Guitar Hero Co-founder On Bootstrapping A Product Retailers Didn’t Want

Bootstrapping a startup doesn't sound too hard if you're talking about software and a tight, devoted crew. But try bootstrapping hardware for years with a maximum of two week's operating funds in the bank and you face a very different challenge. The creators of "Guitar Hero" lived that challenge when building their company before going on to bootstrapped success leading to acquisition by Activision.

Startup Grind ft. Charles Huang (Co-founder of Guitar Hero, Red Octane)

Guitar Hero has been an incredible success for Activision which acquired creators Red Octane in 2006. According to Derek Andersen, who recently interviewed co-founder Charles Huang, Guitar Hero has sold over 30 million units and grossed over five billion dollars in North America alone.

Charles Huang and his brother co-founded Red Octane in 1999:

"We started a company and raised a million dollars with a PowerPoint…doing online game rentals like the Netflix DVD rentals for video games, and that was the first business Red Octane was in."

This was during the famed dot com bubble and was the last outside funding they would receive. When the crash came soon after, they shifted focus because the path they were on would require a lot of outside funding and, at the time, such funding seemed unlikely.

Since customers who were renting Japanese games like "Dance Dance Revolution" before they were released in the States kept asking for dance pads, they started importing and selling them. Because the dance pads they were importing were "garbage" they decided to outsource manufacturing to China for import to the States and that kept the company going through 2003.

Red Octane sold their dance pads online because they didn't have the resources or cash flow to service major retailers. Their number one business rule was "don't die":

"Each week when we started our management meetings the first thing we looked at was how much revenues we took in and how much expenses we had because there was no conceivable vision in our head that we would be able to go out and raise money to fund the burn, the burn had to be funded by the revenues we were collecting every single week and for a period [of] about two years…we were running with less than probably two weeks of cash in the bank all the time."

Realizing that manufacturing dance pads put them at the mercy of other companies plans, they first put out a Playstation version of the dance game "In The Groove" before going on to partner with Harmonix to create Guitar Hero which they released in 2005:

"Heading into that fall it was crazy. Retailers refused to take the product [except for Gamestop and Best Buy]…We tried to raise three million and we couldn’t get anybody to invest money."

Best Buy estimated they could sell 30,000 units during the Christmas season

"They sold three thousand in the first two hours and they called us and said, hey we need 80,000 units next week. And we said…we make these guitars in China and they come over on a boat and next week we’re getting five thousand units and you’re going to have to split that with Gamestop."

"Guitar Hero became the hardest game to find at Christmas. The dirty secret was partially because we couldn’t make enough inventory because we didn’t have the money to build inventory."

As Huang points out, their ultimate success hinged on two months data:

"We couldn’t raise three million dollars in September heading into the November launch. November, the game launches. December it becomes the second best selling game in the US…January we started getting calls from private equity firms to invest 30 million dollars in our company…Activision called us and then…they bought the company in June."

For the first version of Guitar Hero they couldn't get the rights to most of the original music and so used covers. Eventually the remaining members of The Sex Pistols would get back in the studio to record for Guitar Hero and Metallica would release a game simultaneously with the album on which it was based, "Death Magnetic":

"We found out later from them that Guitar Hero was actually the third biggest sales channel for Death Magnetic, number one was apparently Wal-Mart, number two was Best Buy, number three was Guitar Hero downloads."

While the Guitar Hero story does illustrate that sometimes people get away with taking huge chances over and over again, even their precarious success is a reminder that the secret of winning is staying in the game.

Note: All quotes are from the transcript of the above video.

Hypebot Senior Contributor Clyde Smith (Twitter/App.net) blogs about music crowdfunding at Crowdfunding For Musicians (@CrowdfundingM). To suggest topics for Hypebot, contact: clyde(at)fluxresearch(dot)com.