In brutal news for VRChat employees, 30% were laid off late yesterday -- though fortunately, with generous severance packages. In a refreshingly honest email to staff, co-founder/CEO Graham Gaylor puts the blame on himself, saying he over-hired while also taking too long to add management, making it difficult for the startup to reach profitability before they run out of funding:
As we modeled our five-year plan balancing profitability with business growth, we arrived at the hard conclusion that we needed to reduce the team by around 30%. We determined which critical skills, expertise, and roles matched our future business needs and based decisions on these criteria.
As with many other virtual world/gaming companies during the pandemic, VRChat over-hired on staff, and now has to re-adjust.
However, this does not mean VRChat the company -- or the virtual world community -- is in danger.
Objectively, VRCht is doing quite well, with consistently high user concurrency. As I noted recently (and just double-confirmed with an insider), VRChat now has around 10 million monthly active users, making it one of the world's largest metaverse platforms. (And by my lights, one of the most innovative communities.)
With these layoffs, VRChat will now have the breathing room to achieve profitability. As I mentioned to one staffer last night, this reminds me of the time early on when Linden Lab also laid off 30% of its staff -- and then soon saw Second Life take off like a rocket.
For a deeper dive into VRChat's situation, here's a very smart (and bracingly foul-mouthed!) analysis by longtime VR developer/Linden Lab alum Kyle "qDot" Machulis:
In terms of my background and perspective: I worked at Linden Lab for a couple years during its heyday, have worked at startups for over a decade (and non-profits & medium/big corps for another decade), run my own startup, dealt with funding before (at very small levels).
VRChat is a venture funded company, currently living off of its Series D Round, which it got in 2021, off the back of the Meta Horizons hype.
Ideally, you want to IPO/Exit by Series C. Anything after that is like "Wellllllll maybe this time" for investors but you're diluting into oblivion at that point.
At this point in the explanation, VRChat basically has $95.2m in funds as of 2021. It's now 2024.
The $80M Series D in 2021 came because the industry was absolutely shitting itself for virtual worlds thanks to the Meta Horizon Announcement + COVID lockdown.
VRChat got $80m, but they weren't alone. Check out the absolutely wacky shit from sort-of-competitor Rec Room:
Anyway, VRChat. So they've got $95.2m in 2021, and they start scaling staff. I do not have direct numbers, but going off some handwaving and vague estimates from LinkedIn analysis, they went from maybe 15-30 headcount in 2021 to... somewhere around 140-160 before today?
VRChat's staff is international, and I'm used to SF Bay Area Pay Rates, so best I can give is the vaguest estimates on payroll burn. But with estimated 2024 headcount, it'd probably be in low millions per month.
That is *just* payroll burn, not accounting for all of the other costs of business, including online services, legal, etc etc etc. You usually just assume payroll is by far and away the largest burn in a company though.
"But qDot, doesn't VRChat make money? They're not just completely burning, right?"
FANTASTIC QUESTION! IT DOES! So that $95.2m *is* being bolstered by some sort of revenue. How much, well, we don't know.
What we do know today is that it's not enough to match payroll burn.
So what are VRChat's current monetization vectors? Here's an incomplete list off the top of my head:
- Event fees (for things like @furality that just happened)
- Creator Marketplace Income
- VRChat+ Membership feesThose first two are non-recurring income. Events like VKET and Furality don't happen monthly, they're like a once a year deal.
Creator Marketplace could be recurring at some point but is still getting off the ground, and isn't even publicly available yet (I think?)
That leaves VRChat+ Memberships. At $9/month, you're going to need 100000+ monthly subscribers to start even making a dent in that payroll burn.
I have *no clue* what subscription numbers are, so I can't speak to the impact this is having.
From the [Gaylor] email, it sounds like the new leadership brought in around the founders has given a very conservative outlook on recurring revenue growth, meaning that $95.2m must be stretched.
That's why we call it runway. If your company goes off the end of it, you crash and burn.
"But why did payroll get so large?! Why would founders let that happen?!"
The CEO's email covers this. They were inexperienced and overconfident. Admission does not excuse the fuckup and I absolutely hold them accountable, you will also rarely hear leadership ANYWHERE say that.
"But why don't they get more funding?"
It's 2024, funding is FUCKED. VC is 100% vibes based, the vibes suck now that we're out of the ZRP salad days, and virtual worlds are a very fucking dead fad.
Yes I know you like being an animal person in VR but that doesn't mean cash.
To summarize:
- Bad business decisions made by founders.
- Choice: lengthen company lifetime by headcount reduction, or stay course and possibly crash company. Neither is great.
- The first choice was taken.ICs [software engineers] had nothing to do with this and fuck you if you say otherwise.
One of the things to remember here also is that the ICs (individual contributors, i.e. not execs/management) ARE THE SHARE (well, options) HOLDERS.
Part of the reason you join these stupid fucking startups is the ability to maybe own part of it when it goes to the damn moon.
I realize many see VRChat as the platform, not as a going concern. For those laid off (and vested), they may have a piece of the pie, albeit FAR fucking less than the founders and investors.
Don't play the "shareholders" game if you don't understand where the shares might be.
Reposted with permission from qDot's X/Twitter!
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Great article!
Posted by: cf | Thursday, June 13, 2024 at 04:33 PM