Hey folks,
This was a hard week given the layoff, and a lot of our time has been spent trying to help everyone impacted. I know layoffs like this create real worry for people who play Rec Room. I don’t want that uncertainty hanging over the community, so I wanted to try and answer some questions I’ve been seeing come up.
Rather than write a big blog post, I structured this as an FAQ based on what I’ve seen asked and been as candid and transparent as possible.
Are we out of money?
No, our balance sheet i.e. cash in the bank is actually pretty strong, but we were spending too much money. That’s why we had to do the layoff. Our spending got out of sync with our revenue and our growth.
We had a really big team and an ever bigger vision. But we weren’t hitting that vision. And we were spending a lot of money not hitting that vision, and in doing so, we were also frustrating a lot of you. It was not a good situation.
If we had just kept going, we would have run out of money in the next couple of years. And with no money left, we would have had to lay everyone off.
Do you have runway/time?
Yes, we've got several years of runway with the current team, current burn rate, and cash in the bank. It’s hard to give you guaranteed dates because nothing in business or life is guaranteed, but… if nothing about the business changed or improved, our runway would probably carry us into 2029.
This has been a hard week, layoffs suck. We did it so we could give ourselves multiple years to go fix things and go build the right things. We have a lot we need to build. Our team is smaller, but it’s still pretty large at over 100. I’m confident there’s a lot we can build with that team and several years of runway.
Do we have debt?
No, we don’t have any debt.
Is UGC revenue growing?
Yes, July was the highest it’s ever been. It’s growing about 70% year over year.
Are creator earnings growing?
Yes, we paid out more to creators in July than any previous month in our history.
If UGC revenue is growing, why the layoffs?
First, it’s important to note that UGC revenue has different economics than revenue from things we make, and as UGC revenue grows it displaces revenue from things we make. When a player buys a UGC item, a significant portion of that money goes to the creator. That’s the right thing to do. Creators should be paid for their work, but it means lower margins for Rec Room.
To give you a concrete example. When we get $1 of revenue from an item we make, 70 cents gets to us (because we pay the platforms 30%). When we get $1 of revenue from UGC, we only get about 30 cents (because we pay the platforms and creators).
The upside: UGC is more scalable. We can grow it faster without scaling our own costs at the same pace. The tradeoff: we need higher overall volume, because we take home less from each dollar earned compared to when we were selling first-party content.
So as UGC grows (and it is), our costs have to adjust to match. UGC revenue growth wasn't why we did the layoff. We were spending too much money before UGC revenue really started growing in April of this year, but its growth ate into what we were making and didn't help our overall spending problem.
Did you have to do the layoff now or could you have waited?
Ultimately, there’s no good way or time to do a layoff. They just suck. Waiting wouldn’t have made it better though.
We had a strong balance sheet, but we were going through money really fast. Every month we waited came at a high cost, and it was clear what we were doing wasn’t sustainable. Unfortunately a layoff was the only way we could address the problem. Most of our cost each month is salaries and benefits.
I wanted to make sure that if we had to do a layoff, we could treat everyone with respect, providing strong severance and extended healthcare. You can’t do that if you wait until the money is almost gone. Acting earlier gave us the ability to take care of people, while still setting up Rec Room for years, not months of funding. It sucked to do, but I think it was the right choice given the options we had.
So now what?
I don't think we've been doing a good job communicating with our community over the past few years. We're going to try to fix that by talking to you more often and sharing more details. Maybe that's not a good idea. I suspect most startups wouldn't publicly announce how much runway they have. I hope that level of transparency helps you understand where the problems are (and where they aren't).
Creator earnings are growing - We’re paying out more to creators than ever before. That’s good for you, even if it changes how we run the business.
We still have a lot of work to do - We need to improve in a lot of areas, and we know it. We’re working on it.
We’ve got the time to go improve - We made a really difficult and painful decision to get that time. It was hard to do, but we did it so we could give Rec Room years of runway to evolve.
If people find this helpful, I'll try to share more content like this. There are always details I can't share, but we'll try to be more transparent and regular with our communications on financial topics, specifically UGC revenue. If there are other topics people want to hear about, let us know.
Nick