This article is the sixteenth chapter of The Entrepreneur's Journey, a collection of stories about startup companies and the entrepreneurs who built them. To continue reading about key startup themes and lessons learned, check out the entire series here in The Seraf Compass, or purchase the book on Amazon in paperback or Kindle format.
It was the summer of 2007, and all appeared calm on the horizon. The US was in the fifth year of an economic expansion, the housing market was booming, and consumer confidence was at historically high levels. It looked like a perfect time to set out on an entrepreneurial voyage. So it was with great enthusiasm and optimism, Pete Eggleston, Elio Maggini, and Christopher Payne-Taylor took a leap of faith and launched their startup, AdME (Advertiser driven Mobile Engagement). The company was going to help major brands increase engagement with their customers.
The most talented economists, technologists and futurists couldn’t have predicted the fierce challenges Pete and his team would encounter over the next two years. Like the maritime disaster detailed in Sebastian Junger’s The Perfect Storm, Pete would confront the confluence of two powerful economic weather fronts and a major technology hurricane. Unlike the crew of the doomed fishing boat Andrea Gail, Pete and his team lived through their perfect storm and are around today to tell the tale of their startup company, AdME.
Pete’s life course was destined for an entrepreneurial career. As a boy, Pete ran the largest paper route in town. He later got involved in door to door selling, first with a mail-order seed selling business, then others in an attempt to scale up orders. By the time he was ready for college, he was interested in technology and earned a bachelors degree in electrical engineering from Stony Brook and a masters degree in computer science from RIT.
In his first job after college, Pete discovered he had the skills and the drive to succeed at sales. Even though he trained as an engineer, his natural sales talent blossomed when he interacted with customers to uncover then help solve their biggest problems. With an innate ability to listen to customers and undertake market research, he found he had an ability to ‘engineer’ successful product and marketing strategies. Over an eighteen year period, Pete applied his talents to senior management roles at Amerinex Applied Imaging, Plexus and Sonic Networks (later rebranded SoniVox).
During those early years of his career, Pete never lost his entrepreneurial spirit. All three companies were relatively small when he started out with them. Through them, he learned much about running a successful startup.
Pete joined Sonic Networks in 2003 as Vice President of Sales and Marketing. At the time, Sonic developed sophisticated music engines for cell phones and mp3 players. Pete’s job was to license this technology to major companies throughout the US, Asia and Europe. Sonic was incredibly successful with their music engine, and Pete was able to close deals with many of the leading cell phone and sound chip companies. In addition to the cell phone companies, Sonic signed a major licensing agreement with Google. This agreement moved the Sonic music engine technology into the public domain and allowed Google to embed the Sonic music engine into the Android mobile phone operating system.
If you played video games in the mid-2000s, chances are you were one of the many million fans of the music oriented titles Guitar Hero or Dance Dance Revolution. These games were megahits in the rhythm and dance video game genre. Played in family rooms, basements and video arcades all over the world, the games became a cultural phenomenon that generated billions of dollars in sales.
In 2005, when Guitar Hero was first released, many of Sonic’s customers asked Pete if his company could develop a similar game for their cell phones. According to Pete, “The idea intrigued us, and we wanted to take advantage of this huge new market for rhythm and dance games. We put together a small game development team and started the development of a new game platform.”
The initial concept behind the platform was to build a developer’s tool to simplify the creation of rhythm and dance games for cell phones as well as other mobile devices. With the recent success of Guitar Hero, and the explosive growth of cell phone usage, building cell phone versions of the game was an irresistibly intriguing possibility for the team at Sonic. Pete reached out to Harmonix, the publisher of Guitar Hero, and Sonic negotiated a license with the company to develop a cell phone version of their game.
By 2007, Google recognized the importance of Sonic’s music engine for their Android operating system. They struck a deal with Sonic to acquire the music technology. A change in ownership of this technology resulted in big changes for the company, for Pete, and for his team.
“Jennifer Hruska, Sonic’s President, asked to meet with me and discuss what my plans were for our new game platform,” said Pete. “At the time, we were struggling to complete the software. But, interest in what we were doing was high. AT&T was offering us encouragement and willing to help launch our first games. As one of the top two cell phone networks in the US, this was a big deal for us.”
Over the next few months, Pete sifted through what the Google acquisition meant for him and his future. He realized he had some difficult decisions to make, but also an opportunity to take some initiative. “The big question in my mind was do I take a risk and do something new and entrepreneurial,” said Pete. “I thought a lot about it and also talked to my colleagues, Elio and Christopher. We had numerous conversations and planning sessions where we discussed whether there was a real market and real customers to support our game platform concept.”
In Pete’s view any new business had to have a very solid foundation. “We didn’t want to create a startup company just for the sake of saying we did it. We needed a high level of confidence that we would succeed. Of course, there is no sure thing with startups. You can never be 100% confident. But our gut told us the timing was right and the opportunity was real. After some negotiations, we agreed to spin off the game platform from Sonic into a new company, which we named AdME. I worked out a deal with Jennifer where I would continue to sell products for Sonic on a part time basis to provide cash flow to bootstrap the company, and they would license the game platform to our fledgling startup.”
Building applications for cell phones was very cumbersome in the mid-2000s era. To help developers do it at scale, AdME was going to have to overcome some important technical barriers imposed by the realities of cell phones. Back in the pre-iPhone days, there were significant differences between cell phones. An application written for one phone would be useless on the others. Application developers had to port their applications to each new phone. The complexity for developers became overwhelming as more and more phones were released to the mobile market.
Pete and his team believed AdME had an elegant solution to this formidable barrier. “We built a platform that eliminated all coding for game developers,” said Pete. “Our initial platform came with two game play styles. One was similar to Guitar Hero and allowed game players to simulate playing a guitar. The other was a variation on Dance Dance Revolution where players dance to a beat based on patterns presented on the phone screen.”
Using the AdME platform, a game designer could customize the look-and-feel of their application with images and logos of their choosing. So a major brand like Burger King could build a custom app using their marketing content. These fun-to-play music games would act as an advertisement for their brand and keep their customers engaged. They didn’t have to write any code. They didn’t have to port their application to hundreds of cell phones. And, they didn’t have to endure the onerous game certification programs dictated by each carrier. The AdME platform took care of all that.
What could possibly go wrong?
One of the biggest challenges faced by startup companies going after a new market is the sales cycle. This cycle includes the time and resources needed to educate customers. In AdME’s case, their target customers were primarily large brands such as technology companies like Motorola, entertainment companies like Atlantic Records and ABC, and consumer goods companies like Wrigley. In the process of speaking with the marketing departments at these large brands, Pete quickly learned he would need to work with their advertising agencies, as well.
“I knew technology and I knew selling, but this was my first introduction to the world of advertising. I had a lot to learn,” said Pete. “Since AdME’s platform helped brands create what was essentially a new form of advertising, I needed to position what we did as an experiment. What I found out along the way was brands valued both exposure and engagement with their target customers. If I could show how our games would increase customer engagement with a brand, we were onto something big.”
Many of Pete’s preliminary conversations with brands and their agencies were very encouraging. “The concept of applying cell phone games to improve brand engagement made them sit up and listen. Not spending a lot of time educating them on the potential surprised me,” said Pete. “It was pretty quick to get them engaged in the idea and they seemed to get it. At the time, it made me think it would be easier to sell to them than it ended up being.” While Pete thought he saw clear blue skies all around, in reality storm clouds were starting to build.
During the Spring of 2008, Pete and his team were making steady progress building their product and speaking with prospective customers. They were able to raise a few hundred thousand dollars of seed capital from angel investors in Boston. Things were looking up… until they weren’t.
The leading edge of a major economic weather front was fast approaching that Spring. The AdME team was totally unprepared for the onslaught they were about to face. The Great Recession of 2008 was one of the most difficult financial periods we had faced in modern history. There were more than 400 US bank failures during the ensuing four years. The stock market plunged by almost 50% from its peak in July 2007 to its low in March 2009.
The economic recession had a massive and immediate impact on AdME. In Pete’s recollection, it was not pretty. “My first indication that we might be in trouble happened during a discussion with a potential investor. One of Sonic’s early investors indicated a strong interest in making an investment at the time we spun out from Sonic. When I reminded him of his interest and asked him about writing a check in 2008, his response was not what I expected. A few years earlier, on the advice of his financial advisor, he invested in Mortgage Backed Securities. Little did he know that these ‘safe’ investments would become ground zero in the current financial crisis. His savings were decimated and he didn’t have any investment capital to risk with a startup company.”
Lack of liquidity spread throughout the financial markets and many angel investors started to slow down their investment pace. They kept some dry powder to help existing investments stay afloat, but investing in a new startup didn’t interest them. Pete’s potential sources of capital to support his business were rapidly drying up.
Another impact from the economic recession appeared during Pete’s meetings with the brands and agencies who were to become AdME’s customers. There is a negative impact on advertising budgets for consumer brands during any major economic downturn. CFOs are always looking for places to cut back on company expenses during tough times. Unfortunately for AdME, marketing budgets were a great place to start.
Since AdME’s approach to brand engagement was unproven, agencies and companies considered their approach to be an experiment. During good economic times, a brand’s VP of Marketing might allocate 10% of the marketing budget to try out new things. In 2007, when AdME was getting off the ground, times were good, gaming and mobile were hot, and AdME was a likely candidate for experimental marketing dollars. By the middle of 2008, companies slashed their marketing budgets right and left, with the experimental budgets being the first to go. Pete became deeply concerned his only source of revenue was disappearing fast.
As the calendar turned to 2009, AdME’s financial picture looked pretty grim. Lack of new investors and customers with no experimental marketing budgets placed Pete in a difficult bind. His two sources of working capital, equity investment and customer revenue, completely disappeared.
To compound AdME’s financial problems, a major technology wave appeared out of nowhere when Apple introduced the iPhone. The iPhone was a radical departure in terms of mobile computing platforms. By 2008, it was clear it was going to have a huge impact.
Pete didn’t miss the early indicators that the iPhone would change everything. Yet, he couldn’t fully appreciate just how significant the iPhone would turn out to be. Elio Maggini, AdME’s CTO, ran a quick experiment to see how much effort it would take to build their product on the iPhone. It was a relatively straightforward effort. AdME would need to support another mobile phone along with all the other phones they were already supporting. But, Pete didn’t think he had the resources to take on another phone. And, it would require a pivot in their business plan, something he did not feel would sit well with the investors.
Furthermore, agencies and brands weren’t asking for the iPhone at the start of 2008. According to Pete, “When I called and asked if we should pivot to the iPhone, all I heard was no. However, six months later during the Summer of 2008, agencies started calling me and said they wanted the iPhone. All of a sudden the dialogue I was having with them switched from what do you have on feature phones to what do you have on the iPhone? Even though feature phones were still the majority of the market, in hindsight, I should have pivoted to the iPhone at that point in time.”
Could a faster embrace of the iPhone have been AdME’s saviour? That’s a difficult question to answer today. It took a long time for the economy, and ad budgets, to recover. And, it’s doubtful the company could raise the necessary capital from investors to keep their lights on during that time of scarce revenue. Additionally, iPhone iOS and Google’s Android platform were ushering in a smartphone revolution with a completely new era of application development for mobile devices. Gone were the days of fussy ports to multiple devices. Now developers could write for two platforms and reduce their porting efforts by several orders of magnitude. This fact alone eliminated one of AdME’s biggest value propositions, the ease of building gaming apps for all phones.
Brands and their agencies never embraced AdME’s concept of customized games to help increase brand engagement. So it is not clear that the initial traction which Pete thought he uncovered during the early days of AdME was anything more than a fleeting fad with limited staying power.
By the Spring of 2009, the handwriting was on the wall. Pete could no longer bootstrap the company and keep the team together with no cash in the bank. He had to accept the fact his timing on launching AdME was unlucky. No one predicted the Great Recession, and Pete was not to blame for his inability to properly finance the company. However, he does accept responsibility for missing the impact of the iPhone on AdME’s business. A strong economy would’ve kept AdME alive, but the iPhone would’ve decimated AdME’s core value proposition to their customers.
Pete started the process of finding a buyer for the company’s technology assets. He thought he could find a software company interested in their platform, but there wasn’t any interest in the company’s assets. Although the storm had passed and there was blue sky peeking out, there was destruction everywhere. It was time to declare an end to the AdME story.
Pete took it hard and felt he let his team and his investors down. But in July 2009, Pete recalls speaking to one of his investors from whom he got a refreshing piece of advice, “Pete, get on with your life and I will write off my investment.” Most angel investors understand the risks they take when they invest in an early stage company. Although we don’t like to take a loss, we know it’s futile to try and keep a company alive when it is facing a Perfect Storm.