Tuesday, November 3, 2015

Memories From A Tech Startup (back in the stone age)

My story, below, was prompted by reading that an Atari video game cartridges from a 1980's landfill sold for $37,000.  The past rushed back at me as I re-lived an earlier very dramatic time of my life. Brace yourself.

If your first video game console was a Nintendo, this story might as well be about dinosaurs or the Roman Empire or The Middle Ages.  If you are older than that you might find some memories and may notice that little has changed since those times except the absolute speed of change (the relative speed of change has not and more of that later). In hindsight, the risks of high-tech startups do not seem to have changed much and the planning to deal with it requires the same considerations today as it did then. The roman-candle story of RomLabs Inc. may give us a glimpse into it.

The business environment

It's 1983, the first "video games bubble" has been running since 1980-81 and it was a classic "bubble" unbeknownst to all industry participants.  The key players of the second generation of video games devices included video game console (VGC) makers Atari, Intellivision, Coleco (also Commodore, Radioshack, Texas Instruments) and third party developers (game software only) Imagic, Activision and Electronic Arts and a host of other minor participants.

Video games for personal computers like IBM PC (came to the market in 1982), Apple II  and Mac and Amiga and all kinds of C/PM  operating system microcomputers were also on the rise  and would eventually create the more complex, multi-user and graphics intensive games of today, but in 1981-83 they were not part of the "bubble" scene which involved games and consoles oriented to non-technical consumers.

Since 1976, all the VGC games (software) were distributed in ROM cartridges (Read-Only Memory).  Games went to market with prices ranging from $40 or more at the time of release and would decline to $15-20 a few months later as novelty declined and consumer demand moved elsewhere.  Game developers would invent the games, project unit sales and cartridges were produced to meet expected demand. Going to manufacturing was very expensive and required a large investment. The process was conceptually simple, tricky and risky and could be enormously profitable; in essence it had all the ingredients for a "bubble". If the manufactured volume was very large, unit cost would be reduced dramatically and profits could be huge IF the game sold well.  If the game sold poorly, inventories would build, prices would have to be cut dramatically, the reputation of the game would be eroded into a downward spiral. If not enough copies were, made demand would not be met ( price however could not be raised), potential sales woud be lost and those that were made could have had a higher profit margin. Nolan Bushnell, founder of Atari and the other early industry players had proven to be a master in managing this problem, but the increasing number of participants, especially the software-only developers was making the game harder and riskier to manage.  Furthermore, Bushnell had sold Atari to Warner Communications in 1976 and was fired in 1978.  After his departure the Warner's team of incompetent "suits" mismanaged games production so radically that truckloads of Atari game cartridges were reported to be going into landfills in mid-1983 (now you see why past and presents collided in my mind).

Evolution of electronic memory technology

By 1982 new Erasable-Programmable ROM devices (EEPROM) were coming to commercial market (initially had been restricted to military use only). They opened the doors for a host of new applications of compact (for those days) digital memory devices.  By being reprogrammable, they eliminated the need of huge production volumes to achieve low unit cost, although, early in their life cycle, they were scarce and relatively expensive compared to ROMs.

Invention and business venture

Two young inventors in Redmond, WA were interested in the early model personal computers that in the mid 70's had become affordable for individuals to buy.  They were also researching the technology driving the exploding market of video games.  Reading about EEPROMs they envisioned designing erasable and reprogrammable video game cartridges. Experimenting in their garage/lab they designed and prototyped a reusable game cartridge for the Atari 2600 video game console.

They imagined that the efficiency offered by the new cartridge would be irresistible to the industry and would make them rich. They sunk all their savings into refining the product and prototyping cartridges that fit all available consoles to demonstrate to potential licensees.

They also envisioned that their reusable cartridge could be remotely erased and reprogrammed over a phone line.  This vision required the integration of  a) a software-driven modem built with a single-chip-computer (in later years Hayes opened the age of cheap PC telecommunications with this design),  b) a speakerphone and c) a cartridge programming slot to plug in their cartridge into.

The proposed system would then support two business models:
1) a game-publisher-to-consumer (today we call it B2C) - In this case, a game developer would sell the reprogrammable ROM cartridge to a consumer who would be able to buy new games directly from the manufacturer by simply placing a phone call.
2) a business-to-business (B2B) model.  In this case, the games developer would deliver electronically and on-demand new games to retailers who would "burn" them into the consumer's cartridge for a fee using a programming console compatible with all major VGCs

The Rom-Labs system was completed by Summer 1983 just as AT&T and Coleco announced a joint venture to develop and enter electronic distribution of video games (front page of WSJ 9/8/1983). The news over-excited the Seattle Times and the Seattle PI  and some investors that had heard of their invention.  The moment in the spotlight in the papers and on prime-time news happened when I sent a copy of the WSJ article to the Seattle Times asking why so much fuss was made over "AT&T-Coleco's plans" when we already had a working system. One phone call was enough, and we became the news of the town.

Conclusion of the story

Some weeks after RomLabs brief moment in the spotlight, Atari announced a $300 million quarterly loss. The industry was shaken to its foundations and the exuberant braggadocios that ran it turned into deer-in-the-headlights. Talking to any game publishing or VGC manufacturing company became virtually impossible and, with few exceptions, useless.  These instances were representative of the environment in which RomLabs went to market:   The press openly called that time the collapse of the video-games bubble.   Atari had bigger fish to fry than talking to RomLabs as their executives being "executed" weekly.    Imagic, the industry's star, missed their IPO by literally one day and their owners never had a second chance to cash in (see the documentary "It's All In The Game").     Activision's management was busy trying to jump from the ship they had steered to near sinking.    20 Century Fox Video games opened discussions ostensibly to buy RomLabs only to be stopped by their own Chapter 7 filing -  Their CEO later admitted having tried to buy RomLabs to window dress themselves for a bankruptcy-avoidance sale, but ran out of time.    AT&T sent a team in November to investigate RomLab's technology, found it working as advertised, but suffering from "not invented at AT&T", and in any case Coleco, their partner, was busy shutting down the videogame business as rapidly as possible before it would take down the whole toy company (Coleco exited electronic consumer products in 1985 and went back to making dolls, Cabbage Patch Dolls, with great success).

1984 Consumer Electronics Show in Las Vegas

As the market deteriorated, RomLabs looked forward to January and the Consumer Electronics Show (CES) the yearly industry extravaganza where the participants could meet the big players without having to fight through telephone switchboards and executive assistants.  At CES the big companies always went looking for what was coming out of garages and often deals were started that way.  RomLabs committed to a minuscule booth and counted on their system's cost effectiveness to speak for itself.  Between September and January it was the best shot the company had.

At CES RomLabs discovered its competition: Xante a startup funded by a Texas-oil millionaire and Cumma Technology funded by money-no-longer-an-object Nolan Bushnell founder and former CEO of Atari and Romox reputedly funded by Intel's founders.  RomLabs was clearly lightly armed for the contest, but the collapse of the industry would make it all immaterial. In less than nine months there would be no more games to distribute as the industry imploded.

Making lemonade is so hard to do

No one had planned for one last surprise: RomLabs' single angel investor who had committed to make his investment in three installments, pulled out after the first one.  With no understanding of the industry or the technology RomLabs had developed, he only saw a quick kill in the beginning and made funding commitments he could not honor, betting that a quick success would obviate the need for his follow-on payments.  As soon as the company was faced with delays, he folded his hand and left the company in a lurch. Companies need due diligence as much as investors if not more so - caveat venditor or caveat investor is as necessary as caveat emptor.

RomLabs was thus left running on fumes while exhibiting at CES and seeking a buyer.  Its limited-budget debutante gown probably showed it.  It mattered little as the whole industry went on to implode.  Within nine months, not a single company was still producing video games or consoles. Eventually, Nintendo reinvented the industry keeping good control of games releases, supply and demand, etc. just as Nolan Bushnel had done. They ushered-in the industry we know today.

In a few months RomLabs was closed, the inventors, broke (and in one case facing a divorce) went on to invent other devices, but, tapped of all their resources, they could not effectively go to market.  Their inventions included:  a) a peer-to-peer local area network (LAN) technology, years later emulated by 10Net and Microsoft that could not compete with limited funds against the emerging dominance of Novell (the first LAN provider);  b) the first rollerball controller (stationary mouse replacement where the ball is spun in place of moving the mouse), c) a solid state memory portable storage that was a precursor to today's portable USB memory devices.
More importantly, in those days filing patents was not as easy as today and very expensive.  Thus, no patents were filed for a multitude of inventions and devices later introduced and marketed by other companies (e.g. Hayes, Lantastic, 10Net, Microsoft, USB memory makers, etc.).  Their consolation was to compare notes with another inventor, Tim Paterson, who had invented QDOS and sold it for a song to Bill Gates and Microsoft.

The only business the two partners could start with no capital was consulting on the design and installation of accounting systems, using the knowledge they had acquired at RomLabs. Demand for that expertise was strong because of the market traction of the newly introduced PCs and LANs (IBM PC was introduced in 1982 and Novell LAN in 1983).  But that is the story of Fenix Technology. A story for another day.

Take away lessons

John Chambers, CEO of CISCO and Jack Welch have commented that more is to be learned from a company's failure or near death experience than from great successes.  If so RomLabs is a cornucopia of learning experiences.  In a separate post we will analyze those experiences through the template I recommended elsewhere (www.angelpitchguy.com) for due diligence. It works for post mortems as it does for forward-looking due diligence.  Check back for the next posting or register and we'll let you know when we are ready.  Thanks for reading this far.

Marco Messina

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