a16z Podcast - The Challenge of Replicating Reality

Episode Date: February 22, 2023

What would you do if you believed in an idea but everyone said it would fail, nobody would fund you, and the industry was experiencing a nuclear winter?Despite experiencing exactly that, Sandbox VR founder Steve Zhao doubled down and invested all of his personal savings into the unproven business. 7 years and 1 bankruptcy later, Steve has built the world’s leading full-body VR experience with over 30 locations across the globe. In this interview, we get to chat with Steve about the many challenges he faced, how Sandbox made it through the pandemic, the future of VR, and the difficult task of tackling hardware, software, a new computing platform, and real estate. Resources:Check out Sandbox VR: https://sandboxvr.comFind Steve Zhao on Twitter: https://twitter.com/zhaosaurusLearn more about the Squid Game partnership: https://venturebeat.com/games/squid-game-is-coming-to-sandbox-vr-immersive-experience-locations/Watch Steph’s highlight video: https://sandboxvr.com/event/b0b22aad-7c73-475d-ab43-281a456ff590 Stay Updated: Find us on Twitter: https://twitter.com/a16zFind us on LinkedIn: https://www.linkedin.com/company/a16zSubscribe on your favorite podcast app: https://a16z.simplecast.com/Follow our host: https://twitter.com/stephsmithioPlease note that the content here is for informational purposes only; should NOT be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security; and is not directed at any investors or potential investors in any a16z fund. For more details please see a16z.com/disclosures.

You know, running a startup is hard. Running a retail startup during the pandemic is really, really hard. And running a retail startup during a pandemic while going through Chapter 11 is really, really, really, really hard. What would you do if you believed in an idea, but no one would fund you? Everyone thought it would fail, and the industry you're in also happened to be going through a nuclear winter. Well, today we are talking to Steve Zau, the founder of Sandbox VR, who encountered all of the above. In fact, about a year into founding sandbox, he had to double down and invest all of his life savings into this unproven business. But seven years after founding and one bankruptcy later, Steve now has built the world's leading full-body VR experience with over 30 locations all around the world.

In this interview, we get to chat with Steve about the early challenges he faced. And trust me, there were many, but also how sandbox survived the pandemic, the difficult task of building across hardware, software, a new computing platform, and real estate. state, and also how Steve thinks about the future of VR. Oh, and if you're hearing this, you're listening on our podcast feed, but for this episode in particular, we created some exclusive video content that you can only find at our YouTube channel. So go ahead and search A16C on YouTube, and amongst the footage, you'll see my very own visit to the full-body experience that is Sandbox VR. As a reminder, the content here is for informational purposes only. It should not be taken as legal, business, tax, or investment advice, or be used to evaluate any

investment or security and is not directed at any investors or potential investors in any A16Z fund. For more details, please see A16Z.com slash disclosures. So, Steve, we typically jump right into the founder, the company that they're building today, and where that company might be going. But you have such an amazing story. And I want to jump right to the beginning. So people get really the lay of the land of where you came from and how you got into the gaming industry.

So let's start when you were a kid. Your parents were entrepreneurs themselves. And I believe that's also around the time when you could say a love story for games began. Could you share a little bit more about how your parents also being entrepreneurs may have influenced you and also where gaming came into play? You know, I grew up in the Bay Area.

and my parents were immigrants, and they work really hard. And I remember during the summer, I would follow them to where they work, and it was just a grind every day. But over time, like I've seen how being an entrepreneur, great things happen, how, you know, they started, you know, at my uncle's garage, then they bought the own small warehouse, and then it just grew from there. So my biggest takeaway from being entrepreneurs, like, it just takes time. But it was during those times to when, you know, they're busy working

that I have to find kind of solace in my own town. And one of the things I found early in life was just, you know, I was fortunate enough to have a computer pretty early in night. And I think I was about the age of 10 years old when they just started creating these funny little games that I would share with my friends and just kind of go from there. Well, that's super early. I don't remember what I was doing when I was 10, but I certainly wasn't creating my own games. And it sounds like very early on as well, you not just played games for fun, but you started building a business around it. So later on, when you were in university, you started Blue Tea Games.

And I want to hear more about what this company was and what specifically inspired you to do that. Yeah, so Blue Tea Game was Game Development Studio that created games online. People can download it. We call it shareware games back in the days and they would open up the water and put the credit card into the internet and they would buy the full game if they liked the first hour of it.

So I actually started because of the stock crash of 2001. That was when I went to college. My parents, they saved up a nest egg for my tuition and everything crashed. And they're like, yeah, you're going to have to find work while you study university. So at that time, I saw that internet really took off and people were actually building games online. And I thought, that was really fun. Like, I didn't know much about it. I just love building games.

And I was thinking, hey, maybe I can put games online and see people would play it. And they did. I was like, hey, would people actually want to buy it too? And they also did. And it ended up that during that three years in college, when I traded Blue T, that I was able to fund my tuition, which is building games on the side. This is just after the dot-com crash, when people are really doubting the internet in general, let alone paying for games. I mean, I feel like as I was growing up, it was so rare for people to, for example, buy an app in the app store, even if it was 99 cents. So for you to be able to successfully monetize during that period was definitely impressive.

and actually some of the games were really successful. One of them, the Dark Parable series, was downloaded millions of times. And so it sounds like this company was doing relatively well, but ultimately you ended up shutting it down in 2016. So what led to that? I think it was my old stubbornness. So we did very well with PC games, and we grew to a team of 40 people.

So the company was completely booststrapped after college. But what happened was in 2009, that's when, you know, the iPhone came. And then there was a mobile games industry. And for me, I wasn't fast enough to adapt to mobile games. You know, what we built were casual games. And when mobile first came about, it took a lot of the shares away from the PC group. So we saw our industry starting to shrink

while the mobile industry started to grow. By the time I went to mobile, it was too late. We were just catching up. And every year that we went in, it felt like we were further behind. So the company just really stagnated into 2016. that's when we saw a VR kind of blew up. Yeah, I mean, it sounds like he went straight from Blue T games right into Sandbox,

which to me is impressive in a way because after running a company for many years, the reaction of most founders is, let me take a break. And your reaction was actually, no, I see this opportunity. I want to go all in on Sandbox. And so tell me a little bit more about that. What was the vision you had in 2016 that made you say, hey, I need to do this right now? I think it was the fear of missing out.

You know, the painful lesson of missing out during the mobile era was really ingrained. It's like, man, I wish I was there earlier. So when VR first came about, I was like, okay, this is going to be a consumer headset. Oculus is going to launch and HECBite is going to launch. We have to get there early. So I just decided to dive down and just go with it. I think what made it easy for me and my team at that time was also we knew how to build games. We built games from multi-platform.

knew how to build in Unity, which was used to build in VR. And I also had a few folks left in Blue Tea. And that's how everything started. Yeah, so it sounds like you knew how to create games, but one clear differentiator between what you did at Blue Tea and what you then were venturing into with Sandbox is the physical in-person element to it, which we'll get into later because you're doing those software and hardware, which is incredibly hard to do together. But what made you specifically make that decision to say, hey, we're not going to just venture into this new platform, which is VR, but we're also going to do that in person. One of the biggest lesson I learned from mobile games is you don't trade what's popular

today because by the time you're done, it's going to be 10 months too late. So our job is to figure out what do people want in a year or two. We also created games for the headset because we want to be early, but we also have like a second bet, which was, what do people really want out of VR in 10 to 20 years? Like, really trying to project it out and be super, super early for that. And for us, it was, I grew up watching The Matrix. You know, you can get plugged in and you can be anyone and be anywhere. And I thought that VR was that last technological component to create that.

So we're like, can we actually create a minimum viable matrix? A minimum viable matrix? That's a good way to put it. You know, we saw all the pieces, and then we think it fit. And I think people would like it, but it would take time. So when we first started the company, it was, okay, let's build a game. Let's make sure that the game can make some money while we really worked through the idea made of what that would look like to build a location-based project.

And for us, it was just hedging. If the games worked really well, we can double down on that. And if the location works really well, we can double down on that. So I didn't even realize that you were pursuing both of these paths in parallel. Were there any early data points in either direction that made you think, huh, this is really where we should be betting? I think it was just the nature of how the company was founded. When I built Blue T, I moved to Hong Kong,

and I built a community there. I have friends there. So when I started to seek out angel investors, I told them, hey, let's try to build games where it's very organic, right? And we also want to learn what it takes to build in VR. So while we're learning how to build content in VR, we can really figure out how to build a plan. platform that eventually became that location-based component to it.

But for us, we also didn't raise that much. In the beginning, we raised about, I think, 300,000, 400,000, which might seem like a lot, but if you're building a team that wants to build content and then build a technology platform that's never been done before and eventually put it into retail space, that's not a lot of money to go about. So I was, I get a little naive in the thought that,

hey, we're earning up and we build games that by the time the game launch, that we can take the profit we earn from the game and we invest back. That was in 2016, and during that time, there was a lot of hype and buzz still around VR. And we launched our game in December perfectly timed during the holiday season.

We got an incredible exposure on Steam, and we were like the top 20% title, but it didn't generate that much revenue for us. And it was a same for a lot of developers at that time. And we're like, oh, crap. we're going to run out of money. Entering 2017, that was kind of like the start of the VR winter where funding was very, very difficult

because the holiday season didn't really pick up numbers that gave enough trust of the VR market. So that just kind of became organic where it's like, okay, so we cannot really just do games anymore. We have to put 100% of our effort behind this full-body platform that we built on the side. And it sounds like you did that. You went into what you might call,

this nuclear winter in 2017, you had just been working on these digital games. It sounds like they had some success, but you were, in a way, pivoting, but also, as I said, pivoting right into this winter where the amount of funding that you had raised prior would not hold you over. So you made a decision that I think is really emblematic of your journey and the conviction that you've had throughout the years about the platform that you're building, and you put your own life savings into the company. Tell me a little bit more about what conviction you had and why that made you actually decide to take your own life savings

and bet it on this company. I didn't want to put my life savings. That was the first start. But entering 2017, we had like maybe $100,000 left in the bank. And I went back to investors. I went back to institutional, also angels. And it's like, hey, we have this great platform that will, when they enable full-body experiences with multi-play.

you know, in a retail setting. It's like, hey, we just need a little bit more funding to kind of bring a demo out. And we couldn't get anyone to go for it. We're like, okay, this is it. So I had just conversations with, you know, my friends, my family. I have this nest egg that I saved in blue teeth. You know, 10 years working in blue tea, I saved this nest egg.

I can put everything into this and just get the demo out and just prove that this is the cost of we're building for. And of course, you know, I talk to my friends and they're like, yeah, Steve, don't do it. And I've talked to my parents, like, yeah, this is really bad. So I decided to do it. Naturally. I think the conviction came from what we saw, or like in the market location-based VR,

was a company that raised a hundred times more money than we did with a product we felt was not in the right direction. I think at that time, people that raised a lot of money were about how do you interface with the environment? You know, you can touch the wall. You can feel the heat. And I'm like, yeah, that's kind of cool. But, you know, great thing about games, it's really about playing the game with each other, right? The game object isn't the environment. It is your friends.

Nobody built for that. We knew that people wanted that. That was a conviction. So that's when I decided to basically take my life saving and put it into sandbox. And I remember the moment I did that was at the bank, even the bank executive was like, are you sure you want to do that? That's like 95% of you're saying. I'm like, yeah, let's go for it. But it wasn't done in isolation because at that time we were down to a team of six

and I had to sit down with them and I said, like, look, I couldn't get any more funding. This is it. I'm going to have to shut down the company. But I do have this much money left and I'm just going to put everything in it. But if I do that, I will need all of you to be fully committed to go for this. Now, if you're not, that's okay and I'll just shut the company down. But if I'm going to do this, we're going to fight for it. And then we sat down a circle and everyone gave the boat.

Fortunately, everyone agreed to fight on for the next six months to make it happen. That's amazing. I have to ask you. It sounds like you and your team maybe saw something that other people, whether it be investors, whether it be other founders, didn't see at the time. And there are many reasons to say that this won't work, right? As I mentioned before, you're doing both hardware and software. You also are focusing on a social element, which means that you don't only need to convince one person.

you need to convince many people to show up, you are doing so at a time where this technology platform being VR is kind of unproven. It's in its early days. And so there are, again, many reasons to say, you know what, this maybe sounds like a good idea, but in reality it's not worth pursuing. So was it just seeing that certain other companies had raised so much money and were not delivering on the promise that you knew you could? Or what other data points were you paying attention to to say, this is really worth pursuing? For us, it was the intuition of having built games for so long. Once you do for a time, they're just an intuition about what could be really fun.

It just came from that. For me, it was able to kind of see that with just amount of funding, we can actually bring a demo, and then from there, be able to show what exactly this is and get people on board. We end up not just building a demo. We actually built like a full product. And I think it just made it much easier by the time that it was launched. So tell me about that demo, because I went to a Zambi,

recently. And it's this large room. There are so many different cameras. There's like an entire closet of different tools that you use. You're wearing a vest or someone they're helping you. And so tell me about the challenge and how you solve that challenge of getting, as someone might say, an MVP. It's a lot easier to create an MVP of a software site that aggregates a bunch of data. An MVP of sandbox VR sounds quite difficult. Yeah. So we didn't have any like vass. We They didn't have any custom props. We didn't have the nice space that you guys went into back in the days. What we had back then was just $200,000, $300,000 with six people with the likeline of six months left.

What we did was we had hard code of everything. Forget about elegance in your software because we have to bring this out. But also within that really tight constraint, the biggest thing that we had to solve was with retail businesses, you pay for what you get. If you put your product in a nice location with a lot of foot traffic, it's going to be very expensive. The red is going to be insane, and the landlord would have to see your balance sheet to be able to judge if you can actually be there. We did not have that luxury. So we were figuring out, how do you bring people into a place with very little foot traffic? It was during that moment that we created the highlight video.

It's like, how can you get people to become marketers? of your products. Like, well, we saw Escape Room, you know, share photos, but can we push that 10X? Like, what if we couldn't experience where you can show how much fun they had? But by the time they leave, they can have that video and share with their friends and family

so that we can build this word of mouth. So that product was created during this really intense time that came about of trying to solve for a real estate. Like, how do we get like a cheap rent place that works? And that's what we did. Even though Hong Kong has 7 million people, we were able to find a building with zero for traffic. And the rent was insanely cheap. The water pipes were broken.

And we were on a 16th floor. There was no outside stinage. People don't know about us. And we're like, okay, this is the perfect place because this is the only place we can afford. Something that has also come up for me as you're talking is the fact that you're marketing a fundamentally new experience for most people. If you open a mini golf course, you can say, hey, it's Steph's mini golf, and people, for the most part, know what they're getting. They know what kind of experience, but a new location-based VR experience is new. It's even hard to articulate what that is to someone, and there's no expectation linked to it.

So how did you go about those very first early days of opening the store and getting your first customers in there? We grounded it based on the skate room. We called it a hyper-reality escape room, which seems to work. people have played the skate room, like, oh, okay, would you have to be our component to it? So that was our initial way of getting people in. And it's very funny because once they come out of it, they're like, this is an escape room. I don't know what this is, but I'm going to tell my friends about it. So the education part was hard, but the moment they saw the videos and the moment they share it and they saw a friend having fun, like that's when the viral loop really kicked off.

Yeah, I loved the video at the end. And I'm impressed that you thought to include that at the very early stages. So what happened then? If you had these early customers, people are starting to share, what was that early traction like? We got a little bit lucky. So in the beginning, we didn't do much advertisement. We had some media reporter come in and, you know, they brought some customer. They loved it to tell the friends. But, you know, there has to be a certain volume of folks to come in to really kick in. But one of the reporter did a social media post and it blew up. And it went viral. And that kick-started the viral engine where people just book in mass, and that led to more and more people booking. So what happened was pretty soon we booked out our space 100%, 100 days in a row.

And it was really insane because when we first started building this business, I have a good friend of minds who've done escape rules. He said, look, if you can get to 50% occupancy, you're doing well, Steve. But based on your business, even if you get to 100%, it's still a tough business. business. And that's what we've done. We have people skip work and come to play sandbox. We had a few people delayed their flights so they can play sandbox. And pretty soon, like, people knew about our product. And that's how we're able to actually get a first seed institutional round done. So you got this round done. It feels like you're finally hitting the traction you're looking for. And this is one of the reasons I love your story is that there was just so many

roadblocks that emerged out of nowhere. And the next one for you, it sounds like, it was the pandemic, which is pretty fundamental to your business because it's an in-person business. And so tell me about that. How did you stay alive during this period? Yeah, it was tough. People would say during the recession, companies will lose revenue by 30 to 60 percent. For us, we lost 110% of our revenue because not only, we couldn't open any of our stores, so there was no sales, but we also had to refund everyone that vote. And the outcome was that was we had a great team, but we were trying to race our Series B during the early 2020, and we had about three months of runway left. So we had to let go most of the folks.

We let go about 80% of our team. That was very difficult. There were a lot of great people at the team that we wanted to keep, but we couldn't. So how do we make it work? I think to a degree, it was the same thing that I've done early in Sandbass, where we sat down and tried to get all the stakeholders to agree to fight on. I mean, it was much bigger this time. It was getting the investors that backed us, like, hey, this is what we're going to do, this is how we're going to survive it, do I have your support, getting the people that remained in the team to get their support, getting the secure creditors and unsecured creditors,

like, hey, we need to make sure sandbox have a long enough runway so that we can all survive. And just creating a very big plan out of that. Now, the challenge was we couldn't convince everyone. And because of that, we had to go through Chapter 11. We needed protection to get through that phase. So in order to survive the whole ordeal, fortunately, we got great investors kind of helping us, including Andreessen, to kind of give us a lifeline. But part of that plan was also getting folks that we borrowed money from the debt holders

to really extend our line and then going through Chapter 11 to work with the landowners, unsecured debt holders, to find a way to make this all work out. One of the most challenging parts of the pandemic, I think, for everyone, was the idea that we didn't know when it was going to, quote-unquote, end. And I think that would be particularly challenging with your business, as you said, because you didn't go from 100% of sales to 70. You went from 100 to 0, and it was unclear when things would tick back up. So was there a point during that process where you thought, well, A, we should maybe just shut this down

because we're not sure when things are going to bounce back, or B, fundamentally pivoted. We did. That was the first thing we talked about is how can we pivot. We don't know how long this is going to last. But there were a few reasons why we didn't go through that route. Number one was we knew fundamentally we had a great product. Before the pandemic, people love sandbox.

So for us, as long as we can survive it, then it will work. But the bigger telling point was the pandemic impacted every country differently. For example, we saw that in China, things were opened up very quickly. Although there's a lot of rules in place, it felt like it was pretty normal. We're like, okay, why don't we pick countries that weren't really impacted by the pandemic, and we start there? And whenever other countries opened up with the U.S., then we'll go back there again. So that was our strategy, really just making sure we have the runway to kind of just hibernate. There was for a long time, like me and some of the core executive, we didn't take salary.

people had to take time off so that, you know, they can control how we spend. It was really tough, but we just decided to fight on, just focus on a country that we can open in. If I were to have designed a business that I thought maybe would have one of the hardest times throughout a pandemic, it would be something like Sandbox VR. It has a social element, has the in-person element. But you made it. You made it through the pandemic. And I'm curious to know how post-pandemic things have shifted, whether it's that people are

more interested in some of these digital physical experiences. Maybe this impacted your ability to get long-term leases as other businesses are shifting, but also just interested in how you've marketed yourself as you've come back. You know, running a startup is hard. Running a retail startup during the pandemic is really, really hard. And running a retail start during a pandemic while going through Chapter 11 is really, really, really, really hard. And when times get very tough, one thing that we learned is we had to be very slack.

on where we focus. And where we focus, we have to be looking for outsize outcome. So one of the biggest takeaway coming out of Chapter 11 coming out of the pandemic was we made fundamental changes to our product. We were measuring everything against profit, against sales, but really about the margin. So like one example would be when we get the highlight videos that customer get, we've learned that if you were able to hand them the video,

before they leave, they have a 10x chance of just talking about it, sharing it. But it takes us about 15 to 20 minutes to generate the videos so people could be leaving before they actually get the video. So for us, it's like, how do we shrink that 20 minute down to two minutes? So we allocated the product team entirely to solving that one thing, but we knew that the outcome was going to give us much more shareability, and we measured that athletic, and it really worked. So that was just one facet of like a dozen core things we've done.

that really turned the company around. So fortunately, in early 2021, with the vaccination, there was a huge pent-up demand for people to come out. And when they did, oh, boy, did they really go to sandbox? Actually, there was a market shift to where we were able to really renegotiate all the rent that we had for existing location, but also for new locations. Not only that, we were able to convince landlord to fund our project entirely. Because we had no cap, though.

So we have to find a way to create a win-win situation where the landlord is willing to bet a company that's been through the pandemic, that's been through Chapter 11, and say, you know what, we're going to give this company all the money so they can be in our place. And we're able to convince them on that. That's fascinating. How does that work? Generally in the U.S., Donald will give something called a tenant allowance. Usually they would fund retail tenant a certain percentage so that they can build. of the place. Usually what we got in before, it was about 5 to 10%. So we've made it work because we're able to show data point during the pandemic. For example, we're able to open it in our Chicago location. And during that time, we were in a mall that had zero foot

traffic. But 100% of our customer booked ahead online. And that was because of our marketing strategy of our highlight videos. I mean, we have stories where we actually had to meet people at a parking lot to take into Sandbox because they would get lost in the empty mall. But we were doing tremendously well. People wanted to go out. Fundamentally, what we're trying to solve is for people to have a great time together. And that is made no more important than during the pandemic of how important it was.

So we shared these data points and then we're able to convince a few landowners to take a bet on us And then once that happened, we were able to get more and more landlords to take bigger bets on us. That's how we survived the pandemic, yeah. Yeah, it reminds me, I think Apple in many occasions, gets cheaper leases because, yes, these Apple stores are almost just these central locations that attract so much foot traffic that it's beneficial to the landlords of these malls to offer those deals. So it's great that you're seeing something similar. Something you mentioned, though, about Sandbox being this place where people socialize and come together,

reminded me of just the idea of competition. Like, what do you compare Sandbox to? And I can think of many examples, you know, maybe a movie theater, maybe something like Top Golf, maybe something purely digital, like friends playing in Fortnite. So I guess from your perspective,

where does Sandbox fit in that competitive matrix? Who are your core competitors? And what are you really challenging that exists today? We do think ourselves as carving a brand-new market, But if we would take a close example, what we do want to become is like the new movies. When we think about the movies, you know, it's a pretty passive experience and the outcome doesn't change when you watch a movie and you probably do it like not many times. But for us, it's a very highly active experience that depending on who you go with, the outcome

can change when you play the experience. And there's a huge social media component to it where you can actually express yourself and be able to share that digitally with other folks. And structurally it's like the movies because. you come in and there's different experiences that comes out, and you will chase for the next experience. We're starting to have experiences that's starting to hit boss office numbers. Our titles are starting to hit theatrical releases,

the average U.S. theatrical domestic boss office release revenue. And as we scale, there will be a day where we could see Samba's experiences, even being a rival to, like, some of the boss office movie hits. And is that the plan? Because I could see a couple different ways that you could approach the business. One of them being, you just focus on creating one great game that people come back to.

And when they come back, they want to beat their previous score. They want to go back with a new friend, see how it's different. Or maybe another path is having a suite of different experiences. Every time I go back, I'm trying something new, kind of like the movies, right? Often, unless it's something like Avatar, you don't want to go see something again. And so from your perspective, but also from maybe the consumer behavior that you're seeing, which one of those scenarios do you think more so fits

what you're trying to do with Sandbox? Well, definitely the latter. We do see people come back for new experiences that can share with their friends and family. There is a very small subgroup that would chase the high score. And we've seen people play

our zombie experience over like 12 times just to get a certain outcome. What really engages people, what we've learned that's surprising about Sandbox is it's an experience that you guys want to delve into that you guys can share.

And the outcome of that is people come to Sandboss because they want to build a relationship with someone. So a date night is extremely popular in Sandbox or they want to parents having a fun time with the kids in a way that's very shareable or people haven't seen in a long time. So we want to keep doing that, but with different worlds, they can be in a different character. That's great. And in a perfect world, you could have endless resources and launch a new game every single day and they'd all be amazing. and there'd be this endless suite of games that people could try out. But obviously, there's a resource constraint. And so tell me a little bit more about how you think about the rollout of new games and also the amount of resources it takes to build a new game.

I think you have six right now. Is that correct? Yeah, that's correct. So it generally takes about 12 months to build a title, internally three months of pre-production, nine months of production work. But we also work post-production to make sure things goes according to planet or any changes that we make while it's live to the opportunity. audience. So the way we think about content is, in the beginning, we have to build everything

ourselves because it doesn't exist. But over time, other people can build on our platform. That if you're a VR game developer, over time, you can find it more lucrative to build on sandbox than other options. So how we scale location is a factor of that. The more locations we have, the more tickets we sell. The more tickets we sell, the more third-party developers interested in us. So in the beginning, we built a lot of locations. ourselves. And we've proven this to be a very lucrative retail business model. And over time, franchising will really kick in and really bring sandbox all across the world. Once you have that, then you can start needing developers that, you know, with their unique skills that to bring that,

either local content or IP branded content they're really good at or genres they're amazing at and just create this ecosystem. Yeah. It feels like in your early days, you've leaned pretty heavily on the build versus buy options. You built your own platform, you built the content on top of your platform, when others in a similar scenario might have chosen to borrow, right, or buy from another company, whether it's the technology, whether it's the IP. And so tell me about that and specifically, tell me about the IP aspect of things, because it does sound like you're starting to do partnerships. I think one of your titles was in partnership with Star Trek. We have to build because we wanted to get experienced perfect. We want to

full-body experience. And, you know, we couldn't just take, say, a VR game that's for the consumer headset with controllers to work where you have to use the full-body and you have to play with someone in the same space. It wouldn't really take advantage of that platform and wouldn't be a great experience we thought that it would drive people to our location.

It was built really out of necessity. But once we've proven that, we can actually share that news with other brands. Like, hey, wouldn't it be awesome to be in start, Universe, it'd be a cadet where we can beam you to different planets and you can use a tricorder. We did a lot of shooting experiences in the beginning because you had to wear a bulky VR backpack and you're pretty limited. But now with wireless streaming, it actually enables a lot more different genres that we can

utilize. I think an analogy that we would use is what sound is to silent films is what the wireless streaming is to our VR platform. Because once you add a sound, there's a genre that wasn't possible before that you can utilize now. So with wireless streaming, there's a lot more mobility. There's a lot more movement. And you can create experiences where every part of your body movement matters. And that is why we decided partner with Netflix on SquidGame.

Oh, wow. What a great partnership. Thank you. Thank you. It shows a lot of trust in us, Netflix to be able to give us one of the best ITs. But I think it's also a good marriage in a sense. that we can really create a great experience where multiple people in the same space

where you can collaborate or even sabotage one another moving freely in a shared space. So not only do we get to work with a great IT, but also we're able to create an experience that fully utilizes our platform. I think that's so important to your point about what the technology enables

because actually I was too scared to watch Squid Game, but I know the premise and I know some of the games within Squid Game. and some of them would just be inherently underserved if they were done in even of your headset if you didn't have access to your hands because, you know, one of the games is where you're kind of like cutting open a shape within a cookie, for example. You can do that with your mouse or your keyboard, but it's not the same. And that's something that I really was impressed by when I went to Sandbox, which is, as you said, it's like a full body experience. There's haptics on your vest. You know,

if my partner got killed, I go restore him with my hand. And so, there was just so many aspects where it was like you are fully in this experience. And I also think another elements of VR, which is probably my favorite from the few in-person VR experiences I've done, is the ability for you to truly immerse yourself. And what I mean by that is to start experiencing emotions like fear or joy that I don't think I've experienced to the same degree in other games. To give a quick example, the first time I ever went to a VR experience was in Japan. And they get you to walk across this balance beam in VR, and they get you to jump to grab. There's like a helicopter with a ladder hanging down.

And really, you're about four inches off the ground on this balance beam. But because of the immersion that happens, you get scared. You're like, oh, gosh, I don't know if I can make this jump because in VR, there's a big city below you. And the same experience I did at Sandbox, there was this point where they raised both of us up, But we went in different directions, and it truly felt like I was then 100 meters away from my partner instead of, you know, in reality, we were one meter away. So I don't know. I'm just sharing that experience because I do think your point about the actual technology enabling concretely new experiences is really important. And Squid Games seems like one of the best options to actually pursue that with. It's really interesting because when we first started Sandbox and the first experience we built was a zombie experience.

called Deadwood Mansion. We were inspired by, you know, Resident Evil, Left for Dead. And those titles generally is a very male-dominated experience that people love. But when we launched that, we were surprised that half the audience were female. And we asked our customers like, hey, you know, what do you think of our experience? And for them, they say, hey, it doesn't feel like a game. It felt like real life. It felt like me and my friends were stars, our own movies, and we're transported into this world. So we end up that we didn't create just a gaming experience. it felt like an experiential consumer product. The insight that we took from this was that the believability,

once you hit a certain level, it just click. And it just becomes real life. And that's the reason why we built what we've done because when we first started out with a consumer VR headset, we still know that we were in the game because when you put on your headset, okay, you look at your body, you don't see your body, you look at your control, just to like floating joysticks, right?

And you can't really move in your space and then if you're next to like another player online, you can't really physically interact with them. But you put them in sandbox, they forgets they're in assimilation. And there are many times we would get complaints about noise. I remembered in the early days, we worked with IMAX to bring a sandbox in the New York space.

It was right next to the theater. And we found out that we had to shut our store by 5 p.m. I was like, why? And they said, well, because people were screaming so loud that all the theaters around could hear random screaming and like they tried everything they put mattresses, they tried to muffle it all of a sudden it did not work.

You don't get that unless you create something that's very real and believable. It felt very real. I actually avoided the zombie tracks when I went because I was scared of how real it would be and I instead went with the space option. But on this note of truly immersing people and almost like replicating reality in a way,

what does that take? I saw it for myself, but just for listeners, like how many cameras are required, how many props, what is really going into this experience makes it fundamentally different from, let's say, an Oculus headset. It starts with outside-in technology

because in this shared space, it needs to be tracked from the environment rather than from the headset, which is inside our technology, which is tracking from a singular, like, cameras within a headset. Because once you have that, then is building a very low latency environment

that tracks your full body. And low latency is really important because when you're playing experience and it kind of like stutters a bit, then you remember that you're in a simulation. So for us, being able to have like really streamlined wireless low latency experience, that's the full body.

Once you hit that level and that physical element of being able to interact with your friends, that's when you start to believe that this is real life. I definitely was surprised that I didn't get a headache either because I know that can be a feature, or I guess a bug in this case, of other VR experiences. And I get car sick probably 50% of the time. But I went through the whole experience and never had one inkling of that.

So that was surprising. But has this technology been available for a while? Or like, what differentiates sandbox in being able to build this low latency environment? Yeah. So when we first started out, like it doesn't work when we've got the headsets and we've got the cameras. and we try to put everything together. It's a very buggy experience. Back in the days when we go out to try other VR locations,

it was really buggy too. And I think for a lot of folks, that felt like it was okay because, hey, that's just what VR is. But even as a small company back in 2017, with the limited resources, we cut corners. One thing we never cut was the fidelity of experience. Because for us, the end product we wanted to do

was to have someone believe that they're in real life. And to do that, it cannot stutter at all. So we have to be very precise on how we do our tracking and how we do the streaming, which also led to some of the patterns that we had early on, which was we're able to create this prediction algorithm, which actually allows people to be able to move it and be in VR, even if they're being blocked.

So that was one component to it. And the other component was we're able to batch the data, how we send wirelessly, though that if things doesn't go well, you will still have a very smooth experience. So in a way, the technology that we created was like how we ran our startup. Like when things don't go well, we find a way to make it go well. I've touched on this to an extent already, but I just want to hear your perspectives specifically on this idea

of building both hardware and software. People often say that building hardware just on its own is like building on hard mode, and you've decided to integrate both. You've integrated real estate into the equation. And so, curious to know about if we start looking forward in terms of sandbox, how do you think about the business evolving? Where are you focusing? Is it about opening up a bunch of new locations?

Is it about extending the content variety that you have? Is it about getting better deals with your real estate partners? How do you think about the evolution and where to prioritize? Yeah. To answer your first question, building hardware is really hard. Fortunately, in the beginning, we didn't have to worry about hardware because everything was off the show. So all we had to do was make sure the software works really well with all the hardware that we used.

We got very lucky in that respect. And over time, we started building our own haptic wands and wireless props. In the future, we do want to invest deeper into hardware to have a more integrated product. And in terms of how we grow, it just continues to do everything that we do, but really to double down on our content. I always see it as the movies

In the first five years of Sandbox It's like it's a sign-in film of our VR product And now that we just created wireless streaming Now we can add sound to it So now we have all these genres That we can explore

That we can provide for our audience And over time We'll figure out what that color is We can add the color to our black and white sound film And then build even more genres Of experience that can utilize that as you expand your content mix, I'm also curious to know if you plan to or thinking about venturing

outside of the social realm. So it sounds like that is the priority. That is the focus. But as an example of when I went, I asked my husband, if he would go again. He's like, yes, this was great. But I would love an experience like this to work on my surfing. That's something that he's trying to get better at today. But the problem with surfing is that you have to wait for the waves. You know, you can go out in a day and the waves aren't good and you can't get the experience that you're looking for, but you can imagine in an equivalent VR experience, you could have waves nonstop. You don't have to wait for the next one. You don't have to paddle out. And you can really, I guess, condense the learning period. And so that's just one example of where VR could be a more educational resource instead of a social resource. And so how do you think about that if you plan to expand your content mix? Do you think that that might actually expand past social? We do, we do, and I think it's how we started the company always hedging on different vets. So one of the things we're doing is actually we're rebuilding our operating system so that it's white-labeled,

that other developers can actually build on top of our system. That if you want to learn surfing, it might not be in sandbox, but it might be somewhere else, but someone can leverage our technology to create a full-body experience that allows people to be on a board and be able to surf and just train that different type of temple to get to replicate how the waves are. We'll see how that goes, but we do understand that what we have is beyond just our business, and we do want to support how the ecosystem can change over time. Speaking of the full ecosystem, since we've already kind of ventured into the future of VR,

I have to ask about broadly the sentiment of VR being a new computing platform. And as you mentioned, when you started Sandbox in 2016, it existed back then. So we're now in 2023. And I think there have definitely been some impressive strides in the industry. But the challenge that many people would make about VR is that it still remains in this zone of novelty. And so I guess the way I pose the question is how do we change VR from being a novelty to a necessity? We have to really double down on content. a way that can really extrapolate the power of VR because if we look at the consumer

VR market, what you're competing with, not us. You're competing with Fortnite. You're competing with your console, your PlayStation 5, your mobile phone. That someone entering their home want to put on their headset before anything else. So to do that, you're going to have to have a 10x content that can drive people to really want to put on the headset the moment they get home. And that's a very hard thing to do. But I feel like over time we'll get there. But it has to be a content that's just really native to VR that cannot be replicated across the phone or the PC or the TV screen.

And I think people have been trying to figure out what that is and eventually they're going to get it and more people will start using consumer VR assets. When I think about how work positions like out-of-home VR, say compared to in-home VR, I think what we're seeing is the evolution of accessibility. You're seeing that VR headset is not being plugged into the PC anymore. Consumer headset has been very lightweighted.

And over time, this might be a headset that you can actually take outside and go wherever you go, very highly accessible. Now, to do that, which is fine, is they sacrifice immersion, like deep immersion for it, which might be okay for the product lines you're building. For us, we're going to double down an immersion. We're going to make it as real as we can. Just do a lot of tricks in our bags we haven't used yet. So if you want to have a great experience with your friends or family

and to be really absorbed in a world, that's where Sandbox lives. That's interesting because you're basically saying that you don't feel like you're competing directly with an Oculus, for example. You're competing actually, as we discussed before, more so with the movie theater. Would you say that's an accurate depiction? Yeah, we're definitely in the out-of-home realm that is different from what the needs are in home. which kind of makes sense because when you think about out-of-home, the audience needs are different, right?

Usually when it's out-of-home, it's like you want to invite other people to go with you. There might be a reason to go, and you really want to cater to that reason and make it really worthwhile. And whatever you have, that's out-of-home must be the context of what you can get at home. Otherwise, people will just do this at home.

So you can say movie theaters, but to degree, it's any type of experience show that's outside. But I wouldn't say it's directly in competition. I say it's more like we're working together to just bring people outside. And if we know anything about the pandemic, that is really important for people to go out and social lives. I agree. And I love that you're adding to the matrix of things that you can do with friends, which aren't just eating and drinking.

And that's been a little qualm of mine recently, which is when I look at what I do with my friends and I think many people are similar, that's the tendency is to just go, hey, let's go for dinner, let's go for drinks. I also grew up loving games and loving the activity of, you know, solving a problem with friends or doing a sport with friends. And I found as I got older, that became either less available or just less obvious, less of the habit. And so I love that this is an opportunity to venture back into that realm in person. But I think recently I saw a number where Sandbox has sold maybe a million tickets in the last year or so, what do you think it would take for Sandbox to go from $1 million to $10 million

or even $100 million in a year? Is it just the content matrix that you've mentioned before? Or is it some other thing? Maybe it's the generation that grows up with Sandbox. Maybe it's the price point. What do you think it would take to 10X the business? For us, it's just getting more locations because in the end of the day, it's a retail business that's constrained by space and time. So as long as we can solve that, then we can have more people playing Sandbox and with more people playing Sandbox, we can have that acceleration that we need. And we'll basically convince people to build for Sandbox is to show that first, this is a great product that people love all over the world. And that is a very great business for people to run

that can generate a healthy return. That's right. I'm curious to know throughout the journey from when you first started Sandbox to today, which were different places, are you surprised by anything? Have you seen anything in the consumer behavior, the buying behavior, the way that people interact with the product itself that has surprised you in terms of, you know, this is a little different to my original vision, but I'm leading into this and it's helping me build my business in a better way. When we first started, we thought that we created, say, a VR Escape Room, that that was going to be the extent of what we built. And it turns out that I guess it's more of a product that is shared on many different occasions.

We've seen people hold bachelor and bachelor's at parties. We've seen after birthdays, people out of town. People just want to date nice. It's just a lot of reason to use Sandbox as a way to have fun and celebrate. We even done a wedding proposal for a couple in Sandbox because that's when they first met. So it became kind of like a conduit for people to really meet and have a great time and get to know one another. So that was really surprising for us. And I think another facet that we found surprising was when we did the highlight videos,

we thought, great, this is something that would work really well, people show on Facebook. You know, I'm at that generation where Facebook is still a big deal to me. Nowadays, people are splicing our videos and putting it on TikTok. And we're getting like 10 million views, 15 million views. And it turns out that what we created was sort of an expression that they can use to showcase themselves and the light that they have. And we're like, wow. Yeah, and I love that that was such an early addition to the sandbox product.

And so it's fascinating to see how that's continued on throughout so many years. Yeah, like we couldn't have done that without that trial period of running out of money and figuring out how can we get people to come to a location that has no good traffic. So constraint breeds creativity. I think that's a great place to end off. But I will give you the mic, Steve, if there's anything else that you want to mention, And maybe particularly for founders who are in those early stages, they may be hitting similar roadblocks. They may be asking the question of whether they should continue on, whether they should pivot.

And I think, again, your story is just so emblematic of what the startup journey can be like versus from the outside it can look like an overnight success. So yeah, any final parting thoughts there? From my experience, I think sometimes, you know, kind of throwing, let's say, spaghetti on the wall is something that some founders might. I do. To degree that's important, but once there's enough conviction behind it, the need to be able to grind and persevere on a few focused area, I can't stress how important that is. I mean, when I think about us pre-product market, there were a lot of things we could have done. We could have amplified our hardware. We could have made better design on our store. We thought those were cool, but those aren't game-changing. We had to figure out how do we get people to

come to a store without which traffic. That was one place that we doubled down on and we created a shareable experience, like a highlight video, because it was very easy for us to just stop at a photo. It's easy to take a photo, but we thought, no, we have to do something in the world has never seen before. So we had to do not just a video, but a video that splices real life with VR. But that's not good enough because we also have to dig deeper and find what What are the biggest elements that people would react the most to? Right? And so we traded the game based on those elements and we captured those elements.

And we thought, that's not good enough. We have to be able to, once you see the video, make sure that you can download the video right away. So that level of depth on that one facet was critical to our success. So that was our pre-product market phase. And during the pandemic was the post-product market phase where we've learned that there's only a few levers that really changes the profit margin of the business.

He's just figuring out what those levers are and just doubling down on it in a very deep way to get the margins up. And I think that's really important in an environment like today when fundraising is really hard in getting to profitability is key for companies. I think I heard you say in another interview that your locations are profitable.

To me, that's really impressive because I think if people were to guess based on the scope of the business, even though you're many years in, that with all the hardware required, that it wouldn't be profitable. But is that right? Yeah, every location that we open up

within two months of operations are profitable. There are some locations that the profit margin is comparable to a software company. That's incredible. And I think for us, the reason why I think we're able to do that is we created a product that people didn't know they want and we're able to charge a price point

that we felt like what's fitting to the product is $50-60. it's per person or ticket. But when you look online, people ask about the pricing, like, it's totally worth it. Yeah, as we talked about before, this idea of an in-person VR experience

that wasn't a comparable category, and so you got to set the pricing terms for that category based on the value you delivered. And honestly, I'm sure you've done a bunch of testing on this, but it wouldn't surprise me if you could charge $80 or $100 for a visit because it does feel fundamentally different than, let's say, a $20 movie experience. For us, it was a very organic process. We started at $30, and then during the weekend, it was booked out two, three weeks in advance.

So we try to, like, control the value, and then we adjust it. And it kind of peaked around $38, $40, and then the pandemic happened. And then we made all these changes to the product. And then when the world reopened up again, we're seeing the same pattern, but now we're able to organic be adjusted to 50 to 60. And to us, like the way we think about our product is we want to create like a $1,000 product. That's kind of like the direction and that if they're paying like $60 for it, then it's a great time for them.

So that is how we're thinking and how we're iterating is how do you create something that's so valuable that they think they're getting a good deal. Absolutely. And you're seeing that based on the bookings being completely full. And I'm sure people are going to be very excited to see what happens with your new Squid Game partnership. So we can look forward to that. You can't wait. Thanks for listening to the A16Z podcast. If you like this episode, don't forget to subscribe, leave a review, or tell a friend. We also recently launched on YouTube at YouTube.com slash A16Z underscore video,

where you'll find exclusive video content. We'll see you next time.