Saying no to MTV offering millions of dollars was one of the hardest things these blokes have ever done – but with forecast revenue now in the hundreds of millions, there's really no looking back. Simon Pound meets the makers behind SmallWorlds, one of our untold growth stories.
Some businesses can appear rather complicated, but few can be so complex as to have their own global economy. The online social gaming experience SmallWorlds is exactly as the name implies – a world in miniature – complete with a need for laws, monetary policy and a series of entertainments to keep the populace happy and coming back.
And while managing all that in the real world is challenging enough, what with the economic carnage of the past few years, imagine if the populace were made up largely of teenagers? People who, at the best of times, can appear to come from other worlds.
That’s the challenge Mitch Olson and Darren Green face, and one they’ve taken from idea to a significant international exporter with a roster of tech investor royalty and major government support.
In the past year they have picked up a $1.8 million Ministry of Science and Innovation grant and got Sam Morgan on side as a shareholder and board member. In 2013 they forecast $US100m revenue. And while every business counts its lucky moments, this global outlook has very much been the plan from the beginning.
A world within a world
SmallWorlds is an in-browser game and hang-out spot. It’s like a cross between Second Life and Farmville but requires no downloaded program to run. Users join and select a character to be their avatar. They can customise this character as the game goes on, dressing them and perhaps purchasing special marks of status for the character.
They then roam through the game, meeting other users and talking and interacting with them, and undertaking games, challenges and quests. The game is deceptively simple as you stroll within it – as in many ways it provides simply an environment to be within. Indeed, long before Google+ introduced hang-outs, the SmallWorlds team was providing the ability for users to join together and watch a YouTube video simultaneously – giving the kind of shared experience that social networks strive for.
But unlike on Google+, in SmallWorlds you can choose to upgrade the 'TV' you watch the video on to a flash flat screen unit, impressing your mates, just like in real life. And also like in real life, you pay for the privilege.
SmallWorlds is a business based on the freemium model. It doesn’t charge people to use its service, but instead hopes a small proportion of users will love it enough that they'll want to spend real money to have access to virtual goods within the game. These goods operate much like those in real life – some might confer status, some are luxury items, some make life easier, others help to tell a story about a player that is how they would like the world to see them.
They range from the practical status symbol such as the flat screen TV through to the collectibles and items that modify the appearance of the avatar character.
So the secret to SmallWorlds’ success is in making a world that's as attractive and sticky as possible for its users, who are mainly young folk of 13-18, although they run the gamut right up to 30- and 40-somethings. A world where they’ll feel enough ownership that they’ll start doing up a bit.
Olson and Green work hard to find out what keeps people coming back – which means that they run a company that is not just about managing staff and developing software – it’s about creating an environment that people feel that they can express themselves in.
But more on that later – first, exactly how does one go about starting a world?
Building the future
Olson and Green met through consulting, and very quickly realised they had complementary interests and skills. They were both working in product commercialisation, so they knew the importance of analysing a market and owning exploitable IP. They soon set up a company that consulted to companies large and small. Along the way they could learn about new markets, things happening and meet movers and shakers in pioneering business segments – places so new that product commercialisation consultants were needed.
Very early on they realised that what they wanted to do was make their own product and get out of the service side. This is something that seems to be a vital ingredient in the entrepreneur process – the realisation that if you don’t end up owning something you will always be a worker, and always being at the mercy of other people’s decisions.
“I always think there’s that question, how do you balance now care with future care?” Olson says. “Now care is paying the bills today. Future care is the future you want to build. It’s like understanding the fundamental principle of that is the half of building a business.”
In around 2006 the pair saw a number of trends emerging out of the 2.0 era of the web as an application platform. Social media was the word du jour and big media was becoming interested in social.
“We saw, connected to that, digital self-expression – people putting their identity into social networks and into other places as well. Blogging is an example. Often there’s an element of experimentation in that.”
There’s also the trend of the internet increasingly becoming a platform for entertainment as audiences move away from traditional broadcast media. So they identified an area to make their own – an audacious and now proven to be brilliant plan to fuse all these elements into a world.
The beauty of their model is its scalability. Once they hit big numbers, the costs of providing more of what they do is actually relatively low. You can up the servers and the support. However, it can be a long climb to get to that profit point, and that's where you need some solid investment to get you further.
That kind of investment is hard to find in New Zealand. As a nation we seem content to sink $6 billion into unproductive assets by way of property speculating ‘finance’ companies, but when it comes to a tech product in a growing market with a global outlook – well, your average Kiwi says no. So they had to look offshore.
Looking back on it Olson realises that in a way it was easier than most could have hoped. Unlike many owners of a good idea they had the contacts they needed and a bit of buzz going for them.
Due to the consulting they’d been doing they knew a lot of people around the world working in this area – so word spread that they were looking for backing. Word spread to some very big players.
In the building of any great business there are a few defining moments. Saying no to millions offered by MTV before even launching was one for SmallWorlds.
The pair had barely thrown it all in on their idea when the media giant came calling. MTV wanted more control than SmallWorlds was ready to cede, and it would've meant Olson and Green wouldn't get to see their project through. There was more they wanted to do with their idea than simply make some money back – so they walked.
Looking back today with $US100 million projected revenue, it seems inspired – but there must have been some sleepless moments. Olson looks back on it as one of the key defining moments of their journey.
“We were turning down at that stage effectively a $2 million in the hand licensing deal for an unknown future.”
You can imagine MTV was, erm, surprised.
“In the end they said, ‘do you know who we are? You’ll never work in this town again, how dare you turn us down?’ It was just the massive American bravado macho bullshit, it’s quite funny looking back on it.”
Then Disney came calling and the pair found themselves being courted by yet another massive global media company. For a long time things were progressing well, until the small matter of the global financial crisis threw a spanner in the works.
Just as it all turned to custard, in rode a technology-investing knight in silicon armour, who said he'd been building virtual world products for the past few years.
“He said our product was the culmination of everything he’d strived to create, ” Olson said. “He said, I want to invest in your company and I’m prepared to write you a blank cheque, how much do you want? It was an incredibly affirming email to get as you can imagine.”
The investor was Payman Pouladdej, an investor who’d also been involved in My Mini Life (the technology that underlies Zynga’s Farmville) and in IMVU, which is another big player in the 3D chat space.
It was a wise investment. Before even coming out of beta testing, the site had 150,000 users, and since 2005 it’s had 6.5 million people register. In 2010 it hit profitability, and now it's time to really push to see where this baby can go.
Add to that a $2.5 million funding round led by TradeMe founder Sam Morgan and the $1.8 million MSI grant, and cash won’t be a problem for the next little while.
But running a world, that will always be an interesting challenge.
SmallWorlds really is not just a game. It is probably more helpful to think of it as a series of ways people can spend time somewhere virtual. It is in part a social network, a community site, a gaming platform and a site for self-expression.
The makers have to draw from many different fields to provide the entertainment for their visitors. Gaming, sure, but also, psychology, entertainment, group dynamics, social theory – whatever it takes to create that space that people want to be in.
Olson says its complexity is a challenge.
“As a product manager I often look at Twitter and I think ‘man it’s such a simple product’ whereas there aren't many products that are quite as complex as SmallWorlds – and by complex I mean you’ve got a whole ecosystem.”
The true complexity showed in an instance last year. A membership incentive giveaway of a game currency was being manipulated and the economy suffered inflation. Inflation!
“We do supply control and demand,” he says. “We release items that are only available for a limited period.”
Like the monthly collectible that was introduced in December 2008 – a $US5 item that now sells for $US3,000.
Keep 'em coming
However, the main way they keep that engagement is through game elements. The SmallWorlds approach of making a world with the rules of games is something that is now occurring more frequently in other areas of media and commerce.
From LinkedIn profile completeness bars, to tournament ladders, to nurturing games –where, if you don’t come back, the plants will wither and die – to experience points, to achievements and unlocks, they run the whole gamut of engagement techniques. There are other things in play, too, like carefully setting an environment of openness and respect – something very important when dealing with prickly teenagers growing into themselves by trial and error.
“A lot of other products or games that you play, if you say something negative against the game, you mysteriously disappear from the forum. We never do that sort of thing. We try to build long-term relationships and you can’t build long-term relationships with a community and within a community without respecting one another.”
That tightrope of providing the right boundaries for the young, while letting them be themselves is especially of interest to SmallWorlds – the whole nature of making and growing an online identity is happening at a time that these users are learning about and testing their own identity.
“A lot of where I see the Small World is about around that kind of creative self expression and the exploration of your identity.”
And if all this sounds like quite a bit to come to terms with, it was, and a fascinating process. As with other approaches that play on psychological cues to get reactions – for example, Twitter spam that plays on vanity and insecurity (‘OMG, I laughed at this photo of you’) – learning what gets a reaction was vital.
“Since Facebook introduced its application platform, it’s been the most applied environment for reverse engineering and understanding what human motivation is, and leveraging that opportunity and you start to see now effectively the playbook for gaming in terms of what has previously been a black art.”
Cracking that code leads to keeping kids happy. And that leads to referrals.
“The best marketing for a game is word of mouth and so our focus has always really been on predominantly building the most engaging experience because probably 80-90 percent of our users come through from some organic form, word of mouth.”
A weightless export
The practical considerations of running an international virtual exporter from New Zealand have been very much on their minds, as they have scaled up from running a small developer base to now having a staff of 35, with growth of 40 percent last year and a similar rate projected to continue.
Part of the funding has gone in to finding, attracting and housing this new human resource. SmallWorlds operates out of the Ironbank Building in Auckland’s Karangahape Road, a creative technology hub in the making. They work hard to attract and keep great staff. Walking around the offices it had the feelings of a small software company campus – right down to the beer fridge, large couches and X-box type console set up. Perks are important – talent is crucial and in this global market it's a fluid commodity, something Green is mindful of.
“As in any creative industry, the internal culture of your company reflects in the products and innovations that you produce. While making games is fun and challenging, it is also a lot of hard work and long hours, so we need ways for the team to blow off steam and have fun.”
But while we notice the beer fridge, it takes more than that to get the best from staff.
“Stimulating and maintaining a truly creative culture is a much more difficult task. It requires a combination of openness, freedom of expression and mutual respect amongst the team. We run a Google-style 80/20 program from time to time, where our team can spend one day a week on an idea of their own that can contribute to the company's goals and objectives,” Green says. The company has benefited from the programme’s ideas, and Green believes it boosts morale and the flow of ideas within the business.
Attracting the big-name backers came about the same way as the rest of the company’s success: sticking true to their business model, and a touch of luck through the climate at the time. At the end of 2010, they were looking to the US and by chance got introduced to Morgan’s investment manager.
“She rang up Darren and said ‘I understand you guys have got a product’ and Darren said ‘yeah it’s an online game’ and she said ‘oh we don’t invest in games but tell me more about it anyway’.”
They ended up talking for an hour. Sam Morgan came up three days later and at the end of a two-hour conversation had decided to invest in the business.
He was sold by their global vision, labeling it an exciting model.
“Digital exports – software, digital goods and services, games, virtual worlds – have the potential to contribute to New Zealand's prosperity,” Morgan says.
Morgan sits on the board, along with Jade software CEO Craig Richardson as chairman.
“I think Zynga’s planned billion dollar IPO will establish the category as a new generation of desirable businesses,” Richardson says.
“SmallWorlds’ revenue projection is an ambitious target and would make them a substantial contributor to the New Zealand technology and entertainment sector. Only Orion Health have broken through the $100m revenue barrier for New Zealand software developers, but I think its important to understand SmallWorlds is more than a tech company.”
Mixing all the elements together, they are poised to take on a new big challenge – the move into the non-English speaking world.
“The non-English markets represent about 85 percent of our potential audience,” Green says. “It’s a huge growth opportunity for us over the next 12-24 months.”
Olson believes the rise and rise of gaming adds to their firepower.
“If you go back even three years ago and you asked a hundred people if they played games, that number has to have multiplied by I don’t know how much! The game market has $90 billion turnover, and particularly the social games and the mobile games are growing at sort of between 30 percent year-on-year. It’s a very exciting space to be in.”
Ultimately they are very happy to be running this from New Zealand – something the government grants and the Morgan-led investment round have meant they can continue doing. They didn’t want to have to move offshore, and Olson believes they can do it from here.
“This is a great country to be developing games in,” he says. “Your distribution costs are extremely low. If you look at hit games like Angry Birds for instance, their maker, Rovio, comes from Finland. It’s a very, very similar profile in terms of the level of education, and the distance from what you might consider to be primary markets.
“I feel very excited about the future of the gaming industry in this country and the opportunity for New Zealand.”
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