Best Buy was going to fine us money because we couldn't ship it to them in time. And we thought, "Oh my gosh, we don't have enough units. How are we going to do this?"
Below is an abridged audio transcript of Episode 61 from Season 4 of Rock The Boat: Making Waves, edited for clarity.
If you were into video games in the early 2000s, you probably have heard of Dance Dance Revolution. And after DDR, there came Guitar Hero. Surprisingly, this game franchise did not come out of Japan, where most music games were coming from. It came from an American company with Asian Americans at the helm. In this podcast episode, Lucia talks to Kai Huang, one of the founders behind Guitar Hero.
Kai Huang and his brother started their company Red Octane as a video game rental company modeled after Netflix's mail-based DVD rental business. Kai bootstrapped several startups with his co-founders, including his brother. Through their grit, they made Red Octane profitable and proved that music games other than DDR could be successful in Western countries.
I. Meet Kai
Kai: Hi, I'm Kai. I'm a serial entrepreneur and I've spent most of my time in the game industry. I started a company called Red Octane with my brother, and we were most well known for creating the game Guitar Hero.
I was born in Taiwan. My family moved to the US when I was four, so I spent most of my life growing up in the US. We lived in New York for six years, in a small town, 20 minutes North of Manhattan called North Tarrytown. It was most well known for, the Legend of Sleepy Hollow. Then my family moved out to the San Francisco Bay Area when I was about 10. It was in fifth grade.
Lucia: Kai's parents were business owners growing up. He and his brother would help them out in their businesses, which is why when Kai went to UC Berkeley for college, he decided to study business and economics.
But while he was at Berkeley, he got drawn into a computer science class that was meant for engineering majors.
Kai: So after I took that computer science class, I really liked it and I thought, okay, well, let me do an undergrad in computer science. And then, you know, someday I'll get my MBA. The professor also recommended that I take all the business classes as an undergrad that I wanted to make sure that I liked it.
II. Starting his own businesses
Lucia: Kai ended up as a management consultant at Accenture there. He covered supply chain for telecom companies. He actually quite enjoyed it. However, something his father said to him while he was young, stuck with him.
Kai: One of the things that I really credit my parents with and really appreciated, when I was growing up, was, they never really pressured me into a particular area. But, my dad always said, "Hey, you know, it's fine. Go work for big companies. But you know, someday you should really think about owning your own business."
I always thought I would go back to get my MBA and then maybe work for a few more years at a big company and then eventually somewhere along the lines, start my own company.
I enjoyed what I did at Accenture, so I ended up staying four years a little bit longer than my peers who went back to get their MBA. And by then it was the late nineties, internet 1.0 was rip roaring. And I thought, I could go back and get my MBA now, or I could give this startup business thing a try.
Kai's first company created firewall software.
Kai: We bootstrapped the company. We had four co-founders. We developed a product. We tried to sell it. It was about a year into it, and I think we just realized that we knew how to develop the product. We just didn't have the experience to sell it.
So we decided to sell it off, and my brother and I jumped out. He was one of my cofounders there as well. And we're trying to figure out what we wanted to do next.
It's sort of figuring out, well, what are some interesting opportunities? And ultimately we landed on video game rentals. Video game rentals was a billion dollar a year business, which is kind of a threshold for venture capitalists.
Lucia: So you notice this gap in the market for video game rental. How did you guys end up selling DDR?
Kai: We raised a million dollars from family and friends, right in March of 2000 at the height of the internet 1.0 bubble. Literally a month later the dot com bubble burst. Companies like pets.com exploded. And we had a little bit of money in the bank, but we had to figure out how we were going to generate revenue.
One of the games at that time that we were renting was Dance Dance Revolution. And customers would ask us, "Hey, you rent the game, but you know, do you rent the dance pads or do you sell the dance pads? Cause we need that to play the game."
And for months, we told them, "No, we don't rent dance pads or sell. All we do is rent games online. We don't do anything with hardware and accessories."
After months of telling people that and the internet bubble burst, we were like, "Oh gosh, we got to generate some revenue." So we decided, well, why don't we try selling some of these dance pads?
Lucia: This dance pad thing is booming. Was there a certain point where you and your brother kind of looked at each other and were like, "Oh, we should really grow this side of the business?"
Kai: Because we were direct to consumer, we had a lot of feedback. Customers would either say, "Hey, this is breaking and I want a refund or return or exchange." Or they would say, "Huge fans. I love it. Can you put this feature in your next product?"
And we started to figure out, well, you know, what other accessories would they be looking for? So the next product that we did was actually an arcade joystick for fighting games like street fighter. And you know, there was a whole niche community built around those fighting games.
Lucia: So then you have this mentality that you're like, I'm going to gun for the stars. And so you guys just kept iterating and iterating. at what point were you like, let's build our own thing, with it's auxiliary accessories.
Kai: We just kind of wanted to continue making these high end accessories for other people's games. We went to the Japanese publishers who were the ones that really invented the music game genre and made all the music games, and they released a bunch of music games in Japan.
But they didn't release them in the US and so we went to them and said, "Hey, are you guys interested? Why don't you guys release your music games in the U S and universally?" They pretty much told us outside of DDR, we don't think there is a market for music games in the U S they just don't sell.
Lucia: Huh? And you'd prove them wrong?
Kai: We certainly got lucky. We proved them wrong.
We heard that and we were like, "Oh, wow, okay." You know, our business at that point was making accessories for their games, so we were totally dependent on them. And that was going to at some point, potentially jeopardize our business. and that was kind of a turning point for us where you said, well, to sort of control our own destiny, I think we should think about publishing our own games.
I reached out to another startup, a game studio that I had reached out to many years before because we want it to make accessories for some of the games they were developing. And, you know, we never really worked anything out earlier. I call them back up again and said, "Hey, you know, this time we're really interested in not just making accessories for games that you've developed in the past, but actually thinking about publishing and not just being an accessories manufacturer. We're actually thinking about publishing more music games." It took us about four months to convince them to work with us because we were a small startup.
Once we sort of convinced them to work with us, then we were sort of off to the races to figure out what we wanted to build.
We thought that music games, if you were going to build it for the West, you had to pick a genre that people would like here. And so for us, you know, at that time it was rock and roll, and then we were all about the accessory. That was kind of a big part of our business. And we thought, well, if you're going to make an accessory for a rock and roll based game, what would it be? And for us it was naturally guitar, and that was kind of the birth of the guitar hero concept.
III. Guitar Hero
Lucia: How were you feeling the day Guitar Hero dropped?
Kai: There were so many stories leading up to it. Best Buy was going to fine us money because we couldn't ship it to them in time. And we thought, "Oh my gosh, we don't have enough units. How are we going to do this? We can't get fine. We don't have money." We had to borrow money just to survive.
We ended up, luckily shipping everything to Best Buy. By that Friday, they put it up on the shelves and we didn't get any information until the next Monday morning. And by the time we got to the office, we were already getting voicemails. They're like, "Hey, you know, Guitar Hero is selling really well, kind of flying off the shelves. We'd love to talk to you about sending us more."
Lucia: How did that feel when you, when you picked up the phone and heard that?
Kai: It was crazy, you know? You don't think the product is going to fly off the shelf like that.
For the first year after we launched the game, it was really just so much stress. We were trying to figure out, how do we increase our inventory? How do we get more product in? How do we get more games into the channel?
We were expanding into new retailers because we knew the game could sell. So we were looking at different retailers that we had never been in before. Then finally, for the umpteen time, we went back to the VCs to try to raise money.
Lucia: And what did they say this time?
Kai: This time was a little bit easier. There was still a lot of people that didn't like it, but the early results on Guitar Hero were interesting. And so we got a lot more callbacks.
Lucia: What advice do you have to people who are bootstrapping their businesses?
Kai: The one sort of best piece of advice that I got from a friend who started a business when we were starting Red Octane and he sold their business and they did really well back in the early days. He said, "No matter what, you just got to hang on. You just gotta hang on."
To start up a business, whether you bootstrapped or VC doesn't matter. Survival is everything in a startup. You can't win if you don't hang on.
When I look at people ultimately who have succeeded consistently. That's kind of the one thing you can look back to is, they were just able to hang on.
Kai Huang on LinkedIn