The Challenge of Replicating Reality with Steve Zhao from SandboxVR

1. 0:00 – 1:37

   Introduction

   1. SZSteve Zhao0:00

      You know, running a startup is hard. Running a retail startup during a pandemic is really, really hard. And running a retail startup during a pandemic while going through Chapter 11 is really, really, really, really hard.

   2. SSSteph Smith0:11

      What would you do if you believed in an idea but no one would fund you, everyone thought it would fail, and the industry you're in also happened to be going through a nuclear winter? Well, today we are talking to Steve Zhao, the founder of Sandbox VR, who encountered all of the above. In fact, about a year into founding Sandbox, he had to double down and invest all of his life savings into this unproven business. But seven years after founding and one bankruptcy later, Steve now has built the world's leading full-body VR experience with over 30 locations all around the world. In this interview, we get to chat with Steve about the early challenges he faced, and trust me, there were many, but also how Sandbox survived the pandemic, the difficult task of building across hardware, software, a new computing platform, and real estate, and also how Steve thinks about the future of VR. But before we jump in, I thought I'd give you a glimpse of the full-body experience that is Sandbox VR, and instead of trying to explain it to you, I thought I'd show you instead. As a reminder, the content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice, or be used to evaluate any investment or security, and is not directed at any investors or potential investors in any a16z fund. For more details, please see a16z.com/disclosures. [upbeat music]

2. 1:37 – 6:17

   Bonus segment

   1. SSSteph Smith1:37

      Where are we going?

   2. SPSpeaker1:39

      Sandbox VR.

   3. SSSteph Smith1:41

      Have you ever done a VR experience?

   4. SPSpeaker1:44

      No, I haven't. I did one of those, like, games, and I think it was, like, a quest you put on or something, but I have no idea. I don't know really what this is at all.

   5. SSSteph Smith1:52

      So on a Saturday afternoon, I decided if I'm going to do this interview, I better go try out Sandbox for myself. We get to this mall, and candidly, Sandbox looked a little out of place. It was wedged between all of these outdated apparel shops. Meanwhile, Sandbox is this new-looking location, a futuristic logo shining out front. And so we walk in, and Sandbox actually has these machines where you check yourself in. And as part of that, you input your email, which comes into play later when they send you your recap video. Pretty immediately after, we have an assistant come over and bring us to the room that we're doing the experience in. So he brings us to this bench and gets us to put on these sensors. So one on each wrist and one on each ankle. And then you walk into this room. It's completely green, kind of like a three-dimensional green screen around you. And then on one wall, there is almost like this closet, and this closet has a bunch of different props. You see these fake guns. You see these vests. It was actually pretty crazy to see how much gear there was for one single experience. Oh, and by the way, each experience was in its own little room, but it was kind of cool because as people were doing the experiences at different times, as we were setting up, you could see into another room where someone was doing another experience, and you just see these people running around with all their gear on, and they seemed really immersed. So the interesting part for me was the onboarding, which I thought would be done by the human. And although the human did tell you, you know, "Put on this vest, put on these goggles in this way," once you were in the experience, the game itself onboarded you. So it got you to touch things with your hands or try things out with your props live within the VR experience to kind of train you on how to, how to use it. So that included things like if your partner got stunned by an enemy, in order to revive them, you physically would have to walk over to them, put your hand on their shoulder, and revive them. And it also had this box on the ground. Of course, it's not a real box. But when you're in the VR experience, that box is what you have to stay within because if you exit that box, you run the risk of literally running into a wall because remember, you're in a confined space. So from there, we did our experience. We chose one called Amber Sky, where we were in space, and we were kind of on these platforms fighting off the enemies. The enemies, by the way, included anything from a spaceship to these little eggs on the ground that would hatch these creatures that would come and crawl up on you to a standard alien that would come jump on the platform and try to attack you. These creatures felt like they were right there in front of you. And speaking of that, one fascinating aspect of this experience was they're bringing you up these elevators, and it really does feel like you're moving up, which of course you're not. But at one point, we literally are brought up the elevators in a way where they separate like this, and it felt like we went from being around a meter away from each other to maybe 100 meters away from each other. And at the end, it felt kind of strange returning to the real world. And maybe the coolest part of the experience is a couple minutes after you leave, you get shown a video of you in the experience, both as the VR characters that you were in the game, but also the real-life characters of you running around this green room, and it's pretty funny to see. You also get a score, so you can see how you did relative to your partner or other people you played with, and then you get that video sent so that you can share it later. So hopefully that gives you a quick view into what the experience is like. And for me, I was really surprised by how immersed I felt in it. I think it's the closest I've felt to being in another world. But something that I'd like to see is the extension of new types of games and also I want a leaderboard. I wanna see how I compare to other people. I wanna go back, and I wanna improve my game. And so I'm very excited to hear from Steve how he's thinking about all those things. All right, let's jump into the interview. So Steve,

3. 6:17 – 11:37

   Steve’s gaming story

   1. SSSteph Smith6:17

      we typically jump right into the founder, the company that they're building today, and where that company might be going. But in doing research for this episode, you have such an amazing story, and I wanted to jump right to the beginning so people get really the lay of the land of where you came from and how you got into the gaming industry. So let's start when you were a kid. Your parents were entrepreneurs themselves, and I believe that's also around the time when your, you could say it, love story for games began. So could you share a little bit more about how your parents also being entrepreneurs may have influenced you, and also where gaming came into play?

   2. SZSteve Zhao6:52

      You know, I grew up in the Bay Area, and my parents were immigrants, and they, they worked really hard. And I remember during the summer I would follow them, you know, to where they work, and it was just a grind every day. But over time, like, I seen how being an entrepreneur, like, uh, great things happen. How, you know, they started, you know, in my uncle's garage, then they bought their own small warehouse, and then it just grew from there. So my biggest takeaway from being entrepreneur is like it just takes time. But it was during those times, too, when, you know, they're busy working that I have to find kind of solace in my own pastime. And one of the things I found early in life was just... You know, I was fortunate enough to have a computer pretty early in life, and I think I was about the age of, uh, 10 years old, and I just started creating these funny little games that I would just share my friend and just kind of go from there.

   3. SSSteph Smith7:40

      Well, that's super early. I don't remember what I was doing when I was 10, but I certainly wasn't creating my own games. And it sounds like very early on as well you not just played games for fun, but you started building a business around it. So later on when you were in university, you started Blue Tea Games, and I wanna hear more about what this company was and what specifically inspired you to do that.

   4. SZSteve Zhao8:02

      Yeah. So Blue Tea Game was a game development studio that created games online. People can download it. We call it shareware games back in the days, and they would, you know, uh, open up to all the... input their credit card into the internet, and they would buy the full game if they like the first hour of it. So it actually started because of the stock crash of 2001. That was when I went to college. Um, my parents, they saved up a nest egg for my tuition, and everything crashed, and they're like, "Yeah, you know, you're gonna have to find work while you study university." So at that time, I saw that internet really took off and people were actually building games online, and I thought that was really fun. Like, I didn't know much about it. I just loved building games. And I was thinking, hey, maybe I can put games online and see if people would play it, and they did. I was like, hey, would people actually, uh, actually wanna buy it too? And they also did. And it end up that during that three years in college when I created Blue Tea, that I was able to really fund my tuition with just, um, building games on the side.

   5. SSSteph Smith9:05

      So this is just after the dot-com crash when people are really doubting the internet in general, let alone paying for games. I mean, I feel like as I was growing up, it was so rare for people to, for example, buy an app in the App Store, even if it was 99 cents. So for you to be able to successfully monetize during that period was definitely impressive. And from my research, it sounds like actually some of the games were really successful. One of them, The Dark Parable series, was downloaded millions of times. And so it sounds like this company was doing relatively well, but ultimately, you ended up shutting it down in 2016. So what led to that?

   6. SZSteve Zhao9:39

      I think it was my own stubbornness. So we did very well with PC games, and we grew to a team of 40 people. Um, so the game, um, company was completely bootstrapped after college. Um, but what happened was in 2009, um, that's when, you know, the iPhone came, and then there was a mobile games industry. And for me, I wasn't fast enough to adapt to mobile games. And, you know, what we built were casual games, and, uh, when mobile first came about, it took a lot of the, um, shares away from the PC, uh, group. So we saw our industry starting to shrink while the mobile industry started to gr- uh, grow. So, uh, by the time I went to mobile, it was too late. Uh, we were just catching up, and every year that we went in, it felt like we were further behind. So the company just really stagnated into, uh, 2016. That's when, um, we saw VR kind of blew up.

   7. SSSteph Smith10:33

      Yeah, I mean, it sounds like you went straight from Blue Tea Games right into Sandbox, which to me is impressive in a way because after running a company for many years, the reaction of most founders is, let me take a break. And your reaction was actually, no, I see this opportunity. I wanna go all in on Sandbox. And so tell me a little bit more about that. What was the vision you had in 2016 that made you say, "Hey, I need to do this right now"?

   8. SZSteve Zhao10:59

      I think it was the fear of missing out. You know, the painful lesson of missing out during the mobile era was, uh, really ingrained. It's like, man, I wish I was there earlier. So when VR first came about, I was like, okay, this is gonna be a consumer headset. Oculus is gonna launch, and HTC Vive's gonna launch. We have to get there early. So I just decided to dive down and just go with it. You know, I think what made it easy for, uh, me and my team at that time was also we knew how to build games. We built games for multi-platform. We knew how to build in Unity, which was used to build in VR. And I also had a few folks left in Blue Tea, and that's how everything started.

4. 11:37 – 15:37

   A minimum viable matrix

   1. SSSteph Smith11:37

      Yeah, so it sounds like you knew how to create games, but one clear differentiator between what's, what it sounds like you did at Blue Tea and what you then were venturing into with Sandbox is the physical in-person element to it, which we'll get into later because you're doing both software and hardware, which is incredibly hard to do together. But what made you specifically make that decision to say, hey, we're not going to just venture into this new platform, which is VR, but we're also going to do that in person?

   2. SZSteve Zhao12:06

      One of the biggest lesson I learned, uh, from mobile games is you don't create what's popular today. Because by the time you're done, it's gonna be 10 months too late. So our job is to figure out what do people want in a year or two. So when we started, um, Sandbox VR, it was called a different company at that time, Glow. We also created games for the headset because we wanna be early, but we also had, like, a second bet, which was, what do people really want out of VR in 10 to 20 years? Like, really try to project that out and be super, super early for that. And for us, it was... I grew up watching The Matrix. You know, you can get plugged in, and you can be anyone and be anywhere, and I thought that VR was that last technological p- component to create that. So we're like, can we actually create a minimum viable matrix?

   3. SSSteph Smith12:59

      A minimum viable matrix. That's a good, that's a good way to put it.

   4. SZSteve Zhao13:03

      We, you know, we saw all the pieces, and then i- we think it'll fit, and I think people would like it, but it will take time. So, um, when we first started the company, it was, okay, let's build a game. Um, let's make sure that the game can make some money while we really work through the idea maze of what that would look like to build a location based project. And for us, it was just hedging. If the games worked really well, we can double down on that, and if the location works really well, we can double down on that.

   5. SSSteph Smith13:29

      So I didn't even realize that you were pursuing both of these paths in parallel. Were there any early data points in either direction that made you think, "Huh, this is really where we should be betting"?

   6. SZSteve Zhao13:40

      I think it was just the nature of how the company was founded. When I built Blue G, I moved to Hong Kong, and I, I built a community there. I have friends there. So when I started to seek out angel investors, I told them, "Hey, let's try to build games first." It's very organic, right? And we also wanna learn what it takes to build in VR. So while we're learning how to build, you know, content in VR, we can really figure out how to build a platform that eventually became that location based component to it. You know, but for us, we also didn't raise that much. Um, in the beginning, we raised about, I think, three hundred thousand, four hundred thousand. Which might seem like a lot, but if you're building a, a team that wants to build content and then build a technology platform that's never been done before and then eventually put it into a retail space, that's not a lot of money to go about. So I was, I guess, a little naive in the thought that, hey, we're early enough and we build games, that by the time the game launch, that we can take the profit we earn from the game and reinvest back into the platform. That was in twenty sixteen, and during that time, you know, there was a lot of hype and buzz still around VR. And we launched our game in December, perfectly timed during the holiday season. Uh, we went through Steam, and we got, like, incredible exposure on Steam, and we put our game on Oculus Store. And we were like a top twenty percent title, but it didn't generate that much, um, you know, revenue for us, and it was the same for a lot of developers at that time. And we're like, "Oh, crap. We're gonna run out of money." Entering twenty seventeen, that was kinda like the start of the VR winter, where funding was very, very difficult because the holiday season didn't really pick up numbers that gave enough trust of the VR market. So that just kinda became organic, where it's like, okay, so we cannot really just do games anymore. We have to put a hundred percent of our effort behind this full body, uh, platform that we built on the side.

   7. SSSteph Smith15:36

      And it sounds like you did that.

5. 15:37 – 20:11

   Betting your life savings

   1. SSSteph Smith15:37

      You went into what you might call this nuclear winter in twenty seventeen. You had just been working on these digital games. It sounds like they had some success, but you were, in a way, pivoting, but also, as I said, pivoting right into this winter where the amount of funding that you had raised prior would not hold you over. So you made a decision that I think is really emblematic of your journey and the conviction that you've had throughout the years about the platform that you're building, and you put your own life savings into the company. Tell me a little bit more about what conviction you had and why that made you actually decide to take your own life savings and bet it on this company.

   2. SZSteve Zhao16:20

      I didn't wanna put my life savings. That's, that was the first start. Um, but entering twenty seventeen, we had, like, maybe a hundred thousand dollars left in the bank, and I went back to investors. Um, I went back to institutionals, also angels, and it's like, "Hey, we have this great platform that will one day enable full body experiences with multiplayer." But, you know, in a retail setting, um, it's like, "Hey, we just need a little bit more funding to kind of bring a demo out." And we couldn't get anyone to go for it. We're like, "Okay, this is it." So I had this conversation, so, uh, with, you know, my friends, my family. I have this nest egg that I saved from Blue G. You know, ten years working at Blue G, I saved this nest egg. I can put everything into this and just get the demo out and just prove that this is a concept worth building for. And of course, you know, I talked to my friends, and they're like, "Yeah, Steve, don't do it." I talked to my parents. They're like, "Yeah, this is really bad." So I decided to do it.

   3. SSSteph Smith17:18

      [laughs] Naturally.

   4. SZSteve Zhao17:21

      What we saw, like, in the market in location based VR was company that raised a hundred times more money than we did with a product we felt was not in the right direction. You know, I think at that time, people that raised a lot of money were about how do you interface with the environment. You know, you can touch the wall, you can feel the heat. And we're like, yeah, that's kinda cool, but, you know, great thing about games, it's really about playing a game with each other, right? The game object isn't the environment, it is your friends. Nobody built for that. We knew that people wanted that. That was a conviction. So that's when I decided to basically take my life saving and put it into, um, you know, Sandbox. And I remember the moment I did that. I was at the bank. Even the bank executive was like, "Are you sure you wanna do that? That's, that's like ninety-five percent of your savings." I'm like, "Yeah, let's, let's just go for it." But it, it wasn't, um, it wasn't done in isolation, because at that time, we were down to a team of six, and I had to sit down with them and I said, like, "Look-" I couldn't get any more funding. This is it. I'm gonna have to shut down the company. But I do have, you know, um, this much money left, and I'm just gonna put everything in it. But if I do that, I will need all of you to be fully committed to go for this. Now, if you're not, that's okay, and I'll just shut the company down. But if I'm gonna do this, we're gonna fight for it. And then we sat down in a circle, and everyone gave their vote. Fortunately, everyone agreed to fight on for the next six months to make it happen.

   5. SSSteph Smith18:50

      That's amazing. I have to ask you, it sounds like you and your team maybe saw something that other people, whether it be investors, whether it be other founders, didn't see at the time. And there are many reasons to say that this won't work, right? As I mentioned before, you're doing both hardware and software. You also are focusing on a social element, which means that you don't only need to convince one person, you need to convince many people to show up. You are doing so at a time where this technology platform, being VR, is kind of unproven. It's in its early days. And so there are, again, many reasons to say, "You know what? This maybe sounds like a good idea, but in reality it's not worth pursuing." So was it just seeing that certain other companies had raised so much money and were not delivering on the promise that you knew you could? Or what other data points were you paying attention to to say, "This is really worth pursuing"?

   6. SZSteve Zhao19:42

      For us, it was, it was the intuition of having built games for so long. Once you do for a time, you c- there's just intuition about what could be really fun. It just came from that. For me, it was able to kind of see that with this amount of funding, we can actually bring a demo, and then from there be able to show what exactly this is and get people on board. In the beginning, it was a demo, but we end up not just building a demo, we actually built, like, a full product, and I think it just made it much easier by the time that it was launched.

6. 20:11 – 22:38

   Building an MVP

   1. SSSteph Smith20:11

      So tell me about that demo, because I went to a Sandbox recently, and it's this large room. There are so many different cameras. There's, like, an entire closet of different tools that you use. You're wearing a, a vest. There's someone there helping you. And so tell me about the challenge and how you solved that challenge of getting, as someone might say, an MVP. It's a lot easier to create an MVP of a software site that aggregates a bunch of data. An MVP of Sandbox VR sounds quite difficult.

   2. SZSteve Zhao20:41

      Yeah. So we didn't have any, like, vests. We didn't have any custom props. Um, we didn't have the nice space that you, you guys went into back in the days. What we had back then was just $200,000, $300,000 with six people, with a lifeline of six months left. What we did was we had to hard code everything. Like, forget about elegance in your software, because we have to bring this out. But also within that really tight constraint, the biggest thing that we had to solve was with retail businesses, you pay for what you get, right? If you put your product in a nice, uh, location with a lot of foot traffic, it's gonna be very expensive. The rent is gonna be insane, and the landlord would have to see your balance sheet to be able to judge if you can actually be there. We did not have that luxury, so we were figuring out, how do you bring people into a place with very little foot traffic? It was during that moment that we created the highlight video. It's like, how can you get people to become marketers of your products? Like, well, we saw escape room, you know, share photos, but can we push that 10X? It's like, what if we create an experience where you can show how much fun they had, but by the time they leave, they can have that video and share it with their friends and family so that we can build this from word of mouth? So that product was created during this really intense time that came about of trying to solve for, you know, um, our real estate. Like, how do we get, like, a, a cheap rent place that works? And that's what we did. We end up getting a location in Hong Kong. Even though Hong Kong has seven million people, we were able to find a building with zero foot traffic, and the rent was insanely cheap. You know, the water pipes were broken, and we were on the 16th floor. There was no outside signage. People don't know about us. And we're like, "Okay, this is the perfect place, because this is the only place we can

7. 22:38 – 25:06

   Branding a new experience

   1. SZSteve Zhao22:38

      afford."

   2. SSSteph Smith22:39

      Something that has also come up for me as you're talking is the fact that you're marketing a fundamentally new experience for most people. If you open a mini golf course, you can say, "Hey, it's Steph's Mini Golf," and people, for the most part, know what they're getting. They know what kind of experience. But a new location-based VR experience is, is new. It's, it's even hard to articulate what that is to someone, and, and there's no expectation linked to it. So how did you go about those very first early days of opening the store and getting your first customers in there?

   3. SZSteve Zhao23:11

      We grounded it based on escape room. We called it a hyper-reality escape room, which seems to work. People have played escape room, like, oh, okay. There's a VR component to it.

   4. SSSteph Smith23:21

      Mm-hmm.

   5. SZSteve Zhao23:21

      So that was our initial way of getting people in. And, and it's really funny, because once they come out of it, they're like, "This isn't an escape room."

   6. SSSteph Smith23:29

      [laughs]

   7. SZSteve Zhao23:29

      "I, I don't know what this is, but I'm gonna tell my friends about it." So the education part was hard, but the moment they saw the videos and the moment they s- they share it and they saw their friends having fun, like, that's when the viral loop really kicked off.

   8. SSSteph Smith23:43

      Yeah. I, I loved the video at the end, and I'm impressed that you thought to include that at the very early stages. So what happened then? If, if you had these early customers, people are starting to share, what was that early traction like?

   9. SZSteve Zhao23:56

      We got a little bit lucky. So in the beginning, we didn't do much advertisement. Uh, we had some media reporter come in, and, you know, they brought up some customers. They loved it. They tell their friends. But, you know, there has to be a certain volume of folks who come in to really kick in. But, uh, one of the reporter, um, did a social media post, and it blew up, and it w- it went viral, and that kickstarted the viral engine, where people just booked en masse, and that led to more and more people booking. So what happened was pretty soon we booked out our space You know, 100%, um, 100 days in a row. And it was really insane because when we first started building this business, I have a good friend of mine who'd done escape rooms. He said, "Look, if you can get to 50% occupancy, you're doing well, Steve. But based on your business, even if you get to 100%, it's still a tough business." And that's what we've done. We have people skip work and come to play Sandbox. We had a few people, um, delay their flights so they can play, uh, Sandbox. And pretty soon, like, people knew about our product, and that's how we're able to actually get a, our first seed institutional round done.

8. 25:06 – 30:45

   Surviving the pandemic

   1. SSSteph Smith25:06

      So you got this round done, feels like you're finally hitting the traction you're looking for, and this is one of the reasons I love your story, is that there was just so many roadblocks that emerged out of nowhere. And the next one for you sounds like it was the pandemic, which is pretty fundamental to your business because it's an in-person business. And so tell me about that. How did you stay alive during this period?

   2. SZSteve Zhao25:29

      Yeah, it was tough. People would say during the recession, companies will lose revenue by 30% to 60%. For us, we lost 110% of our revenue because not only did people... We couldn't open any of our stores, so there was no sales, but we also had to refund everyone that booked. And the outcome was that, was we had a great team, but, you know, we had only... We were trying to raise our Series B during the early 2020, and we had about three, three months of runway left. So we had to let go of most of the folks. We let go about 80% of our team. That was very difficult. There were a lot of great people at the team that we wanted to keep, but we couldn't. So how do we make it work? I think, to a degree, it was the same thing that I've done early in Sandbox, where we sat down and tried to get all the stakeholders to agree to fight on. I mean, it was much bigger this time. It was, um, getting the investors that backed us like, "Hey, this is what we're gonna do. This is how we're gonna survive it. Do I have your support?" Getting the people that remain in the team to get their support. Getting the secured creditors and unsecured creditors like, "Hey, we need to, uh, make sure Sandbox have a long enough runway so that we can all survive." And just creating a very big plan out of that. Now, the challenge was we couldn't convince everyone, and because of that, we had to go through Chapter 11. We needed protection to get through that phase. So in order to survive, um, the whole ordeal, fortunately, we got great investors kinda helping us, including Andreessen, to kinda give us a lifeline. But part of that plan was also getting the folks that we borrowed money from, the debt holders, to really extend our line, and then going through Chapter 11 to work with the landlords, unsecured, uh, debt holders, to find a way to make this all work out.

   3. SSSteph Smith27:19

      I mean, one of the most challenging parts of the pandemic, I think for everyone, was the idea that we didn't know when it was gonna, quote-unquote, end. And I think that would be particularly challenging with your business, as you said, because you didn't go from 100% of sales to 70%, you went from 100% to 0%, and it was unclear when things would tick back up. So was there a point during that process where you thought, "Well, A, we should maybe just shut this down because we're not sure when things are going to bounce back, or B, fundamentally pivot it"?

   4. SZSteve Zhao27:49

      We did. That was the first thing we talked about, is how can we pivot? We don't know how long this is gonna last. But there were a few reasons why, uh, we didn't go through that route. Uh, number one was we knew fundamentally we had a great product. Before the pandemic, people loved Sandbox. So for us, as long as we can survive it, then it'll work. But the bigger telling point was the pandemic impacted every country differently. For example, we saw that in China, things were opened up very quickly. Although there was a lot of rules in place, it felt like it was pretty normal. We're like, "Okay, why don't we pick countries that, that weren't really impacted by the pandemic, and we start there? And whenever other countries open up, like the US, then we'll go back there again." So that was our strategy, really just making sure we have the runway to kinda just, uh, uh, hibernate. You know, um, there was a, for a long time, like, uh, me and some of the core executive, we didn't take salary. People had to take time off so that, you know, they can control how we spend. It, it was really tough, but we just decided to fight on. Just focus on the countries that we can open in.

   5. SSSteph Smith28:55

      Yeah. I've mentioned this a few times throughout our chat, but just, you know, if I were to have designed a business that I thought maybe would have one of the hardest times throughout a pandemic, it would be something like Sandbox VR. It has the so- social element, it has the in-person element. But you made it. You made it through the pandemic, and I'm curious to know how post-pandemic things have shifted, whether it's that people are more interested in some of these digital, physical experiences. Maybe this impacted your ability to get long-term leases as different other businesses are shifting. But also, just interested in how you've marketed yourself as you've come back.

   6. SZSteve Zhao29:33

      You know, running a startup is hard. Running a retail startup during the pandemic is really, really hard, and running a retail startup during the pandemic while going through Chapter 11 is really, really, really, really hard. And when times get very tough, um, one thing that we learned is we had to be very selective on where we focus. And where we focus, we have to be looking for outsized outcome. We were measuring everything against profit, against sales, but really about the margin. So, like, one example would be when we get the highlight videos that customer get, we've learned that, um, if you are able to hand them the video before they leave, um, they have a 10x chance of just talking about it, sharing it, uh, going about it. But it takes us about 15 to 20 minutes to generate the video, so people could be leaving before they actually get the video. So for us, it's like, how do we shrink that 20 minute down to two minutes? So we allocated, uh, the product team entirely to solving that one thing. But we knew that the outcome was gonna give us much more higher shareability, and we measured that afterward, like, and it really worked. So that was just one facet of many, like a dozen core things we've done that really turned the company around.

9. 30:45 – 33:22

   Sharing risk with landlords

   1. SZSteve Zhao30:45

      So fortunately, in early 2021, uh, with the vaccination, like, there was a huge pent-up demand for people to come out. And when they did, oh boy, did they really go to Sandbox, and everything just worked. And the market, actually, there was a market shift, too, where, uh, we were able to really renegotiate all the rent that we had for existing location, but also for new locations. Uh, not only that, we were able to convince landlord to fund our project entirely, because we had no capital, so we had to find a way to create a, a win-win situation where the landlord is willing to bet a company that been through the pandemic, that been through Chapter 11, and say, "You know what? We're gonna give this company all the money so they can be in our space." And we're able to convince them on that.

   2. SSSteph Smith31:34

      How does that work?

   3. SZSteve Zhao31:36

      Generally, in the US, um, landlord will give something called a tenant allowance. Usually is they would fund, um, retail tenant a certain percentage so that they can build up their place. Uh, usually what we've gotten before, it was about 5 to 10%. So we've made it work because we're able to show data point during the pandemic. For example, um, we were able to open in our Chicago location, and during that time, we were in a, a mall that had zero foot traffic, but 100% of our customer booked ahead online, and that was because of our marketing strategy of our, uh, highlight videos. I mean, we have stories where we ha- actually had to meet people at the parking lot to take them to Sandbox because they would get lost in the empty mall. But we were doing tremendously well. People wanted to go out. Fundamentally, what we're trying to solve is for people to have a great time together, and that is made no more important than, uh, during the pandemic of how important that was. So we shared these data points, and then were able to convince a few landlord to take a bet on us. And then once that happened, we were able to get more and more landlord to take, uh, bigger bets on us. That's how we survived the pandemic, yeah.

   4. SSSteph Smith32:50

      Yeah, and it reminds me, I think Apple, in many occasions, gets cheaper leases because, yes, these Apple stores are almost just these central locations that attract so much foot traffic that it's beneficial to the landlords of these malls, um, et cetera, to, to offer those deals. So it's, it's great that you're seeing something similar. Something you mentioned, though, about Sandbox as really, uh, Sandbox being this place where people socialize and come together reminded me of just the idea of competition. Like, what,

10. 33:22 – 36:14

    The competitive matrix

    1. SSSteph Smith33:22

       what do you compare Sandbox to? And I can think of many examples. You know, maybe a movie theater, maybe something like Topgolf, maybe something purely digital like friends playing in Fortnite. Um, so I guess from your perspective, where does Sandbox fit in that competitive matrix? Who are your core competitors, and what are you really challenging that exists today?

    2. SZSteve Zhao33:44

       We do think ourself as carving a brand new market. Um, but if we were to take it like the close example, what we do wanna become is like the new movies. When we think about the movies, you know, it's a pretty passive experience, and the outcome doesn't change when you watch a movie, and you probably do it, like, not many times. But for us, it is, it's a very highly active experience that, depending on who you go with, the outcome can change when you play the experience. And there's a huge, uh, social media component to it, where you can actually express yourself and be able to share that digitally with other folks. A- and structurally, it's like the movies because you come in and there's different experiences that comes out, and you will chase for the next experience. We're starting to have experiences that's starting to hit box office numbers. Our titles are starting to hit, like, theatrical releases, the average US theatrical domestic, uh, box office release, uh, revenue. And as we scale, uh, there will be a day where we could see Sandbox experiences even, um, being a rival to, like, some of the box office movie hits.

    3. SSSteph Smith34:44

       And is that the plan? Because I could see a couple different ways that you could approach the business, one of them being you just focus on creating one great game that people come back to, and when they come back, they wanna beat their previous score, they wanna go back with a new friend, see how it's different. Or maybe another path, which sounds more similar to what you're describing, is having a suite of different experiences. Every time I go back, I'm trying something new, kind of like the movies, right? You don't often, unless it's something like Avatar, you don't want to go see something again. And so from your own perspective, but also from maybe the consumer behavior that you're seeing, which one of those scenarios, per se, do you think more so fits what you're trying to do with Sandbox?

    4. SZSteve Zhao35:27

       Well, definitely the latter. We do see people come back for new experiences they can share with their friends and family. There is a very small subgroup that would chase a high score, and we've seen people play our zombie experience over, like, 12 times just to get a certain outcome. What really engages people, what we've learned that's surprising about Sandbox is it, it's really some, it's experience that you guys wanna delve into that you guys can share. And outcome of that is people come to Sandbox because they wanna build a relationship with someone. So a date night, it's extremely popular in Sandbox. Or they wanna, parents having a fun time with the kids in a way that's very shareable, or people they haven't seen in a long time. So we wanna keep doing that, but with different worlds they can be and with different characters.

    5. SSSteph Smith36:13

       That's great,

11. 36:14 – 39:14

    Content and IP

    1. SSSteph Smith36:14

       and in a perfect world, you could have endless resources and launch a new game every single day, and they'd all be amazing, and there'd be this endless suite of games that people could try out. But obviously, there's a resource constraint. And so tell me a little bit more about how you think about the rollout of new games and also the amount of resources it takes to build a, a new game. I think you have six right now. Is that correct?

    2. SZSteve Zhao36:37

       Yeah, that's correct. So generally, it takes about 12 months to build a title internally, three months of pre-production. Um, nine months of production work. But we also work post-production to make sure things look, uh, goes according to plan or any changes that we make, uh, is live to the audience. So the way we think about content is in the beginning, we have to build everything ourself because it doesn't exist. But over time, you know, other c- people can build on our platform, that if you're a VR game developer, over time you can find it more lucrative to build on Sandbox than other options. So how we scale location is a factor of that. The more locations we have, the more tickets we sell. The more tickets we sell, the more third-party developers interested in us. So in the beginning, we built a lot of locations ourself, and we've proven this to be a very lucrative, uh, retail business model, and over time, franchising will really kick in and really bring Sandbox all across the world. Once you have that, then you can start needing developers that, you know, with their s- uh, unique skill set to bring that either local content or IP branded content they're really good at, or genres they're amazing at, and just create this ecosystem.

    3. SSSteph Smith37:45

       Yeah. It feels like in your early days, you've leaned pretty heavily on the build versus buy options. You built your own platform, you built the content on top of your platform, when others in a similar scenario might have chosen to borrow, right? Or buy from another company, whether it's the technology, whether it's the IP. And so tell me about that, and specifically tell me about the IP aspect of things, because it does sound like you're starting to do partnerships. I think one of your titles was in partnership with Star Trek.

    4. SZSteve Zhao38:15

       We had to build because we wanted to get experience perfect. We wanted full body experience and, you know, we couldn't just take, say, a VR game that's for the consumer headset with con- flow, you know, with controllers to work where you have to use the full body and you have to play with someone in the same space. It wouldn't really take advantage of that platform and wouldn't be a great experience, we thought, that it would drive people to our location. It was built really out of necessity. But once we've proven that, we can actually share that news with, um, other brands. Like, hey, wouldn't it be awesome to be, uh, in the Star Trek universe, to be a cadet where we can beam you to different planets and you can use a tricorder, and go from there. You know, at that time it, it, you know, it made a lot of sense. We did a lot of shooting experiences in the beginning because you had to wear a bulky VR backpack and, you know, you're pretty limited. But now with wireless streaming, it actually enables a lot, uh, more different, uh, different genres that we can utilize.

12. 39:14 – 47:37

    Special announcement!

    1. SZSteve Zhao39:14

       I think an analogy that we would use is, um, what sound is to silent films is what the wireless streaming is to our VR platform. Because once you add a sound, there's, uh, genres that wasn't possible before that you can utilize now. So with wireless streaming, there's a lot more mobility, there's a lot more movement, and you can create experiences where every part of your body movement matters. And that is why we decided to partner with Netflix on Squid Game.

    2. SSSteph Smith39:44

       Oh, wow. What a great partnership.

    3. SZSteve Zhao39:47

       Thank you. Thank you. It's a, it's a great, uh, um... It shows a lot of trust in us, Netflix, to be able to give us, you know, one of the best IPs. But I think it's also a, a good marriage in a sense that we can really create an, a great experience where, um, you have multiple people in the same space where you can collaborate or even sabotage one another, moving freely in a, in a shared space. So not only do we get to work with a great IP, but also we're able to create, uh, an experience that fully utilizes our platform.

    4. SSSteph Smith40:20

       I think that's so important to your point about what the technology enables, because I actually... I was too scared to watch Squid Game, but I know the premise and I know some of the games within Squid Game, and some of them would just be inherently underserved if they were done in, you know, even a VR headset if you didn't have access to your hands. Because, you know, one of the games is where you're kind of like cutting open a shape within a cookie, for example. You can do that with your mouse or your keyboard, but it's not the same, and that's something that I really was impressed by when I went to Sandbox, which is, as you said, it's, it's like a full body experience. There's haptics on your vest. You, you know, if my partner got killed, I go, you know, restore him with my hand. And so there was just so many aspects where it was like, you are fully in this experience. And I also think another element of VR, which is probably my favorite from the few in-person VR experience I, experiences I've done, is the ability for you to truly immerse yourself, and what I mean by that is to start experiencing emotions like fear or joy that I don't think I've experienced to the same degree in other games. To give a quick example, the first time I ever went to a VR experience was in Japan, and they get you to walk across this balance beam in VR, and they get you to jump to grab this... There's like a helicopter with a ladder hanging down, and really, you're about four inches off the ground on this balance beam. But because of the immersion that happens, you get scared. You're like, "Oh gosh, I don't, like I don't know if I can make this jump." Because in VR there's a big city below you. And the same experience I did at Sandbox, there was this point where they raised both of us up, but we went in different directions, and it truly felt like I was then 100 meters away from my partner instead of, you know, in reality we were one meter away. So I don't know. I, I, I'm just sharing that experience because I do think your point about the actual technology enabling concretely new experiences is really important, and Squid Game seems like one of the best options to actually pursue that with.

    5. SZSteve Zhao42:25

       It's really interesting because when we first started Sandbox, and the first experience we built was a zombie experience called Deadwood Mansion. We were inspired by, you know, Resident Evil, Left for Dead, and those titles generally, um, is a very, very male-dominated experience that people love to play. But when we launched that- We were surprised that half the audience were female. And we asked, you know, our customers, like, "Hey, you know, what do you think of our experience?" And for them, they say, "Hey, it doesn't feel like a game." It felt like real life. Felt like I'm a star of my own m- me and my friends are stars of our own movies, and we're transported into this world. So we end up that we didn't create just a gaming experience. It felt like a, like an experiential consumer product. The insight that we took from this was that the believability, once you hit a certain level, it just click, and it just becomes real life. And, and that's the reason why we built what we've done because when we first started out with the consumer VR headsets, we still know that we were in a game. Because when you put on your headset, okay, you look at your body, you don't see your body. You look at your controller, just two, like floating joysticks, right? And you can't really move in your space, and then if you're next to, like, another player online, you can't really physically interact with them. But you put them in Sandbox, they forget they're in a simulation. And there are many times we would tell... we would get complaints about noise. I remembered in the early days, um, we worked with IMAX to bring, uh, Sandbox into New York space. It was right next to the theater. And we found out that we had to shut our store by 5:00 PM. I was like, "Why?" And they said, "Well, because people were screaming so loud that all the theaters around could hear random screaming." And, like, they tried everything. They put mattresses. They tried to muffle all the sound. It did not work. [screaming] You're fine, you're fine. Go left, go right.

    6. SSSteph Smith44:16

       Who's on me? Who's on me?

    7. SZSteve Zhao44:18

       And you don't get that unless you create something that's very real and believable.

    8. SSSteph Smith44:22

       It felt very real. I actually avoided the zombie tracks when I went because I was, I was scared of how real it would be, and I instead went with the space option. Um, but on this note of truly immersing people and almost, like, replicating reality in a way, what does that take? I, I saw it for myself, but just for listeners, like, how many cameras are required? How many props? Like, what, what is really going into this experience makes it fundamentally different from, let's say, an Oculus headset?

    9. SZSteve Zhao44:54

       It starts with outside-in technology because in a shared space, it needs to be tracked from the environment rather than from the headset, which is inside-out technology, which is tracking, you know, from a single, like, cameras within a headset. Because, uh, once you have that, then it's building a very low latency environment that tracks f- your full body. And low latency is really important because when you play an experience and it kind of like, um, you know, it stutters a bit, then you remember that you're in a simulation. So for us, it being able to have, like, really streamlined wireless low latency experience that's full body, and once you hit that level and that physical element of being able to interact with your friends, that's when you start to believe that this is real life.

    10. SSSteph Smith45:42

        I, I definitely was surprised that I didn't get a headache either because I know that can be a feature, or I guess a bug in this case, of other VR experiences. And I get carsick probably 50% of the time, and so I'm very, you know, susceptible to that feeling. But I went through the whole experience and never had one inkling of that. So that was surprising. But what, I guess, differentiates Sandbox in being able to build this low latency environment?

    11. SZSteve Zhao46:08

        Yeah. So when we first started out, like, um, it, it d- it doesn't work. Like, when we f- got the headsets, and we got the cameras, and we try to put everything together, it's, it's a very, it's a very buggy experience. Back in the days when we'd go out to try other VR locations, um, it was really buggy too. And I think for a lot of folks, that felt like it was okay because, hey, that's just what VR is. But even as a small company back in 2017, you know, with the limited resources, we cut corners. One thing we never cut was the fidelity of experience. Because for us, the end product we wanted to do was to have someone believe that they're in real life. And to do that, it cannot, uh, stutter at all. So we have to be very precise on how we do, um, our tracking and how we do the streaming, which also led to some of the patents that we had early on, which was we're able to create this, uh, prediction algorithm, which actually allows people to be able to move and be in VR even if they're being blocked. So that was one component to it. And the other component was we're able to batch the data, how, how we send wirelessly, so that if things doesn't go well, you still have a very smooth experience. So in a way, the technology that we created was, like, how we ran our startup. Like, when things don't go well, we find a way to make it go well.

    12. SSSteph Smith47:31

        I've touched on this to an extent already, but I just want to hear your perspectives specifically on this idea of building both hardware

13. 47:37 – 50:23

    Building on hard(ware) mode

    1. SSSteph Smith47:37

       and software. People often say that building hardware just on its own is like building on hard mode, and you've decided to integrate both. You've integrated real estate into the equation. And so curious to know about if we start looking forward in terms of Sandbox, how do you, how do you think about the business evolving? Where are you focusing? Is it about opening up a bunch of new locations? Is it about extending the content variety that you have? Is it about getting better deals with your real estate, uh, partners? How do you think about the evolution and where to prioritize?

    2. SZSteve Zhao48:10

       Yeah. To answer your first question, building hardware is really hard. Fortunately, in the beginning, we've, uh, we didn't have to worry about hardware because everything was off the shelf. So all we had to do was make sure the software works really well with all the hardware that we've used. We got very lucky in that respect. And over time, we started building, like, hap- our own haptic wands and wireless props. And, you know, in the future, we do wanna invest deeper into hardware to have a more integrated product. In terms of how we wanna see our future and how we grow is it's just continue to do everything that we do. But really to double down on our content. You know, I, I always see us the movies. In the first five years of Sandbox it's like it's a silent film of our VR product. And now that we just, uh, created wireless streaming, now we can add sound to it. So now we have all these, uh, genres that we can explore, that we can provide for our audience, and over time we'll figure out what that color is. We can add the color to our, um, you know, black and white sound film, and then build even more genres of experience that, that can utilize that, and just grow from there.

    3. SSSteph Smith49:19

       As you expand your content mix, I'm also curious to know if you plan to or are thinking about venturing outside of the social realm. So it sounds like that is the priority, that is the focus. But as an example of when I went, I asked my husband, who was the person I went with, if he would go again. He's like, "Yes, this was great, but I would love an experience like this to work on my surfing." That's something that he's trying to get better at today. But the problem with surfing is that you have to wait for the waves. You know, you can go out in a day and the waves aren't good, and you can't get the experience that you're looking for. But you can imagine in a, in an equivalent VR experience you could have waves non-stop. You don't have to wait for the next one, you don't have to paddle out, and you can really, I guess, condense the learning period to get better. And so that's just one example of where VR could be a more educational resource instead of a social resource. And so how do you think about that if you plan to expand your content mix? Do you think that that might actually expand past social?

    4. SZSteve Zhao50:21

       We do. We do.

14. 50:23 – 51:17

    Placing multiple bets

    1. SZSteve Zhao50:23

       And I think it's how we started the company, always having... hedging on different bets. So one of the things we're doing is actually we're creating-- we're rebuilding our operating system so that it's white label, that other developers can actually build on top of our system, that if you wanna learn surfing, it might not be in Sandbox, but it might be somewhere else. But someone can leverage our technology to create a full body experience that allows people to be on a board and be able to surf and just train at different type of, um, tempo to get to replicate how the waves are. We'll see how that goes, but we do understand that what we have is beyond just our business, and we do wanna support how the ecosystem can change over time.

    2. SSSteph Smith51:04

       Speaking of the full ecosystem, since we've already kind of ventured into the future of VR, I have to ask about broadly the sentiment of VR being a new computing platform. And as

15. 51:17 – 58:18

    Moving from novelty to necessity

    1. SSSteph Smith51:17

       you mentioned, when you started Sandbox in twenty sixteen, it existed back then, so we're now in twenty twenty-three, and I think there have definitely been some impressive strides in the industry. But the challenge that many people would make about VR is that it still remains in this zone of novelty. And so I guess the way I pose the question is: How do we change VR from being a novelty to a necessity?

    2. SZSteve Zhao51:42

       We have to really double down on content in a way that can really extrapolate the power of VR. Because if we look at, say, the consumer VR market, what you're competing with is not us. You're competing with Fortnite, you're competing with, you know, your console, your PlayStation 5, your mobile phone. That someone entering their home wanna put on the headset before anything else. So to do that, you're gonna have to have a 10X content that can drive people to really want to put on the headset the moment they get home. And that's a very hard thing to do, but I feel like over time we'll get there. But it have to be a content that's just really native to VR that cannot be replicated across the phone or the PC or the, or the TV screen. And I think people have been trying to figure out what that is, and eventually they're gonna get it, and more people will start using, um, consumer VR headsets. When I think about how we're positioned, uh, like out-of-home VR, say, compared to, um, in-home VR, I think what we're seeing is the evolution of accessibility in consumer VR. You're seeing that, um, you know, VR headsets not being plugged into the PC anymore, uh, consumer headsets being very light weighted, and over time just might be a headset that you can actually take outside and go wherever you go. Very highly accessible. Now, to do that, w- which is fine, is they sacrifice, uh, immersion, like deep immersion for it. Um, which might be okay for the product lines you're building. For us, we're gonna double down on immersion. We're gonna make it as real as we can and just do a lot of tricks in our bags we haven't used yet. So if you wanna have, like, a great experience with, um, with your friends or family and to be really absorbed in a world, that's where Sandbox lives.

    3. SSSteph Smith53:25

       That's interesting because you're basically saying that you don't feel like you're competing directly with an Oculus, for example. You're competing actually, as we discussed before, more so with the movie theater. Would you say that's an accurate depiction?

    4. SZSteve Zhao53:39

       Yeah. We're definitely in the out-of-home realm that is different from what the needs are in home, which kind of makes sense because when you think about out of home, the, the audience needs are different, right? Usually, when it's out of home, it's like you wanna invite other people to go with you. There might be a reason to go, and you really wanna cater to that reason and make it really worthwhile. And whatever you have that's out of home must be 10X of what you can get at home, otherwise people will just do this at home. So you can say movie theaters, but to degree it's any type of experiential that's outside. But I wouldn't say it's directly in competition. I say it's more like we're working together to just bring people outside. And if we know anything about the pandemic, that is really important for people to go out and socialize.

    5. SSSteph Smith54:29

       I agree, and I love that you're adding to the matrix of things that you can do with friends which aren't just eating and drinking. And that's been a little qualm of mine recently, which is when I look at what I do with my friends, and I think many people are similar, that's- The tendency is to just go, "Hey, let's go for dinner, let's go for drinks." I also grew up loving games and loving the activity of, you know, solving a problem with friends or doing a sport with friends. And I found as I got older, that became l- either less available or just less obvious, less of the habit that, um, people had. And so I love that this is an opportunity to venture back into that realm in person. But I think recently I saw a number where Sandbox has sold maybe a million tickets in the last year or so. What do you think it would take for Sandbox to go from 1 million to 10 million or even 100 million in a year? Is it just the content matrix that you mentioned before, or is it some other thing? Maybe it's the generation that grows up with Sandbox, maybe it's the price point. What do you think it would take to 10X the business?

    6. SZSteve Zhao55:34

       For us, it's just getting more locations, because in the end of the day, it's a retail business that's constrained by space and time. So as long as we can solve that, then we can have more people playing Sandbox. And with more people playing Sandbox, we can have the acceleration that we need. And well, basically, to convince people to build for Sandbox is to show that, first, this is a great product that people love all over the world, and that it's a very great business for people to run that can generate a healthy return.

    7. SSSteph Smith56:03

       I'm curious to know, throughout the journey from when you first started Sandbox to today, which were different places, are you surprised by anything? Have you seen anything in the consumer behavior, the buying behavior, the way that people interact with the product itself, that has surprised you in terms of, you know, "This is a little different to my original vision, but I'm leaning into this and, and it's helping me build my business in a better way"?

    8. SZSteve Zhao56:29

       When we first started, we thought that we created, say, a VR escape room, that that was gonna be the extent of what we built, and that it turns out that I guess it's more of, um, a product that is shared on many different occasions. We've seen people hold bachelor and bachelorette parties. We've seen, obviously, birthdays, people out of town. People just wanna, you know, date nice. It's just a lot of reason to use Sandbox as a way to have fun and celebrate. We even done a wedding proposal for a couple in Sandbox because that's when they first met, and they actually went and played in Sandbox. So it, it became kind of like a conduit for people to, to really meet and have a great time and get to know one another. So that was really surprising for us. And I think another facet that we found surprising was when we did the highlight videos, we thought, "Great, this is something that will work really well, people share on Facebook." You know, I'm at that generation where Facebook is still a big deal to me. Nowadays, people are splicing our videos and putting it on TikTok, and we're getting like 10 million views to 15 million views. And, and it turns out that what we created was sort of a expression that they can use to c- you know, to sh- uh, showcase themself and the life that they have. And we're like, "Wow, we can really, uh, provide more of that over time, and how can we really amplify that?"

    9. SSSteph Smith57:54

       Yeah. And I love that that was such an early addition to the Sandbox product, and so it's fascinating to see how that's continued on throughout so many years.

    10. SZSteve Zhao58:04

        Yeah. Like, we couldn't have done that without that, you know, trial period of, like, running out of money and figuring out, how can we get people to come to a location that has no foot traffic? So constraint breeds creativity.

    11. SSSteph Smith58:17

        I think that's a great

16. 58:18 – 1:03:17

    Startup learnings

    1. SSSteph Smith58:18

       place to end off, but I will give you the mic, Steve, if there's anything else that you wanna mention, maybe particularly for founders who are in those early stages. They may be hitting similar roadblocks. They may be asking the question of whether they should continue on, whether they should pivot. And I think, again, your story is just so emblematic of what the startup journey can be like versus, you know, from the outside it can look like an overnight success. So yeah, any, any final parting thoughts there?

    2. SZSteve Zhao58:45

       From my experience, I think sometimes, you know, kinda throwing, let's say, spaghetti on the wall is something that some founders might do, you know, trying to figure things out. To a degree, that's important, but once there's enough conviction behind it, the need to be able to grind and persevere on a few focused area, I can't stress how important that is. I mean, when I think about us pre-product market, I mean, there were a lot of things we could've done. We could've, like, amplify our hardware. We could've, um, made better design on our store. We thought those were cool, but those aren't game changing. We had to figure out, how do we get people to come to our store without foot traffic, right? That was one place that we doubled down on, and we created a shareable experience. Uh, sh- like the highlight video, because it was very easy for us to just stop at a v- a photo. It's easy to take a photo. But we thought, "No, we have to do something the world has never seen before." So we had to do not just a video, but a video that splices real life with VR. But that's not good enough, because we also have to dig deeper and find, what are the biggest elements that people will react the most to, right? And then so we created a game based on those element, and we captured those elements, and we thought, "That's not good enough. We have to be able to, once you've seen a video, make sure that you can download the video right away." So that level of depth on that one facet was critical to our success. So that was our pre-product market phase. And during the pandemic was, um, the post-product market phase, where we've learned that there's only a few levers that really changes the profit margin of the business. It's just figuring out what those levers are and just doubling down on it in a very deep way to get the margins up. And I think that's really important in an environment like today when fundraising is really hard and, you know, getting to, uh, profitability is key for companies.

    3. SSSteph Smith1:00:44

       I think I heard you say in another interview that your locations are profitable, or at least when you're opening up new locations. And to me, that's really impressive because I think if people were to guess based on the scope of the business, even though that you're many years in, that with all the hardware required, that it wouldn't be profitable. But is that right?

    4. SZSteve Zhao1:01:02

       Yeah. Every location that we open up in about, uh, within two months of operations are profitable. There are some locations that the profit margin is comparable to a software company.

    5. SSSteph Smith1:01:11

       That's incredible.

    6. SZSteve Zhao1:01:13

       And I think for us, the reason why I think we're able to do that is we've created a product that people didn't know they want, and we're able to charge a price point that we felt like was fitting to the product. It's $50 or $60 per person per ticket. But when we look online and people ask about the price, they're like, "It's totally worth it."

    7. SSSteph Smith1:01:34

       Yeah. As we talked about before, this idea of an in-person VR experience, that wasn't a comparable category, and so you got to set the pricing terms for that category based on the value you delivered. And honestly, I'm sure you've done a bunch of testing on this, but it wouldn't surprise me if you could charge $80 or $100 for a visit, because it does feel fundamentally different than, let's say, a $20 movie experience.

    8. SZSteve Zhao1:01:59

       For us, it was a very organic process. We started at $30, and then, uh, during the weekend, it was booked out two, three weeks in advance. So we try to, like, control the volume, and then we adjust it. And it kind of peaked around 38, $40, and then the pandemic happened, and then we made all these changes to the product. And then when the world reopened up again, we're seeing the same pattern, but now we're able to, to organically adjust it to 50 to 60. And to us, like, the way we think about our product is we wanna create, like, a $1,000 product. You know? That's kind of, like, the direction, and that if they're paying, like, $60 for it, then it's a, it's a great time for them. So that is kind of how we're thinking and how we're iterating, is how do you create something that's so, so valuable that they think they're getting a good deal as they, uh, try Sandbox?

    9. SSSteph Smith1:02:45

       Absolutely. And you're seeing that based on the bookings being completely full. And I'm sure people are going to be very excited to see what happens with your new Squid Game partnership, so we can look forward to that.

    10. SZSteve Zhao1:02:56

        Yeah. We can't wait.

    11. SSSteph Smith1:02:57

        [upbeat music] Thanks for listening to the a16z Podcast. If you like this episode, don't forget to subscribe here on YouTube to get our exclusive video content. We'll see you next time. [upbeat music]

Episode duration: 1:03:17