Eric Ries witnessed the dot-com implosion and has the failed company to prove it. His new startup's success shows he's learned from mistakes
Being a tech prodigy wasn't always easy for Eric Ries. He knew the Java programming language well enough as a high schooler to co-author two books on the subject, but couldn't be forthcoming about his age when it came time to find a publisher to back his work.
Still, getting an early start in tech paid off in other ways for Ries, 28, co-founder of IMVU.com, an avatar-creation and instant-messaging service that's lined up more than $8 million in venture funding. Unlike some other under-30 entrepreneurs who had yet to join the workforce when the dot-com bubble burst, Ries was there in the thick of it, and he has the failed company to prove it.
While pursuing a degree in computer science at Yale, Ries took cues from young techies in Silicon Valley who had no problem getting VC firms to back their software dreams. So he and a roommate started CatalystRecruiting.com, an online database of student résumés, and lined up their own slice of the VC pie. "In retrospect it was not such a good idea for investors to give money to kids who just barely knew what they were doing," Ries says. "They were just throwing money at these companies. But when the bubble burst we had no chance."
That project shattered, Ries set out for Silicon Valley after graduation in search of guidance and a chance to start over. He found both thanks to Will Harvey, then an executive at There.com, a 3D social networking site that preceded such virtual-life projects as IMVU and Second Life. Neither is sure how Ries' résumé ended up on Harvey's desk, but the two saw it as fate and dove headlong into the second wave of dot-coms, this one characterized by a consumer-oriented Web, where users create content and shape a site's direction.
Soon another lesson would begin. Ries describes There.com as a "traditional VC-model startup," characterized by high fixed costs, a focused marketing strategy—and an underdeveloped sense of what consumers want. "They start a marketing buzz and a beautiful PR launch," he says of the strategy too often pursued by startups, There.com included. Ries rattles off other hallmarks: blow through cash by bulking up on staff, hire a vice-president of marketing "and the burn rate keeps growing." The trouble is, "they never tested if there would be immediate consumer adoption," Ries says. Worse, the company couldn't easily adapt to change, he says. "It was rigid and top-down." Neither Ries nor Harvey lasted long.
For Ries, try No. 3 would be a charm. After losing their jobs at There.com, Ries and Harvey began working on their own startup, IMVU. This time, Ries says, the lessons stuck. "I knew I couldn't just be a tech entrepreneur," he says. "The tech strategy needs to be determined by the business strategy, not the other way around," he says. So the company's first meeting was all about determining culture and values. "Startups don't fail from lack of technology," he says. "They fail from lack of customers."
Early on in his tenure as IMVU's chief technology officer, Ries audited a class at Berkeley's Haas School of Business. The instructor, Steve Blank, was so impressed with Ries' attention to strategy and understanding of business R&D, that he called Shawn Carolan, a managing director at Menlo Ventures, and advised him to invest. Carolan describes Ries as the guy who would go out and read a business strategy book the moment someone mentioned it.
Menlo became a backer, as did Allegis Capital (IMVU also had angel investors). "In the consumer market you have to have humility to admit you don't know exactly what the consumer wants, so that you can be proactive and test features and make changes," Carolan says. "Eric has an unusual amount of humility and he is unique as a tech person in his ability to be strategic in his business."
Keeping Costs in Check
Part of that strategy was taking the product to the customer for testing as early as possible and keeping site development costs low. IMVU.com had a beta version up and running within six months. By contrast, there hadn't been a test of There.com in its first five years. To prove that the product resonates with customers, there is a small fee associated with participation, and so far, the test phase has met or exceeded the corresponding financial targets.
Additionally, Ries has helped keep expenses in check by adopting a low-cost, low-risk software development process that maximizes ways to improve the site. It's a smart move that sets IMVU apart, says Edward Castronova, author of Synthetic Worlds: The Business and Culture of Online Games. "The fixed-cost element will start to go down with new software innovations, but the demand for the product will continue to grow exponentially," Castronova says.
Kind of like Ries' penchant for learning from early stumbles.