[00:00:01.28] Welcome to the Startup Grind. We are really excited to be here. We really appreciate Charles. Doing this with Charles tonight, it's a guilty pleasure for me because I worked at EA for four years and have been a huge fan of his products and his work for a very long time. Charles attended the University of Berkeley California. He was originally born in Taiwan and moved here at a very early age. He and his brother co-founded Red Octane in 1999 and we're going to hear this whole story and it is just absolutely fascinating, but eventually as you all know in 2005 he went on to build Guitar Hero, which became one of the most successful video games of all time. I checked the MPD data today and in North America it did over 30 million units, more than double that worldwide and grossed over five billion dollars, so really, really incredible. Charles, after getting acquired by Activision in the last year or so has founded two game companies, which are housed here -- Green Throttle as well as Blue Goji, and we're going to see some of those products towards the end of tonight. But, let's give Charles a big round of applause for being here.
[00:01:31.11] CHARLES: So, yeah -- sorry about cramming everybody in as we don't have a lot of open space in this little office. I apologize for that.
[00:01:38.24] This is great. It's called Startup Grind, so it's only fair.
[00:01:42.04] CHARLES: It feels cozy.
[00:01:42.15] QUESTION So, you have this huge success with Guitar Hero and Activision acquires your company and here you are doing this whole thing again. You guys are kind of back in the startup mode again, right? You're not living large, spending money like crazy. What's with that?
[00:02:02.20] CHARLES: So, I started off trying to work from home for as long as I could until my wife got sick of seeing me sit at home. She kicked me out of the house and I had to go get an office, and the first office we got was a smaller office. It was smaller than half this size and I got a sense of being back in a startup. First we went into the office and it was just me because my brother and I were the only two people at the time in the company and he was on vacation. I went in the office and I realized, hey, there's no water here and I thought, who can I tell to get water? There's nobody, it's just me. I thought I need to hire somebody to get water. Who do I tell to hire that person? Well, there's nobody else to tell to hire that person. So you realize that it's just me sitting here and if I don't have water then I better go out and get some water then. And so we really began this sort of what I call, you know in the Rocky movies where Rocky goes back to the grim INAUDBLE [[00:02:58.18]]] but that was exciting, it took a few weeks to get back, but it was just like so much more energy when you're forced to kind of sit there and be dealing in a world where you have limited resources and use them as smartly as you possibly can.
[00:03:19.17] QUESTION: I was telling people as they were walking in that we've done about 50 of these events and you're the first speaker that has ever helped us setup chairs. So, you know I think that -- and we're going to hear your story -- that it kind of goes along with what you're talking about with kind of getting back and jumping in and doing whatever, but –
[00:03:38.20] CHARLES: The thing I was afraid of most the second time around was not being able to do and put up with the hardships because you guys are all here, you know how hard it is to be in a startup and having come through that cycle to the point that you weren't a startup anymore, you were a big company, and to come back, I was really worried about not being able to do everything that I had done before. I talked to somebody, because we had no money, and we had an office in India, you know you fly to India and one time I flew in the middle seat of Coach, twenty-four hours -- it's 12 hours to Frankfurt, 45 minutes off the plane, and then back on for another 12 hours to India and that was the kind of stuff that we used to have to do because we had no money. You know, you take like a business trip to China for ten days and spend less than a thousand dollars including your airline tickets, right? I try to, as much as I can, to do everything myself because I want to be in that frame of mind where I feel like I can do everything I need to do to make a startup work because it's so hard.
[00:04:53.10] QUESTION: Well tell us about your background. Tell us where you grew up, what your dad did for work, the business he had.
[00:05:00.28] CHARLES: So, I was born in Taiwan, and was there all the way through half a year of first grade, so my father moved the whole family. We went to a suburb of New York, and spent five years there and he did the classic Asian immigrant thing, we actually had a grocery store in New York, so I worked out of a grocery store in grade school stocking cans and whatever, you know selling stuff and running cash registers, and then we moved out here to Malibu starting in junior high. I think that was, at least when I was here in the 80s, that was the first time I had ever heard of tech. Some of my friend's parents were in technology companies working on the first hard drives. A lot of it was PC related back in those days. It just so happened that one of my friend's dads ran a company called Okie Semi-conductor and Okie supplied all the chips for the Atari 2600 cartridges and that was my first exposure to really how video games were made because I had played video games before. We had owned the first Pong home console and the Atari 2600, but I had never learned how the video game industry worked and it was enough to have met Matt who, ironically, is one of the co-founders that we have for this company. So, that's how far back our relationships go. I learned about tech, went to UC Berkeley, graduated. I actually spent some time in a family business after I graduated, which was what my dad was into that time import and export of auto parts and accessories, which was far from video games, but it was the place where I learned manufacturing hardware in places like Taiwan and China worked and then in 1999 we started Red Octane because that was the peak of the dot com bubble and that's what everybody did, so my brother and I -- my brother who also went to CAL and got a computer science degree and some other friends of ours started that company.
[00:07:11.06] QUESTION: Where did that original idea come from to start something together?
[00:07:13.26] CHARLES: Yeah, that was -- for those of you who were there, '98 and '99 was crazy. That was the peak of the biggest bubble I have ever seen. Everybody was in a startup, but you go to some random office or event somewhere and ask if anybody was in a startup and everybody would have their hands up. It was just the thing to do and there was a unique window in time where you could basically start an Internet business in almost any field in almost any background and I would say you would get -- you know with a Powerpoint -- you would get a million dollars in funding and if the PowerPoint was any good you would get two million dollars that was how crazy it was. So, we're just big part of this massive wave of people who thought -- hey we could do that. So, we started a company and raised a million dollars with a PowerPoint and we started the company doing online game rentals like the Netflix DVD rentals for video games, and that was the first business Red Octane was in.
[00:08:20.07] QUESTION: And you launched right about the same time as Netflix, right? Six months later?
[00:08:22.18] CHARLES: Yeah, we launched our business six months after Netflix launched their business, so we were the first to do that. there's a company now called Gamefly, which does the same thing, but we were the first to do that. And, unfortunately for us, about six months after we launched -- April 2000 hit and the dot com bubble kind of burst, so we had to figure out a new business model because anything that was, back in those days B2C, Internet, ecommerce model, was just never going to get funding and for a while there it looked like VCs were never going to fund another startup ever again in 2001 and 2002, it just looked like the whole value was just going to die and go away, so we had to figure out a new business, so that's when we scrambled and looked at video game hardware, and then eventually video game software, so that was the beginning of what was many lives of Red Octane.
[00:09:22.06] QUESTION: So let's talk about that first life transition. So, you realized that hey this business doesn't have any legs so you just sat down in a room? Did you brainstorm ideas? Where did it come from?
[00:09:34.28] CHARLES: Yeah, so I would say that was one of the fortunate things because it forced us to ask a question that a lot of startups don't ask, which is should we be in this business? Right, because you start with the idea that we're going to do this business and it's going to be fantastic, but there's is really nothing ever that comes along and makes you ask should we be in this business and if we shouldn't be in this business what business should we be in? So, we were forced to ask ourselves that question -- should we be in this online game rental business? And we realized quickly -- no, because we're never going to get any funding for it and without funding you can't grow that business. So, the next question was what business should we be in? And, luckily for us, we were renting at the time a lot of Playstation 1 games, this is how old that goes back. So, Playstation 1 was the predominant console at the time and if you remember back in that era you could modularize a Playstation to play pirated games or Japanese games, so there were a lot of people renting these sort of crazy video games from Japan, that never made it to the United States, of which probably the biggest rage going at that time was a music game called Dance Dance Revolution, which was huge in Asia during the late 90's, but had not made it to the US, but we knew that people were renting them from us and they were asking us, hey we want to get the dance pads, because without them you can only play tapping on the game pad, which isn't any fun. So, that was our first sense was well if people want game pads, let's just sell them game pads, so we just kind of stumbled into that business through the existing customers that we had, and believe it or not, we started selling dance pads, we realized the dance pads that we were buying and reselling were garbage, because they were breaking down and we thought, we could make better dance pads than this. So, that's where my sort of what I learned about manufacturing came into play because I literally packed my bags, went to China, visited a few of these factories that made dance pads, figured out how they made them and took a bunch of suggestions that users had given us and incorporated them into new designs and so we started coming out with our own dance pads and believe it or not, that kept the company afloat. That turned around our fortunes, we became profitable, slightly profitable, and it kept us alive through the dark days through 2001 and 2002 and 20003. So, we became known primarily for a while there as dance pad or you know video game controlling company.
[00:12:04.17] QUESTION: And you had how many employees at the time? How many people working in the company?
[00:12:06.24] CHARLES: So at that time we were about 20 people in the company.
[00:12:13.25] QUESTION: Here, right? Mountain View? or Santa Clara?
[00:12:16.10] CHARLES: We were in Sunnyville just down the street from the golf course. So, we're about 20 people then selling everything online. For us, we had to start that way because we couldn't afford to sell to stores because the cash flow, the way it works is you sell to, say, Gamestop and they don't pay you for 60 to 90 days and we didn't have the money to do that, so we had to sell everything online because, when somebody orders with a credit card, you get paid in two days as soon as you ship the product, so that cash flow was really important for us and it was one of our biggest lessons running a startup was, you know profits were important, but cash flow was really what kept our company alive. Even if we had sold a lot of these dance pads through retail instead of online, we probably still would have gone out of business because the cash flow just doesn't turn as quickly. It was impossible for most companies, and for us it was I think doubly impossible because of the things we were doing. We were making dance pads, we were selling them to consumers, there were a lot of things -
[00:13:21.23] QUESTION: That was like the photo sharing app, though, of the early 2000's wasn't it? Because everybody was making dance pads.
[00:13:26.19] CHARLES: Yeah, dance pads -- it was kind of a crazy market, but it made money, which was, for us, important, because you know we figured our number one rule to surviving those years was, you know, just don't go out of business. Don't die. As long as your company doesn't die, smart people will find a way to make things happen, but if you let your company die, that's it, you'll never have another shot. So, it didn't matter whether or not we could raise money or whether or not the markets turned, the first thing we had to do was just make sure that our company didn't die and so each week when we started our management meetings the first thing we looked at was how much revenues we took in and how much expenses we had because there was no conceivable vision in our head that we would be able to go out and raise money to fund the burn, the burn had to be funded by the revenues we were collecting every single week and for a period about two years there, crazy as it sounds now looking back on it, we were running with less than probably two weeks of cash in the bank all the time. It's like every single week we were just hoping to make enough money to make the next payroll and then when you made the next payroll, you know we made enough money to pay the the rent and then you paid the rent you were hoping that you were making enough money to a pay the next payroll and it was like that for about two years truly just grinding just every single mile for about two years.
[00:14:56.27] QUESTION: Did you miss payroll? Were there times where people went without?
[00:15:00.29] CHARLES: No, luckily we didn't miss payroll, but we had two specific instances where we were within probably a week of having to basically lay off everybody in the company. One of them we got so close we even had the email drafted where we were going to tell everyone that sorry we don't have enough money to pay everybody so we're going to lay you off, so we had two really near death experiences and that first one it was amazing, it was right before Christmas, and we had never gone through a full Christmas cycle selling product in the video game industry and those of you who have ever been in video games and toys, you know that about a third of all your sales come within that Christmas, literally almost that entire thing come from between Thanksgiving and Christmas, so we thought we would have to lay off all of our people before Christmas and then all of a sudden Black Friday hit and it was like all these orders came pouring through the website, and it was like a gift, like money falling from the heavens, like oh my god where are all of these orders coming from? And then that actually gave us enough money to make payroll and we made enough money over the next month to continue.
[00:16:12.12] QUESTION: That was what year?
[00:16:12.12] CHARLES: I think that was 2001 was the year that we almost ran out of money and then it was another time we almost did, but somehow we -- we almost ran into that situation again, but you know we still had that entire mentality through the entire history of the company was we treated it as if we had two weeks of money in the bank and the way I like to describe it to some people -- it's very different from running a VC funded business or, after we got acquired by Activision we were part of a big company, is that I joke that when we were on our own it was like you went to the mall and you had to shop with cash. Like, if you had a hundred dollars in your pocket you were only going to walk out of there with a hundred dollars worth of stuff. But, when you were VC funded or you had a big company it was like you had a credit card and you walked in there and you just start swiping your card and it was almost unlimited. We had this mentality that we were always shopping with cash. We were not allowed to any given month spend more money than we were bringing in.
[00:17:26.18] QUESTION: So, you started this subscription business for renting games and then you transitioned into doing the dance pad and accessories, and then tell us how that evolved into actually making software.
[00:17:38.21] CHARLES: Yeah, so what we realized back then was, Dance Dance Revolution was made by another company -- a Japanese company called Konami, and Konami had brought Dance Dance Revolution to the United States, but they weren't pushing it particularly hard, primarily because they had another game that was huge at the time called Yugi-Oh so DDR was just an afterthought. So, we sat there and thought at the time well jeez, what if Kunami tomorrow decided to stop making DDR or stop selling it in the US, then we would be out of business. So, we realized that we need to do more to be in charge of our own future. So we started thinking about ways to make video games and and that's how we pivoted into becoming a video game publisher, specifically there was a dance game in the arcade called In The Groove, which sort of had a following amongst hard core DDR players and so what we literally did is we took that product, found the developers and said hey, are you guys interested in making a Play Station 2 version of this and we'll fund it and publish it. We'll do all the sales and distribution and that's how we got into the video game side of the business was through that first dance game, which was called In The Groove, which was moderately successful and it took our company from, I guess about three million in revenues up to about nine million in revenues and it was the profits off of that that allowed us to do our second game, which was Guitar Hero.
[00:19:21.25] QUESTION: Talk to us about where that idea came from. Were you guys guitar fans, were you players? Was that the natural progression from In The Groove?
[00:19:32.29] CHARLES: So, yeah, we had been thinking ever since we started making dance pads and started looking at dance games, our thoughts had always been around how we could make them popular in the US and Europe, because they were enormously popular in Asia. DDR was about as popular a game as there was in the late 90's in Asia and we couldn't figure out -- these games are great, they're super fun, but for some reason they're just not working in the US and in Europe and so we were experimenting with things so In The Groove we put a lot of English songs because DDR had a lot of J-pop and random mixes of songs that people weren't really, yo know, enthusiastic about in the US or Europe, but the game itself was fun, so we had to play with the formula in our first attempt to put English songs in the game I think helped make it more accessible but these were a lot of songs that nobody had ever heard of and so part of our thinking then was that we need to make another music game that would strike at the core of American and European audiences. We need to experiment with the music mix more and try to get songs that people knew and understood, and there were a lot of music games in Asia at the time that we enjoyed playing. Actually, it wasn't specifically that any of us were guitar players, what happened was that we took a look at a bunch of music games, one of the favorites was another Kunami game called Guitar Freaks, which was a guitar game played very similarly, but we took a look at that and said man this thing is fun, but if we could just make a few changes, we think that would be a really fun game and amongst the changes we thought was if you're going to make a game about a guitar it should be about rock and metal and everything that is rock metal and so we started talking to a studio in Boston called Harmonics, we had met them a few years before when they were doing another music game for Sony. They were sort of another underdog music
[00:21:33.07] Yeah, crazy story -- they're very similar to you -- they almost went out of business a number of times.
[00:21:39.18] CHARLES: Yeah, they had been at trying to make music games in the United States for ten years without any success and we had always talked about working together because when we first met we were like this music game hardware company and they were this music game software company and neither one of us had much success, but we had visions of what we could do and so when we got together we said hey, you know we're thinking about doing this game around a guitar and they said that's funny we've been thinking about doing a game around a guitar too and so the ideas just started flowing and it just meshed it was like Guitar Hero was an incredible experience in that in the first day that we talked about it, which was in February to the day we released it, which was in November, it just everything about it just seemed like this magical experience. You know, you hear like musicians how music sometimes the right songs just flow from your head? It was like that, it was like every idea just came so smoothly. It was like yea this works, this works and you didn't have to do market research, you didn't have to think. I guess the culmination of both of us thinking about music games for so long and we started in February like I said -- that game was crazy. We tried to make our first demo for E3 in May.
[00:23:01.20] QUESTION: And you made it, right? I mean that's a big part of the story of how you guys became successful.
[00:23:06.11] CHARLES: Yeah, we did. We won some awards at E3.
[00:23:10.14] QUESTION: But you weren't on the floor, you were like down in the indie back in the basement.
[00:23:14.14] CHARLES: Yeah, in the basement, what I call the bowels. Literally down in the basement where nobody went. The reporters and the reviewers were going down there asking if they're in the right place. Like, random Chinese companies making unbranded game controllers were hanging out at this hall they call Kensha hall. So, we were down there and we didn't even have a booth. We had a little meeting room that we had set up. And, you know the crazy background to that was the whole time we had been working on, we had a team working on the hardware for the controller and Harmonics was of course churning away on the software and nobody knew how the other side was really working. Like, the first time we saw the first software built was at E3 and the first time they saw the guitar build was at E3. We had it shipped directly from China to L.A. and we showed up there and they showed up with their disc and we showed up with our controller just praying that this thing works and you plugged it into the Playstation 2 and it was like oh my god it actually does work. Because, before that all we had seen were the first builds which were literally dots on a black screen falling down and that's all Guitar Hero was and then they had not seen any controllers so they didn't really know how any of it was going to work and we didn't know how the software was going to work. Like we showed up at E3 and it worked and we were showing reviewers and it actually walked away with one of the Best of Show awards for the entire show. You know, most games, we were that year competing with games like Resident Evil and there is a bunch of hit games -- Tony Hawk was huge by Activision at the time and of course EA is showing Madden and all these games, Need for Speed, and our budget, which was laughable. I mean, our budget for Guitar Hero 1 was 1.7 million dollars, which for a Playstation game, most other budgets were probably at least ten times that. After we joined Activision we realized that most of their other games were running budgets closer to 30 to 40 million dollars and we had made a game for 1.7 million dollars that was competing for game of the year, but the product itself had just a very unique fun factor. The software wasn't sophisticated, the hardware wasn't sophisticated, so there wasn't a lot of cost of development, but the user experience, what i call that UX was just so fun and it captured that experience so tightly that we didn't need to spend millions of dollars prettying up the graphics. It was a game that really sold what we call the fun factor and it couldn't be explained. You couldn't see it. You had to touch it, feel it, and you hit five notes and suddenly you realize that wow, this is really fun and that's what we, you know why we had to put it in people's hands and demo it because as soon as they played it they realized what it was about. It also struck this chord, I thought with rock metal and US and European audiences in that we weren’t selling a guitar simulation, but what we thought we were really selling was this aspiration of you being a rock star, right so like kids in the US and in Europe grow up dreaming of being rock stars and of course like 99% of the people can't ever be a musician because we just don't have the talent, but you still have that dream and what we didn't realize was how many people had that aspiration and so the minute you put it on -- I was talking to a famous reviewer [00:27:01.20]INAUDBLE Newsweek, and he was telling me that when he first saw Guitar Hero he thought it was the stupidest thing he had ever seen and his colleagues kept telling him you got to try this game, it's fantastic and he said finally that by the time Guitar Hero 2 released somebody convinced him and said you got to try this and he realized that this things getting huge I should try it and he said the minute he put the guitar around his neck, he said i didn't even have to play the game, I just knew because it made him feel like he was a rock star and he said that's all it was, it just captured that spontaneous moment where you felt like you were a rock star. There was no time to focus test anything, we had very tight deadlines, but we had this belief that , you know we never imagined Guitar Hero was going to be a massive hit, but we had this belief that it was a good game that people would have fun playing and we had this belief that there would be this audience for it based on everything that we had seen, renting music games to niche audiences in the US so like a lot of our other projects at the time, our goal with Guitar Hero was just not to lose money. So, you know we minimized the downside, which was we thought we could break even and then we tried to maximize the upside from there. That was our entire philosophy heading in was 1.75 million -- yeah we can break even on that, especially after we started to win awards, but even after we started to win awards there was still a lot of skepticism within the industry.
[00:28:37.04] Could it go mainstream.
[00:28:38.29] CHARLES: Yeah, you know we started to pitch the game in the summer time to retailers and despite the fact that this game was winning awards, most retailers didn't take the product and didn't carry it. We only got two to take the product out of the six or seven that we pitched.
[00:28:56.01] QUESTION: Who was that? Who took it?
[00:28:56.01] CHARLES: GameStop took it and they were almost obligated to take almost every video game product because Game Stop was where hardcore gamers shopped, so you have to have everything, so it wasn't hard to get in there and the only other retailer that took the product was Best Buy and nobody else -- we pitched Target, we pitched Wal-Mart, Toys R Us, Circuit City. Toys R Us was the fascinating one. We showed it to a buyer there and never heard back from him and literally that Christmas season where Guitar Hero 1 was released, we heard from one of his colleagues, you know he basically locks himself in the office all day and just plays Guitar Hero, that's all he does all day, but he still refuses to buy the product and carry it because I think there was this ingrained belief that this game was just not going to fit the mold of every other successful game. This box was big, it doesn't fit correctly on the shelf. The shelves are meant for stocking this little DVDs jewel cases. This price is too high -- the games sell for 49 dollars, you want to sell your game for 69 dollars? That doesn't make any sense. Why would somebody pay that much? The idea that music games didn't sell in the United States because they look at sales data, which is backwards looking, and they say you know music games never sell in the United States, so we had all these things that conventional wisdom that worked against us, even though you put the game in that buyer's hand and he can't stop playing it, something in his head still tells him that this will never sell.
[00:30:25.14] QUESTION: When you first came to Harmonics and you guys first started talking about any of the ideas, did you get worried about sharing your idea when them? I mean, you guys were the hardware guys, they were the software guys, but either one of you could have become direct competitors right then.
[00:30:40.11] CHARLES: Yeah, most of the things we do we tend to be more open about collaborating with other companies and I think part of the reason comes from the fact that we didn't have enough resources to be able to build everything internally, but the bigger part was that our belief at the time was we would go anywhere in the world and talk to anybody that was working on music games, because we never felt like we would have all the great ideas just in our little company and what makes games work is great ideas, creativity, and we always thought that, you know you have to find that and search that out anywhere on the planet, so we would go to Japan to talk to somebody making music games. We would go to the UK. It didn't matter where you were. I mean, anywhere there was somebody working on a music game, we would go and talk to them because it was more likely that w would be able to increase sort of the scope of our thinking for music games through that interaction.
[00:31:37.03] QUESTION: So, you launched the first game in Christmas season 2005 and tell us about the next two or three years, what happened after that?
[00:31:49.14] CHARLES: Yeah, so heading into that Fall, I'll just start there and tell you about how things ramped up. So, heading into that fall it was crazy. Retailers refused to take the product. We were out there trying to on this weird path where we were starting to win awards and still nobody was carrying the product. We tried to raise money to fund the initial inventory, we just tried to raise three million dollars from VCs. The previous year we had done nine million in revenues i mentioned and we had netted almost three million dollars, so it wasn't like we were a startup that was burning cash, we were already profitable. We tried to raise three million and we couldn't get anybody to invest money. Part of the reason was, at the time, video games were just considered an uninvestable category by VCs. It was hit driven, you show us two racing games, we can't tell you which one will sell better. So the whole category was just off limits. So, in order to get the game out, my brother and I took out second mortgages and credit card debt and whatever money we could to buy inventory for the launch of Guitar Hero 1.
[00:33:04.17] QUESTION: And this is after the awards, this is after the praise and things?
[00:33:08.07] CHARLES: Yeah, this is after we started winning awards and people still didn't think that the game would sell. One guy literally told us that looks like a fantastic game, too bad you're going to go out of business trying to sell it because it was just so deeply ingrained that a game like this with all these things working against it -- the big box, the high price point, just wouldn't work.
[00:33:29.03] QUESTION: Harmonics too, they had this string of critically acclaimed games that were not commercial hits, right? So, I don't know if that played into it as well.
[00:33:37.01] CHARLES: Yeah, they had talked about the curse of a hundred and seventy-five thousand units, which was like they could never break that, which meant that none of their previous games were profitable and so none of us had really high expectations. We launched the game in November, Best Buy had given us a forecast that they thought they could sell thrity-thousand units of this game through the Christmas season so that was really for us, two weeks in November, December, and January. The day that it launched, they sold three thousand in the first two hours and they called us and said, hey we need 80,000 units next week. And we said, uh, you don't understand how this works. We make these guitars in China and they come over on a boat and next week we're getting five thousand units and you're going to have to split that with Gamestop and that's how it was. Guitar Hero became the hardest game to find at Christmas. The dirty secret was partially because we couldn't make enough inventory becaues we didn't have the money to build inventory, but it was the hardest game to find. Gamestop store clerks were telling us that they started answering the phones with no we don't have Guitar Hero, they don't even wait for the person to ask. So, that first year, Guitar Hero was essentially sold out everywhere. We were making guitars as fast as we could out of China in our first year we sold -- in the first 11 months -- I say 11 months because Activision bought us at that time, we sold 45 million dollars worth Guitar Hero and it was crazy. We couldn't raise three million dollars in September heading into the November launch. November, the game launches. December it becomes the second best selling game in the US. It was only number two because we didn't have enough inventory and that sales data is released in January, so January we started getting calls from private equity firms to invest 30 million dollars in our company and I was talking to my brother saying this is crazy, three months ago they wouldn't even invest three million dollars and now they want to invest thirty and the first day that we got a term sheet from one of them Activision called us and then, eventually after a few months of negotiation they bought the company in June and so, that was right around the time that Guitar Hero 2 came out and so Guitar Hero 2 then took us, as you were saying it started to scale like crazy, took us to 300 million in sales, by the time Guitar Hero 3 came out, that took us to 1.1 billion dollars in sales and then Guitar Hero 4 took us to 1.5 billion in sales and then we came back down to a billion after that, but that's another story.
[00:36:21.24] QUESTION: And that's with Rock Band basically splitting the market.
[00:36:25.21] CHARLES: Exactly, that's with Rock Band splitting the market. That was with us engaged in this massive market share battle, because they were acquired by Viacom at the time and we were under Activision.
[00:36:39.01] For those that don't know, Harmonics who was making the games, got acquired by Viacom and then you guys got acquired by Activision.
[00:36:45.08] CHARLES: Yeah, so when the game came out, all the big companies look around and goes, what is this game? Who the hell made this? Who is Red Octane, who is Harmonics? Nobody had, you know, EA, Activision and everywhere else and Microsoft were like who are these guys? They started going around and talking to everybody. I think interestingly, Activision ended up acquiring us and then Viacom acquired Harmonics, and that sort of split the companies because Viacom and Activision had some lawsuit in some past history and so the two parent companies were dead set against working with each other, so that set the course for now there is going to be a Guitar Hero and there was going to be a Rock Band, which a couple of years later the game came out and so we became -- we were collaborators, we eventually became competitors. It was not on a personal basis, we were still friends. It was funny, we would show up at shows, and you know people would assume that we were like mortal enemies and that if we saw each other there would be a big knife fight or something like that and we walk in and you know we're hugging each other telling each other how things are going and you know to this day the collaboration of two unknown companies making a product that kind of shook up an industry, we're still tight to this day. We talk to each other. People have come out of their company and we've worked with them. People come out of our company and work with them. So, it was just an incredibly fruitful relationship.
[00:38:22.20] QUESTION: I remember seeing a meeting at EA and the analyst there said, you know we’re talking about Guitar Hero and he said, well I did the analysis on whether or not we should give an offer for Guitar Hero and he said, you know, add X number of hundred million dollars or whatever in the six figure million range, he said there was no precedence for it. We couldn't justify it and then, as you say, it just absolutely exploded and then we were like how couldn't you see it? But, no one could really -- no one had that vision of the market and what the product could become except for the guys who were making it.
[00:38:57.10] CHARLES: Yeah, it's a tricky thing I realized about sales data, once we were inside Activision, and a lot of big companies tend to rely a lot on sales data and marketing research, is sales data is inherently backwards looking and what happens if you look at what games sold last year and you try to make games that sell a lot is that you make the same game. So, if a first person shooter has sold a lot last year, then you make first person shooters this year and then so inherently it drives this -- when people complain about lack of innovation in video games -- a lot of that is driven by this inherent sort of backwards looking philosophy of what sold last year must be what will sell this year so we'll just make that and it works for some things. It works for how to improve the games incrementally, but it doesn't help you discover the next big game, which is why I think it's surprising that the biggest game fans just completely come out of left field right so, World of Warcraft comes completely out of left field. Nobody thought that an MMO could reach millions,and it does. You know, Grand Theft Auto, comes completely out of left field because nobody ever envisioned that an open world game would be interesting to players. So, a lot of these things happen because we don't have access or we don't rely on backwards looking sales data and a lot of the things happened or us because out of sheer ignorance, quite frankly, because we didn't know that retailer like Wal-Mart and Target wouldn't stock a big box on their shelves and we didn't know that you weren't supposed to charge more than 50 dollars for a video game and to a lot of people's surprise for the first five years of the company, even when we were making -- up until the point we started making Guitar Hero -- we did not have a single person at Red Octane out of the 25 people or so, we did not have a single person that had ever worked in another video game company before. All of us were first timers. None of us had ever made a video game. None of us had every made video game controllers and so we had this.
[00:41:04.14] QUESTION: Was that by design? Did you want people from other companies?
[00:41:08.05] CHARLES: Yeah, I think just people wouldn't come work for us. But, it was liberating in the sense that we knew what we wanted to play and we knew this audience and we didn't have to live by all the constraints of sort of industry convention and a lot of times that's what I find myself battling the most is the second time around assuming that that won't work and then I have to find myself and I have to catch myself when I say that because I recall a period where people tell me the same things well that's not going to work.
[00:41:48.05] QUESTION: What motivated you guys to see it through and to push forward on your vision even though there was basically no data or anything to back, other than what you though was going to work?
[00:41:58.07] CHARLES: Yeah, the thing that we had was, through our ecommerce business, early on we had direct conversations with consumers. So, that's one thing that I always advise companies, if you can, is to talk directly to the consumers. It's difficult to get the information if you have a middle man whether it's a retailer or another retailer or some channel partner, because you just don't have that information. We were talking directly with consumers. They were emailing us to tell us why our products sucked, why they were braking down and over the years, we just learned a ton from direct interaction with consumers and we would go to trade shows that were consumer trade shows so we would show up at like at Comic Con and Anime Expo and set up booths and people would come and play the games and tell us what they thought of the product. So, we had this feeling that we could sell enough games to break even and that was sort of our belief was we knew this audience, we had a way to sell it online, we were never going to let somebody stop a great game from getting to the market, so even if no retailer carried the product, we would still sell it online and we thought we could sell enough units to break even. So, being able to control our own distribution was critical in that sense and not relying on somebody else to be willing to distribute our product to us. So, the confidence that we had that if we control the risks enough we felt that we could have a positive ROI and we control our distribution enough that we felt like even if nobody in the world wanted to carry Guitar Hero, we could still sell this product. Having those in place allowed us to make crazy bets like take out second mortgages and borrow money from friends and what not to pay for Guitar Hero 1 inventory. Once the game comes out, then everything completely flips almost immediately to where it becomes accepted sort of convention oh of course this is what consumers want and at that point you're struggling with a different set of issues that you were going into it when there's a healthy amount of skepticism. So, for all of you guys that are in this startup grind, is that you'll likely come into the same inflection point in your business, when they use that term inflection point, it really was an inflection point where within a matter of a couple of weeks, everybody's view point on this game just changed completely and they we t from this will never work to oh my god you need to ship us 80 thousand units next week and it literally does change. For us, with that specific instance, it changed in two hours -- two hours of data.
[00:45:08.22] QUESTION: But five years earlier, you could have just as easily never even existed. You could have gone out of business five years earlier, right? I mean you guys found a way, we use the word pivot, but you just iterated and you just kind of just found your way to what would eventually become an amazing product, but it was far from what you ever started doing in the beginning.
[00:45:29.06] CHARLES: Ironically the fact that we were never able to raise money helped in the sense that, we could sit in a room in just decide do we want to do this and if we decided we wanted to do it, then we would do it and not having sort of what i call adult supervision around telling you what you should or shouldn't do helped a ton for us in those instances. If we believed in the product we would just do it. As long as we could make money on it or if we thought we would break even, or as long as we didn't lose money we would just go ahead and do it so that helped immensely with the ability to pivot was not having adult supervisions looking over our shoulders and the second thing that allowed us, was what we talked about earlier, was the financial independence of being, not only profitable, but cash-flow positive and knowing that you're not going to have to go raise money somewhere, gives you the ability to do things that you can't otherwise do. Some of you -- it's rare in a lot of tech companies, because i frequently have discussions with some of my VC friends who have seen a lot of startups and I ask them have you ever seen another startup? because we never raised a penny from VCs.
[00:46:46.06] QUESTION: Didn't you raise a million?
[00:46:48.13] CHARLES: That was from friends and family. That was '99 where people were really willing to invest money in startups. So, we never took VC money. It was only friends and family and relatives and things and I would ask her -- have you ever seen another company that didn't take VC funding and that had an exit that was, and I just arbitrarily picked a hundred million or higher, and only one of them came up with one they said VM Ware had don it, was the only other company they thought they had seen in the Valley here do that. I think it is just such a part of the conventional mindset that what you do as a startup is you build your prototype or you know your initial proof of concept and then you go raise a bunch of money, hire a bunch of people, build it bigger, try to scale this thing, raise some more money, scale this thing bigger, and that's just so ingrained in the Valley that nobody had ever even though of another path that was possible and because that path was cut off from us. We had to find our way through, which was incredibly rough, because it was such a grind, but the positive side of that was that we had complete freedom to do whatever we wanted. I had a friend who had asked me later on, he said how in the world did you guys greenlight this thing? Because EA, Activision, you would never have gone through the first greenlight meeting with a concept as preposterous as that and I said there was just three of us in the room and we just said do we want to do it? And, if we said we wanted to do it then we would do it. So, those factors helped create that environment for us where we could take a risk like that.
[00:48:41.23] QUESTION: We're in the Blue Goji and Green Throttle offices here, tell us what you guys are doing now and why you're so passionate about it, why it's exciting to you.
[00:48:51.26] CHARLES: Yeah, so before we had started, I had some interesting advice from a friend of mine, his name is Mike Wood, he was the founder of a company called Leap Frog, which made the Leap Pad if you've seen it. If you have kids, you may have seen that product and he was a second time entrepreneur and he said something interesting to me, he said before you start think hard about this he said because you have to find something that you're passionate about going to work for because it's too easy to get distracted by other things number one and number two you're really signing up for the second startup and the third startup because if the second one goes under, you're going to have to do a third just to prove that the first one wasn't a fluke and so that made me think long and hard on it -- wow do I really want to do three? But there was something for us that, back when we did dance games about half the people were using dance games for exercise products and about half were playing them as music games and we always thought that was interesting to explore this idea of using games as exercise so we were working with researches at UCSF doing research on kids with type 2 diabetes, kids with hypertension, we were doing projects with educational elementary schools in Portland who were using dance games inside the classroom to help kids study and so we thought that was an interesting path, but when Guitar Hero came out, Red Octane became kind of all Guitar Hero all the time, we couldn't do anything else. So, when we finally left Activision in 2010 we thought we wanted to go back to that and in the interim Wii Fit had come out and taught the world you could use a video game to exercise and thee were all these exciting new platforms -- mobile phones, Facebook games, all these things that we could built games on. So, we started working on ideas for that, you know what I call making the world healthier through video games and that was how we started working on Blue Goji, which I would happy to demo the product later on for those of you who are interested, but what we started looking at was how can we build games that make people healthier? That make you exercise more? That, you know, treat different areas or wellness and treat areas of pain. We talked to a lot of health insurers, we talked to doctors, we talked to hospitals, we started just strying to learn as much as we could about which areas might be impactful if we could apply video games concepts to. We started looking in the area of exercise and to use a very simple metaphor, what we learned from them was that it's just gospel in the medical community is that exercise is good for you and if you could get more exercise, then even better. So their whole objective is to get people to exercise and to get people to exercise more and that's where we thought video games could help because video games are very good at getting people to do things, you know for hours and hours at a time. So, we started using this metaphor with them to get them to understand how we could work and contribute in that area, so what we said was if you took a bunch of kids into a middle of a field and you made them run wind sprints one side of the field to the other side, they're going to do like two wind sprints and they're going to say this really sucks and they're going to stop -- this is boring, this is painful. But, if you took them to the middle of a field, they were trying things of what I call gameification, which works, but it's slightly different than what we're trying, so the gameification would be, go out into the middle of a field and i'll give you a point for every wind sprint that you do and we'll time you and put you up on a leader board to see who is the fastest and all these things -- who runs the most, and that works to motivate people, but what you could also do is take a bunch of kids from the middle of a field and play tag -- you say tag you're it -- and the game starts, right? People will just start running and sprinting in all directions and biomechanically it's the exact same thing, you're not doing anything other than running on a field, but kids will play tag for thirty minutes to an hour, and they'll laugh while they're playing tag. You know, you'll hear laughter and joy. Nobody ever laughs when they do wind sprints, right? But they laugh when they play tag and that's what we wanted to do is we wanted to create tag where other people see sort of wind sprints and exercise, we wanted to create experiences like tag and so we started looking trying to build games on top of higher intensity level exercises than what Wii Fit had tried, we started looking at ways to make exercise that people already do a lot more fun, so exercises like hopping on an elliptical machine, or stationary bike or treadmill, we started looking at ways we could apply games to make them more fun. We started looking at other things like how can we use games to help people cope with lower back pain, because that was a bit problem for all you guys who are in startups and you know that you probably sit in front of your computer for more hours than is really healthy, and if you do that for enough years, you know ten or 15 years, then you're going to develop back problems. So, that was a big problem that we learned from the medical community was the number one reason people miss work in the United States is lower back pain, the number two reason why people go to the doctor in the US is lower back pain. Colds and flues is number one reasons people go to the doctor, and lower back pain is number two. So, we started looking at these things and trying to figure out can we use video games and apply those concepts that we use in video games to help people cope with the rigors and grind of exercise and cope with basic pain like lower back pain.
[00:54:35.08] QUESTION: You co-founded it with several other guys. How big is the company, have you raised money, are you bootstrapping again? What are you doing?
[00:54:39.15] CHARLES: That one we founded with two other co-founders, so my brother who started Red Octane with me and a third co-founder, his name is Coleman Feng, he is in Texas -- he is kind of a data guy, he founded previously a financial trading software that people who trade derivatives in oil and energy and commodities use. You know, so Wall Street bankers and those types use his software use his software that his company has done, so he's a big data guy. We started the company with two offices. One in Austin, and one in the Bay Area for a couple of reasons. One was not just because Colemean lived in Austin, but because in this environment, it has become so hard to hire teams that we thought being able to hire from two geographic locations would be helpful for us and this one we.
[00:55:46.20] QUESTION: Is it still hard for you to hire?
[00:55:48.18] CHARLES: What I've seen a lot, and we haven't really run into this problem yet, is what I've seen a lot of is startups who get into about the 12 to 15 person size and then they begin to turn -- the next quarter they hire two or three people, but they lose two or three so I’ve seen a lot of that happen. Trying to break through that seems to be difficult. So, we try to look at being able to hire. We had always even at Red octane, been pretty sort of adventurous in terms, you know we had offices in Hong Kong, China, we had a game development studio in India, we found out we were the first video game company to have our own subsidiary in India because we had a fifty person video game development studio in India and so we were always seeking out ways to find some kind of competitive advantage. So, office in Austin and office here, it's relatively small team right now. We've got eight people and so we do the same thing that we did with Guitar Hero, we find a way to outsource a lot of the hardware engineering to people that we worked with before on Guitar Hero, we find a lot of -- we develop some of the games internally, but we also work with external developers to make games. We find that it's a lot faster and more efficient for us to do that and we get more ideas. So, we try to build as broad a network as we can around this product, but our company itself is only about eight people.
[00:57:33.11] QUESTION: Does anyone have any questions they want to ask and then maybe we can check on the product.
[00:57:41.12] QUESTION: Did you have to work with record companies and artists -- I can imagine all kinds of legal issues.
[00:57:44.15] CHARLES: Yeah, that was sheer hell. No, I'm joking -- sort of. No, I always used to joke that when you have to deal with the record industry, it's like dealing with borderline criminals sometimes. People in the music industry, at least some of the artist, would truly appreciate that they are borderline. What happens when you get to deal with the music industry is music rights are so sort of fast changing, like they're evolving so quickly because there are all sorts of new ways to distribute music that it's very complex so you end up with different royalty rates for downloadable music into the same game versus music that was shipped onto disk, and for us we had to deal early on with the fact that we were an unknown entity trying to make a game that we couldn't show anybody because it wasn't done yet what that game was, so in the first Guitar Hero game, we couldn't get clearance for any of the original recordings -- it was all re-records, which will in the back of the wave group help us put together all the re-records because that was all anybody would give us access to, except for one person. Zach Wilde from Black Label Society actually gave us some originals and to just give you the brief story, the story was that his manager asked him -- hey they want to license your song for this game called Guitar Hero and he kind of joked well, if they're making game called Guitar Hero then I should be in it, which he should be. Then they said we'll they're going to re-record the song and he said, no no no, nobody re-records my stuff, give him the original. So, that's how we got our first master recording. By the time Guitar Hero 2 came, it was sort of a hit and it was starting to accumulate a following and we got few master original recordings but we also had this event happen where there was a guitarist that goes by the name of Bucket Head, some of you may have seen him he's toured with Guns N' Roses, he actually performs with a Kentucky Fried Chicken bucket on his head, and bucket head, liked the game so he actually wrote a song just for Guitar Hero 2 and he said I'm going to write a song for you and it's going to be the hardest song in Guitar Hero 2 so he wrote a song called Jordan named after Michael Jordan, because he thought this was going to be the hardest song, and we put it in the game and a very interesting thing happened with that, is a guitar pad showed up in one of the guitar magazines, I can't remember, that said Jordan by Bucket Head, as appeared -- usually they put the name of the album -- but it says as appeared in Guitar Hero 2 and that was one of the first times that sort of an original song from a video game had appeared in sort of a music publication and then all of a sudden that sort of broke some doors open so Guitar Hero 3 came and then crazy things happened. Like, we went to license music from The Sex Pistols and we found out that all of the original recordings from The Sex Pistols had been lost or stolen or destroyed, something, which is ironic because that's exactly what you would expect to have happen with The Sex Pistols music, because they're the pistols. So, what they said was, well if you pay for studio time, we'll get back together and re-record three songs for you, and I though of course we'll pay for studio time. What we were worried about then was, well but Sid Vicious is dead, how are you going to do this? What we learned from them was well, when they recorded their first album Nevermind The Bullocks, Sid was actually in the hospital with Hepatitis so he was never on the first album anyway, so yeah we don't need Sid and they got back together, they re-recorded and we even got some b-roll of them telling that whole story and that became an event in that, you know they got on the Tonight Show, they got on some other late night shows saying hey the Sex Pistols got back together and are playing again, and they were able to do two concerts -- one date in London and one in L.A. as a result of them getting back together in the studio and re-recording three songs for Guitar Hero. So, we got Anarchy in The UK, which in the game, if you see it, it says Anarchy in The UK by the Sex Pistols and the date on it is 2007 because that was the year they actually recorded that version. So, from there, of getting sort of famous bands to work on music, that evolved to then we were able to get, we got Slash in the game, we were then able to get Aerosmith to do a complete game just around Aerosmith music and a lot of that was through, you know Slash talking to Joel Perry and telling him that this was a cool project that I did and then Joe Perry said, yeah we should do one and so we were then able to do a complete Guitar Hero set, or you know game with Aerosmith. We were able to do one Guitar Hero Metallica where we released the entire game or the entire -- they had a new album coming out called Death Magnetic -- and we were able to release that album day to date on Guitar Hero the same time they released the full album in the CD in stores, but what was fascinating about that was we found out later from them that Guitar Hero was actually the third biggest sales channel for Death Magnetic, number one was apparently Wal-Mart, number two was Best Buy, number three was Guitar Hero downloads and so, interesting things happened very quickly over the course of three or four years from the point where we couldn't get anybody to give us original recordings to, you know The Sex Pistols getting back and re-recording to Metallica releasing their album basically at the same time through the video game as in stores.
[01:03:47.02] QUESTION: Are you still working with your brother?
[01:03:47.02] CHARLES: Yeah, I still do work together with my brother crazy as that is. It's particular challenge, any of you who work with siblings or spouses, it can be a very difficult thing, because you don't have to be tactful to each other, so when he would say something, I would tell him in a meeting that that is the stupidest thing I ever heard and then a big argument would ensue just like when we were five years old and you slam the door and leave the room and then the next day you come into the office and everything's okay because that's the way you are as brothers. But there's a level of trust and understanding that happens too. You don't have to spend any time figuring out what the other person would think, we almost instinctively know whether the other will like this idea or not, we also know each other's strength and weaknesses better so there's a lot of benefits to that. One thing that was fascinating was, I don't know how much we enjoyed the times we were working together and arguing, but my parents liked the fact that we worked together and it basically achieved the same level of success because, my mom used to joke that it would have been horrible if one of us had made Guitar Hero and the other had not.
[01:05:13.09] QUESTION: One thing I think is really cool about Guitar Hero is how you managed to make a non-violent video game that wasn't wimpy and lame, but was still like really cool and macho, can you speak to that at all?
[01:05:26.20] CHARLES: Yeah, the [01:05:31.17] INAUDIBLE comes from the music and the arts style that's associated with rock metal, but you're exactly right. There was no violence other than -- the only things we would ever get pinged for in the ratings were the lyrics depending on the songs that we would pick. So, but parents were generally very comfortable and I think that was what was helpful for getting Guitar Hero exposed to a broad audience was people felt comfortable letting six year olds play the game and people that were sixty years old felt comfortable playing the game. There were a couple of instances where I thought that was particularly sort of poingent to me about the fact that it was a non-violent video game and how broad an audience it attracted. A friend of mine gave Guitar Hero to his young nephew who was six years old. His nephew came into the kitchen one day, I think his nephew's mom did not know that he was playing Guitar Hero, and he came into the kitchen and he was whistling Cheap Trick by Surrender and she heard that and she said how in the world does he know Cheap Trick because he's six years old and then she asked him how do you know that song and he said oh it's a Guitar Hero song -- he had no idea it was Cheap Trick, he just knew it was a Guitar Hero song, and so it ws cool in the sense that it bridges the generations and that was especially impactful to me. One time after Guitar Hero 1 came out, we got an email from this person and he was a dad, I think he was from the Midwest if I remember right. But, he sent us an email saying that he spent the previous night playing Guitar Hero with his teenage daughter for about two and a half hours and she was asking about the bands and the songs, he said those were the songs he grew up listening to, and he was talking to her and she was explaining the video game to him and he wrote an email to us just to thank us -- he said I have not had a bonding moment like that with my teenage daughter in years and I just want to thank you for that, and that was extremely sort of moving for us that you can have people of different generations sharing a sort of experience like that whether they were brought in through the music or they were brought in through the video games, and so that was the best part about sort of creating a non-violent video game and really pushing that into audiences didn't previously play any video games.