While the headline-making and money-making successes in Durham’s booming tech sector have dominated headlines, several failures also have made news.
In WRALTechWire’s “New Bull City” series, day four focuses on the darker side of the tech boom story. From telecommunications and wireless to app development and videogames, WRALTechWire reviews some of the disappointments – and the lessons learned.
Also today, the series includes a first-person account of a startup’s march to failure. Be sure to read Read Matthew Davis’ account of GetZeek.
DURHAM, N.C. – Motricity’s decision to move headquarters to Seattle was “the toughest thing I’ve ever gone through,” recalls Jud Bowman. The decision was announced in March of 2008. Bowman and one other member of the board of directors were the only ones who voted against the move.
Bowman had helped build the company in Durham, and had grown the headquarters location at American Tobacco to more than 250 employees. The announcement meant that virtuall all those employees would be laid off.
Motricity, who was one of the first tenants at American Tobacco, shut down operations gradually, and the remnants of the firm that didn’t move West were transported elsewhere in the Triangle.
Bowman, however, went on to start Appia, and we told that story in part three of our series, but what happened to the rest of the employees who lost their positions at the billion-dollar company?
“All those people have recycled,” said Bowman, the term which is given to talent landing at another startup when the one at which they were working shuts down operations. “They’ve landed at Appia, at Bandwidth, at Netsertive,” said Bowman, just three examples of companies that are using the talent from Motricity to build successful companies, “and they are contributing to the growth of the startup community.”
And Motricity? “I think the punchline,” said Bowman, on the company’s decision to move headquarters and close down Durham operations, “is that Motricity was at one point was a billion dollar company. They were late to the game to get to smart phones.” And this has cost the company, and allowed more nimble startups, like Bowman’s own Appia, to carve out a huge market due to a focus on smart phones.
Motricity was not the first company to lay off employees in Durham, nor will they be the last.
Smartphone maker HTC opened an office in Durham in 2011 with great fanfare, hired more than 50 people, and just over a year later, in June of 2012, announced they were closing the Durham office and would lay off 50 employees. Companies shut down, close office locations, experience layoffs, and pivot business models.
This is what we’ll study in today’s segment of “The New Bull City.”
Joystick Labs Fails as Gaming Model Changes
“One game is all it takes,” says John Austin, former managing director of Joystick Labs and current managing director at Groundwork Labs, “but you have to have that one big hit.”
We’re talking about game development, but a sports analogy may be the best way to think about the industry, says Austin. Think of it like a hockey game. “In order to get that one big win,” says Austin, “you’re going to need to take a lot of shots on goal.”
Rally Software, for example, says Austin, designed, built and launched 32 games before they found a hit with “Angry Birds.” It’s the example most used to describe the shift in the gaming industry, and just how tough the marketplace can be.
“It’s fine to say that we failed,” says Austin. “We can own that.”
Joystick Labs was first conceived by Glen Caplan and Justyn Kaisierski to harness the energy and talent within the gaming industry in the Triangle. “They felt that if they created an accelerator to harness the talent in the gaming industry,” said Austin, “it would be successful.”
It was 2008, and in national press accelerators were a hot topic. “There were not, then, vertically aligned accelerators,” said Austin, and so the idea was to jump ahead of the curve and set up Joystick Labs as a way to bring in game developers, investors, and game publishers.
After a “pitch-event for game publishers,” said Austin, publishers would meet with the teams and sign them on to complete the rest of the game’s development. In 2008, said Austin, the gaming industry was still structured in a way where this was possible.
“It took Joystick Labs a long time to raise money,” said Austin, “and in the middle of all of this, we had a mobile gaming revolution start.”
By the time that Joystick Labs was fully funded – Summer of 2010 – the industry had changed, said Austin.
The market changed, said Austin, from one where game designers built games to license to big publishers, who would turn around and sell their games for $40 or $50 a pop. Mobile gaming changed this, said Austin, because the industry was no longer about creating blockbuster games that cost more than $40.
Thus, the first and only three-month session of Joystick Labs began in Fall of 2010, and in the background, “was a shift towards mobile gaming,” said Austin. In fact, “when companies applied to Joystick,” said Austin, “pretty much all of the teams were mobile-related.”
“It is just really hard to be perfect,” said Austin, “the first time you build a game.” And, given the new gaming model, said Austin, “if the game is not polished, you just don’t have a chance.”
Of the seven teams who participated in Joystick, only four shipped games they built while in Joystick. One could still potentially ship a game, and two never shipped a game. Three of those four titles have been critically well received.
“Unfortunately, to date, none of these titles have returned significant money,” said Austin.
Without a return on investment, and given the shift in revenue generating models in the gaming industry, Joystick’s investors balked at funding an additional session.
“Around summer of 2011, as we’re looking around the landscape,” said Austin, we realized “we needed more money so that we could create more shots on goal.”
The failure of Joystick Labs came down to a really simple reason, said Austin, “our investors weren’t ready to invest in the kind of money that it would take.”
LaunchBox Digital: From DC to Durham to Shut Down
LaunchBox Digital was born in Durham as a result of a strong local desire for an accelerator program similar to Y Combinator and TechStars, said Chris Heivly, managing partner of Triangle Startup Factory, and former executive director of LaunchBox Digital.
Heivly, who in early 2009 was raising money for an accelerator program that he was tentatively calling “Triangle Startup Factory,” traveled to DC to pursue investors.
“As is typical for a lot of accelerators,” said Heivly, “I was raising the money for one session.” Sessions at accelerators are generally 3 months, said Heivly. “What I came across were a couple of guys who were investors in LaunchBox Digital, a DC-based accelerator.”
Many of those involved in LaunchBox in DC, said Heivly, were moving on to take roles with the new Federal Government, after Barack Obama took the oath of office in January of 2009.
The investors and Heivly decided to use the brand, leverage the name, and launch an accelerator. “LaunchBox was born,” said Heivly, “but it was kind of a one-shot deal.”
The first session attracted seven companies, all of whom received $20,000 in return for equity in their companies. Of these seven companies, who graduated on January 12, 2011, only three remain in business. All are still based in the Triangle, and include Spring Metrics, Keona Health and HealtheMe.
“By all accounts, everyone said LaunchBox was successful,” said Heivly, “it was a catalyst for a lot of conversation. It became the center conversation point for entrepreneurship in the area.”
LaunchBox had only raised money for one session, however, and so it was a one-and-done program.
Heivly spent most of 2011 to figure out if there was a viable future for an accelerator in the area. “I was only going to do it if we could raise money for more than just one session,” said Heivly. “We needed something with a longer-term view than just three months.”
EvoApp, Unable to Compete
Joe Davy, who built EvoApp from its infancy in 2009 to its surprising shutdown in 2012, now heads online-retailer BUYSTAND. The company is off to a quick start, propping up small, independent and local outdoor retailers and providing a distribution channel.
To any observer, it’s apparent that Davy has moved on from the surprising shutdown of EvoApp. Former EvoApp CEO Kip Frey has moved on as well, heading up Dognition, which quickly gained a partnership with McKinney.
“EvoApp is a part of my past,” said Davy, “I am proud of it, and upset by it, which is strange in a way.”
Davy delivered his next line carefully, clearly contemplating the thought. “We made the right decision,” said Davy, about shutting down EvoApp. Davy said he spent the entire day feeling physically ill when the company notified 80% of its staff about layoffs.
The company shut down in 2012, saying in a statement that other competitors outflanked and outpaced EvoApp. Kip Frey, who had joined EvoApp in September of 2011 as CEO, told WRAL Tech Wire’s Rick Smith he “had to start fundraising immediately.”
At the time the decision was made, said Frey, “Fundamentally, we were working on a technology that ended up being further behind other competitors than we originally thought.”
In July of 2012, Frey told investors that he “would seek bridge funding from them if [EvoApp] had a partnering transaction on the table that offered a reasonable path forward.”
“No such transaction or path appeared,” said Frey. Time ran out, and, eventually, all 16 employees at the startup were laid off. The company’s board of directors, said Frey, “understood what [competitors] were doing in the space, and that we didn’t really have a viable way to move forward and fund our company.”
“The biggest barrier wasn’t the other competitors in the market,” said Davy, agreeing in part with Frey’s analysis, “what we didn’t have access to was the capital needed to scale quickly.”
Other firms, competitors, had been able to attract significant capital investments, said Davy, but EvoApp was limited in its ability to execute a rapid, capital-intensive expansion.
Davy likened venture capital to a poker game. “It’s winner-take-all,” said Davy, “and if you’re going to sit down at the table, you have to know that you have enough chips to play the good hands and the bad hands.”
“We just didn’t have as many chips,” Davy said. EvoApp did utilize and spend $2 million in funding while operational.
Zenph Pivots Amidst Industry Shift
Kip Frey was once a member of the investment community, serving as a general partner at Intersouth Partners from 2000-2009, after his first company, OpenSite Technologies, was acquired in May of 2000.
Frey, who sat on the board of directors of SciQuest and Inspire Pharmaceuticals, left his position at Intersouth in 2009 in order to take the helm at Zenph Studios. Frey, who had been responsible for evaluating the company, told WRAL Tech Wire that the opportunity “seemed uniquely suited to my background and skill set.”
The company received $10.7 million in funding from Intersouth Partners, and company founder John Q. Walker became the CTO once Frey stepped in. Walker became interim CEO when Frey left to join EvoApp in September of 2011.
The young company replaced Frey with Kirk Owen, and quickly planned a pivot.
“The old Zenph got squeezed by a tougher-than-expected experience curve and falling CD sales,” said Owen in an interview over email. This, said Owen, “made it impossible to sustain the original version of the company.”
The company had to pivot, said Owen, and “began looking for a pivot that would explore its core technology, which is based on understanding how music is played.”
Zenph relaunched in August of 2012 as Zenph Online Education Network, or ZOEN, and quickly received an additional $900,000 in funding from Intersouth Partners.
The company, which is housed in the First Flight Venture Center, has embraced its pivot, said Owen.
Zenph expects to need additional funding, said Owen, who will be responsible for pursuing it. “There is a lot of talk about the Series A shortfall,” said Owen, “and the plight of venture capital in general.” Yet, there “are a number of promising seeds,” and strong support through local entrepreneurial initiatives, said Owen.
What is in the cards for the new Zenph? Will it go the route of EvoApp, or will it rise from its own ashes and grow into a phoenix?
With help from incubator First Flight Venture Center, and a bevy of entrepreneurial support organizations, Zenph may succeed.
Tomorrow, in “The New Bull City,” we profile support organizations that have contributed to the growth of the entrepreneurial economy.