the chances of us raising were like pretty close to zero. It rounds down to zero. But I also knew that when you're raising and when you're selling, you just need one yes. like one person to say yes that's all you need and so with sales if someone up a numbered game you talk to as many people as you can and there's a conversion funnel uh and so i having had experience raising money twice before i decided that okay we're going to go and raise and i put together this deck and the first thing i did after the deck is i did some research and i basically put this Coda page, this like Notion-like project management software that I've been using and put together a list of every VC who has ever invested in VR or retail or games for consumer anything.

15:41Basically every VC, right?

15:43Siqi Chen:Yeah, right. And I organized it by basically first geography because it's a Hong Kong-based company. And in order to really get the company, you have to be able to try the experience because it's very hard to describe if you haven't been to sandbox vr it's just it's such an impressive experience but on paper it just sounds really stupid um we need the reason by the way and the reason you're doing that is because you need to you need to know what investors are at least going to be speaking your language uh who will have appreciated opportunities in these different spaces already which is something that a lot of very early stage founders who are raising for the first time don't consider, right?

16:26They just start hitting up investors almost at random, or at least it becomes kind of who can they get in contact with. But what they're not realizing is that they need to be able to appreciate and understand the opportunity in front of them because the more they understand it, the less risky they will perceive it to be.

16:44Siqi Chen:That's right. That's right. So we need people to understand it. But in this particular situation, we needed people who could go to Hong Kong. right right or rather who are willing to go to hong anybody could go to hong but are they going to actually fly out there to see your stupid retail business so that's a big ask right so you want to talk to the hong kong local investors first and maybe people in asia so i had this list and then i also had an evaluation of how likely they were to invest um and in different tiers and I think the highest percentage I had was like maybe like 15 % because this investor really liked VR and games and they turned out to not invest yeah and for some other investors like Andreessen I had them at basically 0 % or I think with like 1 % or something like that like there's no way they're like a really great investor a tier one investor yeah right no way they're gonna do it So, we had a list, started pounding the pavement, doing outreach, pitched as many investors as Asia, and got a lot of questions about the financials, the forecast.

17:51Siqi Chen:And I'm like, we have one store. There's no real financials here, but the one store is looking really good. It's completely sold out. Margins are really good. But people wanted to understand the numbers of the business looking at the best. And generally, when that is the main focus, people didn't invest. So we then, or basically - Is that, by the way, a general rule? Do you find that if you're reaching out to investors and the thing that they focus on exclusively is the numbers that they're not going to invest? Is that the case? Yeah, so that's, yeah, it's good to double click on that because that depends on your stage on the investor, right?

18:32Siqi Chen:The further you along as a business, the more the numbers become important. But at the earliest stages, it's really not about the numbers. it's about the team and what you want to do and the market and opportunity you're seeing and it's a lot more about story and the what i found is that sort of like the less well-known less well-respected investors in terms of tiering they will come and they care about the numbers but i think that's sort of a category mismatch in that like if you want to invest in numbers you should be investing in public companies or later stage companies right those numbers are there at the earliest stages, there are no numbers and the numbers aren't even that particularly important.

19:13Siqi Chen:Yeah. And so what I have found is that at the earliest stages, the better the investor is, the less they care about the numbers, which is quite rational. But when I tiered it, I wanted to talk to the best investors last, right? Yeah. And so what I found is that the higher level of the investor, the higher quality of the investor I talked to, the less they asked about the numbers and the more they cared about what we're building and the product experience. That's very interesting, but also would super track with what so many investors, yourself included, say, which is, especially at the early stages, I'm investing in the founder, not in the company.

19:54And if you're investing in the founder, well, then the founder doesn't have numbers attached to them. Founder has trust and vision and so on. And if you're obsessed with the company, then you're only interested in how much money that company is making.

20:08Siqi Chen:So that's what I've seen with investors. And so we ran out of money, basically. And what Steve, the founder, did is he had some savings for his business. And he spent, I think it was like almost a million dollars, half a million, a million, building and launching our first retail store in the Bay Area. It's at the Hillsdale Mall in San Mateo. And this is because, I would imagine, if we step back, you have listed off a whole bunch of problems. Some of those problems are, we are in multiple categories that are hard to raise money for. This is a VR company, it's a game company, it's a retail company, and so on.

20:49And then you have to list off all these other reasons why it's been very hard to get people to pay attention, including the location. You've got to get people to fly out to Hong Kong and so on. And so you must be looking at these and thinking, well, which one of these are changeable? And you can't change that it's a VR company or that it's a game company or that it's a retail company. It just is. If you remove some of those factors, you don't have the product that you have. But you can change the location. It's expensive, but it's doable. And so that is presumably the reason why you chose, well, if we're going to make any kind to move here the move is to just eliminate the barrier that we're able to eliminate which is

21:29Siqi Chen:the pacific ocean that's right and all credit goes to steve the founder on the on this one right and i think that's what makes a difference as a founder like with any sustainable company there are multiple near-death events always there's all multiple moments where you have to bet the entire farm and hope that you know the the it comes up red yeah and in this case it wasn't just betting the company he was betting his entire life savings right and he did that and then that made it a lot easier so i had a network in silicon valley do you remember the conversation that you had with him about that like did he come to you and ask do you think this is a good idea did he just decide this is how he was gonna bet his life savings like how you know watching from a close distance on a decision like that how did that decision get made yeah i don't know if being told is my vague recollection this is like eight years ago now he's like yeah i'm gonna take you know we're out of money but i think this i'm gonna make this bet and i was like are you sure this is a big bet and i can't guarantee we're gonna raise i even with my network this is gonna be really really really hard like yeah no this is what i want to do and i said okay then i will do my best and you know when you see a leader going all in it makes you want to walk through walls yeah right and uh that was a pretty clear uh statement that this person was all in right Okay.

23:12So what happens? So then I invited some of my friends to start going to the store. And of course, I went down the list of VCs to talk to.

23:24Siqi Chen:And one of the people who came early is Ryan Hoover from Product Hunt. And you come to our store and you bring some friends and you get this video at the end, right, that we automatically generate. You're in the screen room and everyone's screaming and it's very fun. and of course he shared it on twitter and the people have never seen it before it was a really fun video so people started retweeting it and and that can't be by accident by the way i assume that like the the experience had been crafted to give people a very shareable visual presumably so that they would share it on social yeah that was part of the business and technology that the team built um everyone gets this video of their experience at the end and we call it a DGE.

24:11The word for the future is the demand generation engine. That was why we did it. You know what's funny, Siki, is that kind of thing used to be something that companies would charge for, right? It would be a add-on revenue generator at the end. It's like, hey, you had a great experience and now buy the photo. Kind of like you take a roller coaster and then at the end, they try to sell you a$50 shot of you going down. But now people have realized like that is the small dollars trying to get the$50 is small. It would be better is for them, you to give the photo to the person for free. And then they post it on Instagram, on Twitter.

24:50And, uh, and then you get 10 new clients out of it and that's considerably better. So it's like an interesting shift. Yeah.

24:55Siqi Chen:Uh, and we were open as a store, so we were invite only. Um, so Ryan posted it. I brought more people to the store and then people started asking for invites to try the experience because it looks crazy and fun. And it very quickly, the dynamic became that it became a status symbol to get invited to this so that you can share this video. Right? Like, oh, you're, you know, people want to know that, oh, they're important in some way. And you weren't important if you didn't get invited to this where you got a chance to share the video. So people started asking for invitations just for that reason alone.