How I Built an $80M Annual Revenue Business in Just 5 Years | Sandbox VR, Steven Zhao

Intro

00:00I remember vividly there was a story where we tried to hide a game producer, and he asked, how can Sandbox VR beat Sony or Nintendo or any big VR players in the United States? And of course, coming from a Hong Kong company where we've never seen success in Hong Kong at that scale, that was a very valid question.

00:15I always believed that in order to make a big change, you have to have a direction that's uniquely different. We believe that what we are building is something that no one else in the world is doing right now. I put all the money into the company and then in six months time, we built the technology infrastructure.

00:31At that time, it was what we call the winter of VR. Us trying to raise in 2017 was essentially impossible. So we had just two months of runway left. And then I really wanted to build this physical space in VR. None of the investor came in. One of the biggest feedback that we've gotten is like, well, this works in Hong Kong.

00:48It could work in Asia, but this probably would not work in the US. That kind of pissed me off. So I thought, okay, you know what, we're going to bring this to the US. And we decided to open in San Mateo, in the heart of Silicon Valley. You know, this is our flagship store.

00:59We're able to share this with the world. And of course, we're ready for the next stage, which is get to series B. But a couple of months later, the whole world shut down. My name is Steven Zhao. I am the founder and CEO of Sandbox VR. So what we do is we provide a full body VR experiences for friends to play together in our retail spaces.

01:22So we create our own technology that enables that. We also create our own content and we both open our own locations and franchise them out. Today we have 47 locations, so we grew pretty quickly. We have eight pieces of title, not just original IP.

01:35We're also working with Netflix. So Squid Game is in Sandbox VR. Rebel moon is going to come out later this year. We hope to continue to partnership with them and other IP holders.

Chapter 1. Lessons Learned from Pivoting the First Game Company

01:48So I grew up in San Francisco. As a child, I spent a lot of time pretty much alone, just like do a lot of reading, sometimes playing games. And part of it is the immigrant stories. Both my parents immigrated here when I was a child, and they work a lot of nights, so I have a lot of time to myself just kind of doing my own things.

02:05But luckily at a young age, my parents got a computer. And then I really started to kind of figure out how to use that machine. And one day my friend showed me a game creation software, which I put into the computer, and I started making games and it started becoming a hobby of mine.

02:20So since 12 years old, I've been building games. So I studied in UCSD at University of California, San Diego, in electro engineering. After college, I moved to Hong Kong to build a gaming studio called Blue Tee Games, where we made PC and mobile games.

02:34You know, we grew from two people to 40 people. It was pretty successful for a time during that period, PC was pretty hot. People would download the game on their computers, but the shift to mobile created like a brand new way of playing experience.

02:48And for me personally, I didn't adapt fast enough. I was late to the mobile space and because of that, when we transitioned to mobile, we didn't catch up and we weren't able to create games that was able to be successful. So that was a pretty big learning for us.

03:03Is always look at what is trending in terms of technology and how do you build for that future? So when you build a game, it's important to not build what is popular today, because by the time you finish, you know you'll be nine months too late.

03:16What? It's going to be popular 1 or 2 years down the line from my first startup at Blue Tea games we failed to do that and we weren't able to scale. And it was around 2015. We saw that VR was becoming very hot. So we decided like, hey, why don't we take our learning as a game developer and bring it to a whole new medium, double down on VR?

03:33And we decided to do that with a brand new company. So that was essentially how Sandbox VR was formed. So when we started the company, we were like doing two things. Number one, we were building games on the VR consumer market. A part of us also took our learning back at blue Tea, which was you always want to build for the future.

03:51What do people want two, five, ten years in the future? And we felt like the consumer VR headset itself wasn't enough. We wanted to be fully immersed. We want to be able to interact closely with friends and to us like, you know, I grew up watching The Matrix.

04:04It's like, hey, do we have the technology to actually create the matrix? And then we look backwards like, hey, we do. So we did a regular consumer game and we basically iterated on what the matrix looked like. Come the end of 2016, we launched a consumer game.

04:18It was like a top 10% best selling game, but the market just wasn't there. Like we weren't able to make enough revenue to keep the company going. So at the end of 2016, like all our bet was putting into building this other project, which is basically it's now Sandbox VR location based VR experiences for group of friends to play together.

04:35But for us, that was our pivot.

Chapter 2. How a Small Hong Kong Game Company Successfully Entered the US Market

04:40At that time, it was what we call the winter of VR. The Christmas sales didn't live up. People thought the hype of VR us trying to raise in 2017 was essentially impossible. So we had just two months of runway left, and then I really wanted to build this physical space in VR.

04:53None of the investors came in. One of them invested with asked us, well, you're just a team of six people. We didn't have a big team, so that was one big challenge we had. The second challenge we had was you were not located in the US. There was a geography challenge.

05:07You know, our team is based in Hong Kong and it comes to a certain type of perception. But really, like, you know, you're not in the dominant market. How do we know that this is something that can work in a different country? So for us, we have to build our technology, build our content and build our retail location.

05:22So there's not a lot of money to come around. We have to be very resource creative. And, you know, for us is how do we use technology to solve something that can be replaced by using a lot of hardware. So for instance, in order to do full body tracking you need a lot of cameras.

05:37But each camera were very expensive. So we spent a lot of time figuring out how to use software to minimize the amount of cameras. And this turns out to be a blessing because it was very important later down the road, as we scale that, every location will be as low cost as possible.

05:52Another challenge we had was in terms of being resource constrained, we tried to figure out how to, you know, get people to come to our location. You know, one of the hardest things is marketing our business. As a small company, you don't have a big marketing budget.

06:05So we had to be very creative, like, how do we get people to come? So we decided that, hey, why don't we productize it? Why don't we make it so that we create a software video that after you come and play, will give it to you. And this video is going to be capture the most embarrassing and funny moment of you playing with your friends.

06:22And then you can easily share it on social media. And when we created that, every customer that comes in start putting it on social media, and that generated an insane word of mouth. So that taught us like two important things. Number one is every problem is like looking really deeply into it, like really analyzing it.

06:37There's probably a creative way to solve it with less resource, but also to get a much better outcome. And the other thing that we've learned is it's not only important to just build a product, but it's also really important to build a distribution strategy for that product.

06:51So at that time, I took all the money I had and I put it into Sandbox VR. And then in six months time, we built the technology infrastructure and we opened a really small shop in Hong Kong. And I remember vividly there was a story where we tried to hire a game producer, and he asked, how can Sandbox VR beat Sony or Nintendo or any big VR players in the United States?

07:11And of course, coming from a Hong Kong company where we've never seen success in Hong Kong at The scale. That was a very valid question. And what I told him was, I always believed that in order to make a big change, you have to have a direction that's uniquely different.

07:24And for us, we believe that what we are building is something that no one else in the world is doing right now. The moment we felt like we had product market fit was during a test run before we even launched a product, my friends came and played and within experience, they were like screaming and yelling and so loud to the point that the neighbors came knocking on the door saying, hey, is everything all right?

07:46Like, we didn't know the type of visceral reaction that customer would get. And we felt like that visceral reaction is something that has never been done before. And we're like, okay, there's probably something there. So after we got done product market fit in our one Hong Kong location, we got funded by Gobi Alibaba.

08:03That allowed us to really build out our location to really fine tune our unique economics, to restart franchising. And at that time things were going well. But one of the biggest feedback that we've gotten is like, well, this works in Hong Kong.

08:15It could work in Asia, but this probably would not work in the US. That kind of pissed me off. So I thought, okay, you know what, we're gonna bring this to the US. And we decided to open in San Mateo in the heart of Silicon Valley. We put the location there and people came and played many of the people that, if not all of them, it was like, wow, we never experienced anything like this before.

08:34And pretty soon I remember Marc Andreessen and Ben Horowitz. They came and tried it out. The partners did, and they're like, yeah, this is really awesome. We're gonna bet on you. And that became my series A, and the funding was able to allow us to really scale out the business and open about nine locations across the US.

08:46And I remember we're sitting here in the San Francisco downtown location. This was at December 2019. We're like very excited. You know, this is our flagship store. We're able to share this with the world. And of course, we're ready for the next stage, which is get to series B.

09:03But a couple months later, the whole world shut down. We have a new name for the coronavirus. The World Health Organization has officially called it Covid 19.

Chapter 3. From $68M Series A Funding to the Brink of Bankruptcy : How Sandbox VR overcame and Secured Series B Funding

09:23Around March April 2020, when the pandemic hit, all the stores that we had had to close right away and we didn't know how long this was going to last. I thought it was like it was like a funny joke. It's already really hard to run a startup and it's really hard to run a retail startup.

09:37The first thing we did as a company, which unfortunately was we had to downsize. It was pretty dramatic. We lost about 80% of our team. And you can imagine morale was like at all time low. And the people that stayed like in the months following that, a good amount of them left as well.

09:51So it was really number one we had to do was keeping the team motivated, kind of having that vision of like, hey, we can survive Covid. What does this mean for Sandbox VR? What does this mean for us? And it just repeating that message and just kind of like being a cheerleader and be like, hey, we can fight through this.

10:06You know, this is one of the biggest tests for any of us. It's a tough story. It's something that you'll be proud about even if you fail. And that's what we wanted to set, was having that really strong story of the future. And the last part is we had to go through chapter 11 bankruptcy because as a retail business, we have a lot of leases, and there's no way to get out of the leases at that time.

10:24So we had to go through chapter 11 to get an emergency and work through with our landlord to figure out how do we survive out of this. That was just a lot of collaboration with people that we owe money to. We work with different lawyers across different groups, but during that period, we also took the opportunity to really fine tune our business, like to the minor or minor details, like how can we build the most economically strong retail that we can?

10:48You know, in terms of how do we improve our technology, our operations, our content, so that when we do reopen back up again, not only will we have a very strong people will come back in droves, but we also have very strong profit margin because that's what we need to come out of this.

11:02And around that same time in 2021, it's kind of when the world started to open up again, especially for our stores in California. And the moment they did, people came back in droves. I remember there was an incident where the mall was completely empty, but 100% of customers booked had online.

11:17We had to wait for customers in the parking lot to guide them inside the empty mall to our store, and we've been seeing that across all the Other locations and very soon the locations are filled up. Customers are happy to have a place where they can share with their friends and family, and then we're able to take that traction to open more locations by working with landlords who can fund us.

11:35By grabbing those traction, we're able to kind of paint, hey, this is how sandbox is going to look in the next few years. And fortunately, we started fundraising again. They've seen our progress. They know everything that we've been through.

11:45It's like, okay, you guys survived the worst. The future looks bright. We're going to back you. And they did a series B, so after we got a series B funding in 2021, we had about maybe 13 locations. Today we have 47 locations. So we grew pretty quickly.

12:00We see Sandbox VR as pretty much like the new movies. This is something where we believe that people will go out for. They will go with their friends and family and colleagues instead of just watching it on a screen. You get to live in it, embody it.

12:13It's a very social experience that you really get to share, and it creates a lot of team bonding moments for us is how do we create a repertoire of amazing experiences, you know, on a regular cadence to get people to come back again and again?

12:25And how do we continue to open up more locations so that we can have a Sandbox VR in every neighborhood? And our strategy for that is to continue to build up our franchising, because the more locations we have, the more we can reinvest back into our technology, into building better and bigger content to have more content, which in turn will help create more demand.

12:44And with more demand, we can have more locations and go from there. So the next big thing for Sandbox VR is two pronged is how do we build better content? And that's just a very iterative process, but also just working with strong IP holders to bring their world in the Sandbox VR in a really organic way that works best for our platform.

13:01What I see in ten years is you have what you get at home home consumer VR that gets better over time. That headset gets lighter, better quality experiences. That's something that you would likely just do, you know, multiplayer and you can play on hours on end.

13:13And then for us, out of location is in ten years time having thousands of locations, one in your neighborhood where you have a reason to go out and play with your friends.