To embrace or flee Facebook?
Vampires, werewolves, and...widgets? Don't laugh. That combination of old-world monsters and cutting-edge Web technology created a booming business for Carnet Williams and his fledgling company, ChipIn. But it also presented him with a huge headache and forced him to rethink the very nature and mission of his company. Williams came up with the idea of pitting vampires against werewolves as a tongue-in-cheek way to get an audience for his company's products, programs that companies use to design and control widgets. Widgets are those bite-size packets of software used to spice up websites and blogs with simple interactive icons. They're increasingly of interest to big companies, which like widgets for their ability to help them conduct transactions online without having to build expensive websites. Williams saw a huge opportunity in helping businesses build and manage their widgets.
With his vampires and werewolves, Williams hoped to create some buzz and ultimately draw Facebook's millions of users to his company's signature widget and to its namesake, ChipIn, a software program that lets businesses, nonprofits, and other groups use powerful widgets at a low cost. Williams hired a designer to create evocative monster images. Then he had his coders build those images into two widgets designed to run in Facebook. People were asked if they were werewolves or vampires. Anyone who answered the query was "infected" and could "bite" other Facebook users.
The idea was to spark a viral competition between werewolves and vampires inside the confines of Facebook, with the goal of promoting ChipIn. Within a month, nearly 500,000 Facebook users had downloaded the application. Heated debates over the relative evilness of the monsters sprawled over discussion boards inside Facebook communities. Then the advertisers came calling. Lionsgate Entertainment used the application to promote the werewolf movie Skinwalkers, spending $15,000 a month to embed a promotional video inside the vampires and werewolves widgets.
For a cash-starved start-up, the money was a gift. And all the attention was fun. But keeping up with the new business began to take its toll on ChipIn. Its software developers were finding themselves devoting more and more of their time to coding for Facebook applications.
Before long, the question became clear. Would the success of the monster face-off turn ChipIn into a pure-play Facebook application provider and advertising company? Or would Williams sell off the Facebook offshoot so his company could refocus on building its early technology lead in enterprise widget software? It was a critical juncture. Should he roll the dice on a hot but perhaps short-lived hit? Or should he keep moving toward his original vision of developing his widget product and marketing it to large corporate clients?
This wasn't the first time Williams had been forced to consider a big shift in strategy. ChipIn was launched, in the winter of 2005, by Williams and three friends, in Honolulu. They were hoping to create a Web-based system for coordinating group transactions and payments, putting online the often time-consuming function of collecting money for sports-team uniforms, graduation gifts, or just beer money for the next poker game. Williams, who has spent much of his career working in the nonprofit sector on technology issues, saw ChipIn becoming a powerful way for charities to raise money, with ChipIn taking a small percentage of each transaction. Williams raised $1 million from angel investors to develop the service. It launched in May 2006 but failed to attract enough users. "We got good media coverage, but there wasn't enough interest to justify pushing on with that plan," he says.
Undeterred, Williams turned to Plan B--widgets. He would morph ChipIn into a widget-based fundraising product, making it easy for nonprofits, charities, and other groups to create campaigns using audio and video and then send them over the Internet with cut-and-paste ease. Then he got what he figured was an even better idea: Rather than just sell the widget applications, ChipIn would build tools for creating, tracking, and managing widgets for all sorts of industries. Williams envisioned a broad market that would include industries as diverse as health insurance and ad agencies. Tracking and controlling widgets is complicated and critical for large businesses. For example, if Nike set up a campaign that allowed the masses to upload homemade spots to widgets, it would want to count how many people watched the spots, and it would want to have the ability to shut down inappropriate spots running inside a widget bearing the Nike logo. ChipIn would provide the means for Nike to do all that.
Meanwhile, Williams was watching Facebook grow into a social networking giant. In May 2007, Facebook began allowing outsiders to post small software programs that could be used inside the network. ChipIn quickly built a Facebook application for collecting money similar to its fundraising widget. But when ChipIn went live on Facebook, in late June, only a few thousand people downloaded the widget--a meager turnout compared with the millions who snapped up more popular applications such as Graffiti and iLike.
That's when Williams got the idea for the vampires-versus-werewolves gimmick. It was stupid simple. Players would collect points based on the number of people they converted and how many people those converts bit. A month after launching, in early July 2007, vampires-versus-werewolves had a huge following. In mid-August, riding the coattails of the latest Pirates of the Caribbean release, Williams rolled out a pirates-versus-ninjas application. Total users quickly broke the one million mark. Suddenly, Williams had two of the top 100 most popular Facebook applications. Those two franchises were worth roughly $2 million in late September, according to Adonomics, which rates and values Facebook applications.
What had been intended as little more than a public relations stunt turned into a big drain on resources. The widget applications for monsters and pirates soon required their own servers and the equivalent of a part-time administrator to keep them humming. ChipIn's engineers had to retool the code to keep the system from crashing. "We never designed it to be that popular," says Williams. "We hacked it together. We didn't optimize it to handle that kind of load." He realized that everyone in the company was spending at least half of his or her time on the Facebook applications. Chief technology officer Kevin Hughes, for example, spent two days designing a mousepad and T-shirts for ChipIn's pirates-versus-ninjas campaign. "As the CTO of the company, I knew I wasn't supposed to be spending this much time on trivial stuff, but I just couldn't help myself," Hughes says. "It was totally addictive working on something that millions of users paid attention to."
Little wonder that the company's angel investors started to get nervous. One investor and key adviser, former AOL Time Warner (NYSE:TWX) CTO William Raduchel, began prefacing every instant-message conversation he had with Williams by typing, "Focus, focus, focus." The widget-software-tools space was rapidly becoming more competitive, with dozens of companies reeling in large checks from venture capitalists for pitches based on widget technology. Microsoft (NASDAQ:MSFT), too, got into the game, announcing it would soon distribute software that would make it easier to create simple widgets with limited functionality. ChipIn's technology lead remained intact, but for how long?
The Decision Refocusing the company on the Facebook applications was tempting. But Williams noticed the majority of the advertisers buying slots on the applications were other Facebook application companies hoping to get users to download their applications. To Williams, that smacked of the advertising mania of the Internet bubble days. Copycat applications that mimicked the monster and pirate themes were quickly catching on; some even surpassed ChipIn's own Facebook applications in total users, which gave Williams further pause. With barriers to entry that low, betting the farm on such a fickle business and fickle user base looked increasingly dubious. Viewed in that light, the original ChipIn business--helping companies build widgets to perform complex tasks--seemed like a better bet. Licensing software, Williams knew, has higher barriers to entry--writing code is hard-- and is a lucrative business, with gross margins as high as 70 percent. And Williams understood that the Facebook application business would always be an unwanted siren song for his team.
Williams began shopping the Facebook applications business and quickly found a number of interested buyers willing to pay in the low seven figures. He accepted an offer from a Silicon Valley venture-backed software start-up looking to acquire interesting social networking technology tools. The deal, which as of this writing had not closed, will also include some intellectual property for widget management tools and, in all likelihood, one or two engineers. Williams says he feels he made the right choice and has high hopes for ChipIn's enterprise offerings, even as Facebook mania continues. In October 2007, Microsoft paid $240 million to purchase 1.6 percent of Facebook, a deal that put the rough valuation of the start-up at $15 billion. "For us, Facebook applications were like a drug," Williams says. "They were loads of fun and making a little bit of money. But in the end, we want to make hundreds of millions of dollars, not millions of dollars. And I didn't think Facebook could do that for us."
If Williams believes widget tools can generate hundreds of millions in revenue, then my gut would be to trust the vision of the entrepreneur. ChipIn's Facebook apps "diversion" will give the company the funding necessary to begin building the widget tools team. I don't see why Williams had to completely divest himself of the upside in the Facebook apps. They are actually pretty sticky, and the competitive landscape in Facebook is not quite as daunting as in the enterprise space, where you have to compete against Microsoft.
My first reaction is, Where's the market need? Do enterprises really want to build their own widgets? Or are widgets part of a marketing strategy that they will outsource? With vampires and werewolves, ChipIn stumbled over a "demand pocket." Finding that is the toughest challenge for a start-up. Abandoning it for an untested enterprise tool may have been premature. I would have invested energy in understanding the characteristics of this demand pocket to determine whether a business model existed to support targeting it.
Redwood Shores, California
Selling the "Monster Mash" portfolio to fund the core business was the right move. However, it may be more difficult demonstrating Web 2.0 expertise to prospective clients without the advantages of having a top Facebook app. And though margins are, indeed, higher for enterprise software than for advertising-based businesses, these margins are also more difficult to scale without significant investment. I would strongly advise the team not to raise outside capital. Keep the burn rate low, and take on only projects that get them excited.