Like some of you, I have an uncle who likes forwarding emails that feature quotations, random slide shows and holiday alerts. Mind you, since we have a lot of holidays and festivals in India, these emails are frequent. Still, it is fun to hear from him (mostly because I love him). Recently, he emailed me an old folk tale.
According to the story, a farmer has a donkey, which falls into a well. The donkey starts braying, forcing the farmer to look for ways to figure out what to do. His conclusion? Since the donkey is old, it’s not worth the effort to retrieve the donkey.
He starts shoveling dirt into the well. The donkey has an “oh-crikey” moment and it starts crying and creating a fuss. But then, it quiets down. With every few shovels of dirt, the donkey re-adjusts, shakes dirt off his back, and stands up. Before the farmer knew it, the donkey was out of the wall.
This old folklore has a simple lesson: When life pours dirt on you, shake it off and move forward. This lesson is particularly true for start-ups that have to face their moment of truth.
I was reminded of this story when I was transcribing my interview with Neil Young, CEO and co-founder of mobile video games start-up, ngmoco (acquired by Japan’s DeNA for $403 million.) Young and I have talked off and on, and before he sold his company, he and I discussed the change of direction he made for the company.
Neil shared with me the story of how, when facing a near impossible business environment, he had to find a new business model for his company, which started life building premium mobile games. It sold a lot of games!
To the outside world, ngmoco was a massive success, but Young knew the harsh facts: the games had a very short half-life and they lost money-making potential once they fell out of the top ten or after the initial couple of weeks.
Young argues that for a company making premium mobile games, the company would have to have two games in the top five paid games on the iPhone store for 365 days for the company to build a $10 million a year business.
Even if you added Android platform opportunities, ngmoco was still in a hit-driven business. With new free (and paid) apps launching every day, Young & Co. knew that it would be difficult to keep on the hit trail. Moreover, the average price of the games was decaying fast and settling at around 99 cents. The ad-based revenue stream wasn’t going to be enough, as the eCPMs were pretty low. Like the donkey, ngmoco was in a well, with no likelihood of coming out.
However, upon closer scrutiny, Young’s team realized they had a lot of games, which had very high engagement and user loyalty. “Games are not built for a fleeting moment in the charts, but are built for an (ongoing) relationship with the customer, “ he says. “The longer you can maintain that relationship, the longer the opportunity.”
Armed with this knowledge, ngmoco started the Plus+ network (its social gaming network), and embraced the Freemium model that eventually led to the company increasing its revenues and later selling out to DeNA.
All Chips In
Young isn’t the first corporate honcho who made tough decisions. Intel Corp., the company we chip-heads affectionately refer to as Chipzilla, was the proverbial donkey in the well in 1983, when it was getting killed in the market by Japanese memory chip makers.
The company had been dabbling in the microprocessor business, supplying chips to the likes of IBM, but the majority of its revenues came from the sales of memory chips, primarily dynamic random access memory (DRAM).
Andy Grove, then-president of Intel (and later its CEO and chairman) made a crucial decision: Forget the memory chips and gamble it all on becoming the single source of microprocessors for the PC industry. His decision came at a time when it wasn’t clear what PC standards were going to prevail, or if the 8086 processor was going to catch on. The rest is history.
And the Story Goes…
Richard Tedlow, a professor at Harvard, in his book, Denial: Why Business Leaders Fail to Look Facts in the Face and What To Do About It once wrote: “Denial is the unconscious calculus that if an unpleasant reality were true, it would be too terrible, so therefore cannot be true… In fact, denial might be the biggest and potentially most ruinous problem that businesses face, from start-ups to mature, powerful corporations.”
Nokia’s denial of the existence of the iPhone and the disruptive impact on its business is a good example. Young of ngmoco could have accepted the short-term success of his company, but instead he decided not to.
I have seen many a startups (and many a founder) spend most of its energies bemoaning its miseries, instead of trying to do something about it. But like the proverbial donkey, the decision is yours to make.
Around the Web
- Niall Ferguson: Americans and Revolutions
- Scott Olsen: DST & Y Combinator: A (VC) Industry in transition
- Brandon Watson: Why developers shouldn’t listen to Scoble