← Money Rehab with Nicole Lapin
Money Rehab with Nicole Lapin
The Double-Edged Sword of the "Shark Tank Effect" with Club Penguin Cofounder Lane Merrifield
00:43:42
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- [00:00]
Nicole Lapin
What is your bank doing for you and how much is it costing you? That's a serious question because if they're charging you $8 a month with zero extra services, I've got to stage an intervention here. What are you paying them for anyway? To hold your money for you.
- [00:14]
Nicole Lapin (Host)
You deserve better.
- [00:16]
Nicole Lapin
That's what I love about Chime. There are no monthly fees, no maintenance fees. My younger self would have definitely benefited from this. It's not just the no fees thing, it's what they have to offer you too. If you set up direct deposit, you can get paid up to two days early automatically. And with qualifying direct DEP, you're eligible for free overdraft up to $200 on debit card purchases and cash withdrawals. Plus they have over 47,000 fee free ATMs. So seriously, ask yourself, what is your bank doing for you and just how much are they charging you to do it? And if the math isn't mathing, think about making a change. Work on your financial goals through Chime today. Open an account in just two minutes@chime.com MNN Chime feels like progress. Chime is a financial technology company, not a bank. Banking services and debit card provided by the Bancor Bankna or Stride Bank NA members, FDIC spot and eligibility requirements and overdraft limits apply. Timing depends on submission of payment file. Fees apply at out of network ATMs. Bank ranking and number of ATMs according to U.S. news and World Report 2023 Chime checking account required. Support for today's episode comes from Square. The easy way for business owners to take payments, book appointments, manage staff, and keep everything running in one place. On this show and in my books, I always talk about how important it is to have multiple streams of income. But how do you actually go from hobby to hustle? The answer Square I have seen many times in real life. Just this weekend at the Farmer's Market, there was a mom selling banana bread. We love banana bread and I could not resist. In the past, I might have missed out because I never carry cash. But with Square, she was able to take my card in seconds. I got my delicious treat, she got paid, and neither of us had to stress, with Square you can get all the tools to run your business with none of the contracts or complexity. And why wait? Right now you get up to $200 off square hardware@square.com go. That's square.com go. MNN as in money News Network. Run your business smarter with Square. Get started today. I'm Nicole Lapin the only financial expert. You don't need a dictionary to understand. It's time for some Money Rehab. There is no better entrepreneur than a consumer. And that's because the best entrepreneurs know what problems need to be solved. I see this a lot with parents. Parents know exactly how products for kids can and should be made better. And today I'm talking to one of the most successful parent turned entrepreneurs out there, Lane Merrifield, who is one of the co founders of the beloved children's game Club Penguin. Lane and I talk about the most important considerations for anyone making kids products and, and beyond that, advice for any entrepreneur solving a problem. In fact, Lane is on Intro, the platform for one on one coaching with experts. So after you hear this conversation, if you need more Lane in your life, I've put the link to Book Lane in the show notes.
- [03:11]
Nicole Lapin (Host)
Here's our chat. Lane Merrifield, welcome to Money Rehab.
- [03:16]
Lane Merrifield
Thank you. It's great to be here. Great to chat with you.
- [03:18]
Nicole Lapin (Host)
We're going to chat a lot about advice for entrepreneurs today. But first we have to talk about Club Penguin because around Money Rehab land we love Club Penguin and we would love to hear the origin story of it.
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Lane Merrifield
Yeah, so Club Penguin started really as a couple of young dads who had young kids who were jumping onto the Internet and looking to play games and realizing that the social Internet had really taken hold and was growing really quickly for adults. But there really wasn't much for kids. And so kids were kind of either hanging out in adult spaces or really just doing kind of single player games which were more isolating. We put together a business plan, we bootstrapped it ourselves, we took out loans on our homes and kind of did whatever it took.
- [03:57]
Nicole Lapin (Host)
Wow.
- [03:58]
Lane Merrifield
To try and pull it off. Yeah, I didn't, you know, you could have said the letters VC and I couldn't have even told you what they stood for back then. So we were just trying to figure it out. And because we bootstrapped it because it was our own money, we were very capital efficient, we were very focused. We got something live as quickly as possible. Again, this is all pre lean startup, but we certainly followed a lot of the same principles and we got it out there and it started to take off. It grew a lot faster than what even we thought. You know, we started monetizing it and the rest is history. It was a lot of fun.
- [04:27]
Nicole Lapin (Host)
Well, let's double click on that monetization strategy. So my understanding is that Klump Penguin had a freemium model for those who might not know what that Is can you explain that business model and how companies make money that way?
- [04:40]
Lane Merrifield
So a freemium model is basically some part of the core product is offered for free. And there are parts of it, though, that are effectively, you know, back then we called it behind the velvet robe, parts of it that required some form of monetization. And we were always really intentional about what we wanted to offer for free. We didn't want kids to feel like they were ostracized or on the outside. We always wanted to make sure that there were some great free offerings. One, we wanted to make sure that, frankly, the most expensive part of the whole thing was chat, the ability to have conversations because of how heavily moderated it was. So we had at one point, three or four hundred people behind the scenes moderating what was going on in Club Penguin, keeping it safe, making sure that everyone was following the rules. All of that, we made sure, was free in our view, or I guess in our game. What we monetized was the opportunity to kind of buy more clothing and decorate your igloo more, have more than a few puffles if you wanted, like 10 puffles, which were the pets of penguins back then. What's funny is, and this is something that kind of gets lost because we're so used to subscription businesses now. I kept one of the press clippings from someone basically saying, no one is ever going to pay a monthly subscription for a video game. It's going to be on the web. The only way to make money is through ads. Or if it's going to be a video game, the only way is to sell hard products. And frankly, the influence we use, the example we used back then was hbo, which for me was like, well, people pay for HBO even though there's lots of free tv. And because it's a premium experience, so literally, as we're pitching it amongst ourselves, we're like, well, it's going to be like a premium Internet experience. I mean, now we're just inundated with subscription. Now we have subscription fatigue. But back then, it just didn't exist. But the reason why we chose to do it that way is because we knew we were going to be launching lots of new content every single week. Obviously, all that content had to be created by employees who had to be paid. And so we needed to make sure that we had some sort of an annual recurring revenue in place for them.
- [06:25]
Nicole Lapin (Host)
That's why you didn't go the ad route.
- [06:27]
Lane Merrifield
Well, that. And frankly, we were dealing with such a young group of kids. One of the things that we saw that was really insidious back then on the web was the way that websites would be established to try and click kids from very innocent areas of the web. And sadly, because there was very little policing of what ads went where within about 3, 4 clicks, a 6 or 7 or 8 year old could be in a really bad part of the Internet just by clicking through ads. And so it's gotten better, but it still is not ideal. And we also felt like, well, if we're going to charge parents for this, then it should be ad free. And we didn't want to try and take money from both. And we were offered a lot of money. I mean, we had big companies offering a lot of money to be able to put their logos somewhere in Club Penguin. But for us, it also suspended the notion of this. We lost the suspension of disbelief. My first job was at Disneyland, so I was a big Disney fan. And to me, I thought if there was billboards all over Disneyland advertising, in some ways there are, but it's not as blatant as it is in other theme parks. And we wanted to keep that same notion of letting the creativity of the world be on the forefront.
- [07:31]
Nicole Lapin (Host)
So as entrepreneurs are thinking about business models, can you just explain high level, the pros and cons of the different ones? Like you have a free, you have a premium, you have a freemium, which is a combination. And what they should be thinking about when they're trying to get their company off the ground.
- [07:48]
Lane Merrifield
Yeah, I mean, one of the things I love most about tech is that you can find, win wins. You know, it's not a zero sum game. Someone doesn't have to lose in order for someone else to win. And so for me, whenever I talk to entrepreneurs about a variety of business models, and there's so many great ones out there now, especially as payment systems have gotten more sophisticated, it's gotten easier and cheaper to add different types of payment systems. People understand what microtransactions are now, which they didn't back in the day. Subscription is more normalized. I still remember being in an office with Eddie Cue from Apple, trying to convince him to allow us to charge a subscription in our game. Because back then Apple only allowed subscriptions for newspapers and for magazines. And they're like, no, we would never allow subscriptions for a game. It just doesn't make any sense. And ironically enough, fast forward now you've got Apple Arcade, which in and of itself is a music subscription. So it just shows the evolution there. So we've evolved a lot, which is Great. But I see oftentimes entrepreneurs starting with the opportunistic approach of saying, well, what's going to make me the most money? And the tough part about that is then they end up executing it, they launch it, and for some reason it doesn't meet their expectations because they haven't found that win win. You know, we started very intentionally by saying our parents are going to be our decision makers, our kids are going to be our influencers. And so our decision makers, we need to keep them happy first and foremost. Which is why we're going to make it ad free. So we're going to cut off that revenue stream in order to make sure that our decision makers are as happy and content as possible. So that when they walk by their kids computer screen, they're not seeing a giant billboard for Kool Aid or for Lucky charms when they're going, wait, why am I paying five, six bucks a month for this? And they're still inundating my kids with that. So those are all very active decisions, sometimes risky decisions. But we found those wins. We found a way to make sure that everyone in the ecosystem was happy and content. And I think we were financially rewarded for it.
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Nicole Lapin (Host)
So at the time you didn't put the whole thing behind a paywall entirely because Apple didn't allow it.
- [09:37]
Lane Merrifield
Well, by the time we were having those conversations with Apple was when we were rolling out our mobile apps. So we started on the web, right. It was purely web based back in the day. And so thankfully we had some time to convince them and it wasn't until we started showing them the numbers that we were able to kind of convince them. And in fact, Club Penguin was one of the first that was allowed to actually use subscription model in the App Store. But we didn't start in the App Store, right, We started on the web. So that was part of it. But no, it felt like we were being hypocritical if we said we built this thing for kids to have a safe place online, but only wealthy kids and we really don't care about the others. I mean, not to sound overly like sappy or altruistic, but we really said, hey, we want the core of this game to be available for everyone. And you know, for those parents who can't afford five bucks a month rate, they can help subsidize a lot of the kids out there that can't and all the kids are going to have a safe space.
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Nicole Lapin (Host)
How much revenue was Club Penguin making when you sold it to Disney?
- [10:29]
Lane Merrifield
I'd say we were somewhere between 50 and 100 million at that point. And then post Disney, we grew that up to well north of 150 million annually in AR, just from the subscription business, of course. Then we added in consumer products and we were doing magazines and all sorts of things which all added to that. Ironically, people always ask about Club Penguin being shut down, and there's a lot of reasons behind it. One of the worst ones was Disney accidentally signing a contract with a credit card provider who was unwilling and they were unable to transition their subscriptions off of the previous provider onto this new one without canceling everyone's subscriptions and basically having to start from scratch. And so if the numbers I heard were accurate, because I wasn't obviously involved back then, flipping was still making 30 to 40 million a year when Disney decided to shut it down.
- [11:18]
Nicole Lapin (Host)
I guess at that point you knew what ARR, which by the way, if you can define that for our audience and VC meant.
- [11:26]
Lane Merrifield
Yeah, ARR is annual recurring revenue. And so to put it in perspective, we all pitched in about 50 grand, 50 to 100 grand each, launched Club Penguin for about $200,000. It was profitable three months after launch. And I think we're 50 to 60% margin for most of its lifetime. Yeah. So ARR being annual recurring revenue, VCs being the folks that started knocking as soon as they saw those numbers.
- [11:54]
Nicole Lapin (Host)
It always happens that way. When you don't need it, they come knocking.
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Lane Merrifield
I know it's amazing. I have a lot of VC friends, so I'm not harping on it. And I think for the right company, being venture backed is not a bad thing. Vc, obviously standing for venture capitalist. And as an investor now myself, there's times that I think it works. But there's also times, if I'm being really honest, that I don't think it's right. And I'll tell entrepreneurs this. Sometimes entrepreneurs just assume that getting other people's money or VC money is like. It's an assumed step in the process. And I've literally attended company parties before where the company party is really an announcement party of how much money they just raised and a giant celebration of we've made it. We just raised $10 million, $50 million. Tada. And it's so funny to me because it'd be like getting all your friends together and being like, all right, we're going out this weekend, we got to celebrate. I just got my credit card limit raised from $5,000 to $10,000, and I'm feeling like we should really celebrate because that must mean, I've made it.
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Nicole Lapin (Host)
You just took on a bunch of debt.
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Lane Merrifield
Exactly. I think, sadly, there's a lot of 20, 30, 40, $50 million companies that could have been very successful, that could have made their founders a lot more money even in the long run, but it might have taken longer to get there, but that were squished and destroyed by being jammed into trying to force them to be unicorns. And they were never really designed for that, because the moment you take that money, the expectation is, if you're not using numbers like half a billion or a billion dollars, don't waste my time. And so you get a lot of founders who are like, well, of course I'm going to make a billion dollars. Well, they could have made them and their founders a few hundred million dollars and it would have been just fine.
- [13:28]
Nicole Lapin (Host)
I totally, totally agree with you. I have an entrepreneur friend who took on a bunch of money and they grew like crazy and then needed to then fulfill all of these expectations. And I was having dinner with her and she said, you know, I just wanted to let you know, like, the company is going to go bankrupt. And I'm like, I'm so sorry. And she said, oh, no, no, no, this is the best thing. My husband and I started this to have a lifestyle business, and we wanted it to make money, but this became out of control. And I'm so happy that it's getting back to where the intention was.
- [13:58]
Lane Merrifield
And sadly, there aren't enough gatherings to sit down and talk about when that credit card check finally comes due. You know, when that board sits around the table and says, hey, I think we're going to replace the founder CEO with another CEO who's going to go do this. I think we're going to go ahead and, you know, you're going to have to take a down round in order to keep your employees. And so we're going to screw up your liquidity and your cap table in doing so. And basically, you've now lost your company and there's no parties when that's happening. There's no celebration when that's happening. And again, I'm not trying to imply that that's always the case. And frankly, I went through with a different company that I've worked on. It's a really, really painful process, and one that I don't think is necessary.
- [14:35]
Nicole Lapin (Host)
A down round, just to clarify, because we try to cut through the jargon on this show, is where you raise money for a lower valuation than the round you raised for before to keep the lights on, essentially yeah.
- [14:46]
Lane Merrifield
So you might be in a situation where you say, okay, I'm going to give away 20% of my company for the first round, for, you know, maybe it's a seed round or a series a round, the first couple rounds. And that kind of 10 to 20% is your ideal amount to give away. And all of a sudden you're like, I'm not going to make payroll. And so people come in and go, okay, well, we'll invest in you. But we thought you'd be worth 500 million because you kept talking about these, you know, billion dollars you're going to make. Now you're only making 50 million or 60 million. So now we're going to go ahead and it's going to cost you 40% of your company, 50% of your company. Well, if you've got employee stock options, you've got founder shares, you've got, you know, depending on how well you structured your cap table and whether or not you protected yourself from that, it's very easy for founders. I mean, it's so funny sometimes because even I've talked to founders, gone up to them, founders I know, and I didn't know the details of their company, but I see them, you know, they exited for half a billion dollars, you know, $600 million, 300 million. And you hear these numbers and you're just assuming, oh, these founders are just walking away with gobs of cash. And the reality is I have a lot of founder friends who had a hundred million dollar plus exits and walked away with like 2 million bucks, 3 million bucks, which is still, don't get me wrong, it's a lot of money. I'm not saying it's not a lot of money, but it's not nearly as much as you think. And a lot of it is because of all of these rounds and all this process that went into it.
- [15:56]
Nicole Lapin (Host)
It's like the shark Tank effect, right? Like if you're going to start a company, you might as well take money from Mark Cuban or somebody else. And every time you raise money, the valuation is going to go higher and higher. But I'm glad you clarified like a down round or a flat round, where that just doesn't happen.
- [16:09]
Lane Merrifield
Yeah. And it happens more than people realize because at the end of the day, and to be fair to the VCs, they're going, hey, we took a risk assuming X, we're now seeing it's going to be Y. We can't give you the same valuation you had before. And so that's the other thing. A Lot of entrepreneurs make the mistake of is accepting too big of a valuation for the company. You kind of get deluded into thinking, I just had a VC say that my company's worth $50 million. You know, then they do the imaginary math. While I still own like 20% of my company, that means on paper I'm now a millionaire, I'm worth this. And then sadly, it's all on paper and it never becomes real.
- [16:42]
Nicole Lapin (Host)
Yeah. And part of the spirit of why you start a company is to be your own boss. And I think it's a great reminder, and you do this all the time, of saying to entrepreneurs, as soon as you take money, it's not free money. Now you have somebody to report to.
- [16:58]
Lane Merrifield
Absolutely. It's that credit card. It said, hey, all of a sudden, guess what? Every month you're going to get someone sending an invoice going, hey, how's it going? Let's have a quick board meeting here and figure out what's going on over here. And we don't talk about the personal elements of this enough. The stress that puts on founders, the amount of anxiety they find themselves under, and sadly, the poor decision making that can come from being under that level of anxiety that when they were first starting out and feeling like, hey, they had nothing to lose and they were taking smarter risks, better risks, sometimes more risks. All of a sudden you've got 30 people on payroll and I feel responsible for them and what if they can't pay their bills because I screw something up? And all of that just ends up creating this compression that if you can't really handle it, if you can't work your way through that fear and get to the other side of it, you're going to end up making poor and poor decisions, which now has you in a cycle that is only going to make matters worse and not better. And it's really tough to watch.
- [17:51]
Nicole Lapin (Host)
It's like trading one problem or one source of anxiety for another. I have a founder friend who took on a bunch of money and didn't write back to an investor on time or something, like in a timely manner and kind of got a talking to. And they're like, hey, I need to spend time doing sales calls or bringing in more revenue. Right. And so then you have to, with a limited amount of time, answer to these investors who then gave you a bunch of money where you could. I mean, the calculus is using that same time to make money or bring in revenue other ways. But I'm really glad that you're saying the contrarian view to what's been proliferated around this.
- [18:31]
Lane Merrifield
Yeah. And you know what? There's been kind of. And again, I was on the Canadian version of Shark Tank called Dragons Den. So I was part of that propaganda machine around entrepreneurialism and just, hey, it's all about taking money. And frankly, if I'm being really honest, it's a little bit of why I'm not on the show anymore. I did three seasons, but it was hard to see people assume that, well, once I've got the investment, now I've made it, now I've achieved that. That's all I really need to do. And even some of the investments I made on the show, you see it switch. And now they're kind of. They're more concerned about me and my perspective than they are about their customers. When we were acquired by Disney, I still remember one of my kids saying, like, well, is it weird now, dad, because now you have a boss? I was like, well, yeah, I've always had a boss. It's like, well, what do you mean you were the boss? Like, well, yeah, I was maybe the CEO of the company. But ultimately, my success or failure as a CEO was driven by the customers. So they were my boss. And the parents, all those millions of parents out there, they were my boss. And so ultimately, I think it's in a weird way what happens when investors and a board and everyone comes in is you can start to lose sight of who the real boss is, you know, ultimately your customers and keeping them happy. And I've seen some CEOs do an amazing job of keeping their boards happy and apprised, and they run incredible board meetings, and they're detailed and they're specific and they know their numbers and they drive their company right off a cliff because they realize that I spent so much time managing up to my board, I kind of lost sight of who I was really building all this for, and I lost sight of the customers.
- [19:59]
Nicole Lapin (Host)
And you never took on capital when you were at Club Penguin?
- [20:02]
Lane Merrifield
No, like I said, we didn't really know what it was. So we, you know, we had credit card debt, and I took a line of credit out on my house. And so there's three of us as founders. There was Dave Crisco, who owned the marketing company that we were building this out of, and he basically said, hey, I will put in some cash. But also, you guys have free range of everything you need here. Use all the equipment, use the space, whatever. Lance Pre and myself, who both basically took a line of credit out on our homes that was the same. I think it was 60 or 70 grand, which is terrifying because it was my first house. So I just kind of got to a place where I'm like, okay, this might actually work. We might actually be able to pay this mortgage every month. And all of a sudden, thankfully, there was some equity in it because the market had gone up. But I knew that if Club Penguin failed, there's a chance we'd be back in an apartment for a little while. So it was a little dicey, but it also, again, allowed us to be really focused on who we were there to serve. We were there to serve our team and our team was there to serve our customers and we were there to take care of kids. And thankfully we had a great financial outcome. But I think we had a great financial outcome because we kept our eye on the ball.
- [21:02]
Nicole Lapin (Host)
I love what you said to your son. I mean, everybody does have a boss. And when you take on money, investors are a boss or a board is a boss. I mean, everybody reports to somebody. But reframing that and saying like, you report to your customer and if your customer is a kid, you report to those parents because if you don't serve them, then you don't have a business.
- [21:20]
Lane Merrifield
Yeah. We literally had a statement that was even written on the wall at one point in our offices that just said, if it doesn't matter to an 8 year old, it doesn't matter. And that was really critical to us. And in fact, even for me, there's speaking opportunities, there was press interviews, media interviews. I mean, I think we turned down like Forbes and Bloomberg about a dozen times in there. And the reason being is that if we couldn't directly pinpoint to this is going to help us get our message out to parents or something that the kids would really value us being a part of, then we just didn't have time for it. And it really dictated everything. And we would call each other on it. You know, we'd be like, hey, I'm thinking about, you know, we're going to do this big thing over here. We're going to go do this, I'm going to go speak at this conference. It's like, oh, how many eight year olds are going to be at the conference? Well, I mean, there's no. Oh, okay. But it's like a parent conference. It's like a teacher conference. Like, well, no, not really that either. Oh, so it's an ego conference. It's going to make your ego feel better. So we give each other a hard time about that, but it was a good frame for us to just go, what really matters and what doesn't matter because we can't do it all. And, you know, obviously Steve Jobs is credited all the time for saying, you know, I'm more proud of what I've said no to than what I've said yes to.
- [22:23]
Nicole Lapin
Hold on to your wallets. Money rehab will be right back. And now for some more money rehab.
- [22:34]
Nicole Lapin (Host)
They read that you could buy things on Club Penguin through digital coins. Was that pre Disney acquisition?
- [22:41]
Lane Merrifield
Yeah. So that was part of the original kind of game loop. The idea was that for kids, we want to kind of play to be like their work. Right. And in fact, almost all the games did have a little bit of like a notion of a job to them. So there was like one where you're unpacking the coffee beans from a truck, and there's another where you're helping fish for the restaurant. And then the jobs paid out coins, and then those coins could then be spent in the world on updating the clothing of your penguin or your igloo or feeding your puffle or other things. So that was the game loop, right? And that was the way it worked. But we never sold the coins. Coins always had to be earned. What the monetization strategy was was just unlocking more things you could spend your coins on. And so you just had opportunity for more diversity and more creativity there.
- [23:25]
Nicole Lapin (Host)
So basically you invented cryptocurrencies.
- [23:30]
Lane Merrifield
Well, here's the funny thing. You're not the first person that's made that joke. Certainly not at least around NFTs. I mean, there's people now. In fact, there's a NFT based game called Pudgy Penguins. They reached out because it is literally, we grew up playing Club Penguin. We were fans of it, we modeled this off of it. And it should have been, you know, if I could buy an NFT of my avatar, my penguin avatar back then, I would have. And so they're modeling it after. I'm not endorsing that I play no role in it, but it was certainly an interesting conversation, what it would be like today if we were still in the game.
- [24:04]
Nicole Lapin (Host)
But you did invent the metaverse. It sounds like.
- [24:08]
Lane Merrifield
Well, here's the thing I will take credit for. Listen, there's a lot of great games and a lot of really cool things happening back then. And we were inspired by a lot of what others were doing. The one thing that I will take credit for was we had a firm belief that our universe, this universe of Club Penguin, should always be interconnected and so some of the patents that I'm most proud of filing are patents that we filed around how to connect books into a digital world. You know, physical books into a digital world, magazines into a digital world, you know, some of which you could use codes for, which were easy, but you couldn't always put a code with everything. And so, you know, if you bought a club, Penguin plushie or Stuffy or a toy, everything we sold had an unlock. And so you're either unlocking that exact outfit or unlocking coins or something in the world. If you got to a certain level in a game, we had, like, DS games and back then, Nintendo Wii games on other platforms. If you got to a point in that game, we were sending a code back to our servers to tell our servers that you had reached a certain point in this level. And so you should have access to, let's say, like, if you found out about the spy agency now in the web version, you now had access to that same spy agency. And now that stuff, people call it transmedia or cloud entertainment or whatever, all of that's a little bit more common. It's still somewhat novel, but it's a bit more common. But back then, you know, again, I remember in meetings, being in meetings with Nintendo, being in meetings, and they're like, no, you know, we don't send data back to servers for any reason. We had to get special permission to say, well, no, here's why. Because we think it's going to be so magical for a kid when they log in to be like, hey, you've been recruited by the spy agency. And for a kid to be like, how do they know I was playing on my Nintendo DS on the way to school on the bus? Why all of a sudden did I get recruited into the spy agency? We just always wanted the story to be consistent and to be interconnected and make a more magical experience for the kids.
- [25:54]
Nicole Lapin (Host)
Lane, our executive producer, Morgan, was in the spy agency.
- [25:58]
Lane Merrifield
Oh, really? First of all, they shouldn't be telling you that, because it was the secret agency that no one should be sharing whether or not they made it into the agency or not.
- [26:08]
Nicole Lapin (Host)
It's the first role of the spy agency. Don't talk about the spy agency exactly.
- [26:13]
Lane Merrifield
It was our fight club. It's funny, actually. One of the things I miss the most, I miss sitting in those creative rooms with our team and just coming up with these crazy ideas, but also listening to the kids. One of the things I'm most proud of is that we invested a lot of money and effort into Just listening to our audience. And it wasn't easy because back then, kids didn't have a million YouTube channels. They weren't all over TikTok. So they would either send in an email or something which, you know, we set an email reply will always get a reply. Every time they pick up the phone and called us, someone will always pick up the phone and answer. And even if they hand write a letter, we're going to hand write a letter back to them. And so that was always our kind of notion of just maintaining that communication. But those communication channels were integral to us because one of the things I love the most is how much kids would come up with an idea and they'd almost rally themselves behind this. They'd create this lore of this idea. And then we just had the opportunity to figure out how to make it come to life. And so millions of kids would write in saying, you used my idea. Use my idea. And the reality was, we did. They didn't know that there's a million other kids that had the same idea. But we loved turning their imaginations into reality. And in fact, we considered ourselves stewards of that. We are stewards of their imagination. How do we just connect the dots and make it come to life?
- [27:23]
Nicole Lapin (Host)
Did you get any shit from parents who wanted their kids to spend less time online?
- [27:28]
Lane Merrifield
Yeah, actually, it's one of the reasons why we were one of the first games that had a parent portal, a parent access that allowed them to limit how much time their kids spent online. So we always said, we don't mind being the bad guy. You just tell us what time of the day and how long you're willing to let your child play online. And we would literally pop up a warning like, you've got 10 minutes left to play and five minutes left to play. And we would be the bad guy giving them the warning so their parents didn't have to. But that was a feature we custom built from scratch. There wasn't anything out there. Now, again, there's parental controls and everything, but back then there wasn't. And again, people thought we were crazy, because most people are like, no, no, you want more time. You want them spending as much time as possible. Right. Look at social media. Well, how are those funded? They're funded through advertising. So the advertisers want as much airtime as possible. And that's the way that works. We didn't have ads. We didn't care if the kid logged in and spent five minutes, but had an amazing time.
- [28:17]
Nicole Lapin (Host)
That's all that mattered because it Sounds like you were making it for your kids. You're a bunch of dads. Who knew the pain points. There are a lot of pain points when you're dealing with a teen focused vertical right or a business that's geared toward kids. What kind of advice do you give entrepreneurs? Entrepreneurs who are thinking about getting into family or team focused businesses?
- [28:36]
Lane Merrifield
I get this a lot. And people don't always like the answer. They see the market and they say, well, it's less crowded, so I'm going to jump in there. What they don't see is the reason it's less crowded is because it is significantly more complicated. You're dealing with significantly more, you know, more laws, more regulations, and rightly so, frankly. I mean, you know, when we started Penguin, it was a bit of the wild west. And in fact we had the chance to sit on the board for coppa, the Children's Online Privacy Protection Act. Part of why we had the invitation is because a lot of our standards were what they were using. And you're dealing with kids who don't always have email addresses. You can't market to them directly, you can't even the communication that takes place needs to be very controlled. They can't share too much PII with you or with each other. You need to have parental involvement. Sometimes parents don't want to be involved, sometimes they can't be involved. Like there's a lot of complexity there. I should say there's a lot of complexity if you're going to do it well. If you don't always do it well, sadly you get the media headlines that have been out there and I'm not going to pick on any one company. But there's a handful of kids based entertainment companies that have rightfully so gotten in trouble because they just tried to ignore a lot of the regulations and a lot of the policies that are put in place frankly, to protect kids.
- [29:52]
Nicole Lapin (Host)
Would you invest in an entrepreneur who was starting a team focused or family business who wasn't a parent themselves?
- [29:59]
Lane Merrifield
I would. But I would want to see who their first, second and third employee was or who their co founders were. Because I don't think you have to be a parent to be a great founder of a space like this. But like any entrepreneur, you better know your weak spots. If you and your roommate from college had fun hammering beers together. So now you're going to go do a startup because you read some article and you think there's a big opportunity there. It's the most dangerous thing because you end up ignoring each other's. Blind spots and driving each other right off a cliff. So I would want to see your employee table. I'd want to know how many of them are parents and I'd want to know what level of access they have to you and what level of influence they have over you and your decisions.
- [30:36]
Nicole Lapin (Host)
I want a little SWOT analysis action.
- [30:39]
Lane Merrifield
Totally, absolutely.
- [30:42]
Nicole Lapin (Host)
And being an employee, your first job, you said, was at Disney. Selling to Disney. I mean, come on.
- [30:50]
Lane Merrifield
It was surreal, to say the least. It was surreal. And negotiations, I mean, we went all over the place. There's other companies involved. It wasn't a sure thing. But I'll tell you one of the craziest parts about that. So I grew up in Southern California, was Canadian by birth, but grew up there, moved back to Canada and that's where Club Penguin was formed. But I remember in the process of moving from Southern California, which for anyone who's lived in Southern California, especially if you grew up there, you kind of believe it's the epicenter of everything. And in some ways it is, but in a lot of ways it's not. It's hard to believe that life exists outside of it. And I remember thinking like I was doing the rat race, moving ahead of my company. And I remember thinking, if I move up to Canada, to the small town in Canada, I'm probably never going to see the inside of the boardroom again. I'm ignoring all opportunity for a real significant advancement in my career outside of like a small town marketing company, which is what I was going to work for. But I wanted to raise my kids in that environment. Fast forward to walking into Bob Iger's office at the Walt Disney Company multiple times, sitting around his personal conference table and negotiating. This gives me chills even now, just thinking about it. I mean, you can imagine what it was like then because it felt like I took two pay cuts before we founded Club Penguin because of who I wanted to work for and with. Because of who I wanted to be around, because of the culture I wanted to be around and because of the place I wanted to raise my kids. And so to be in that situation, sitting across the table from Bob and having these conversations was like nothing I'd ever imagined. And I was a total Disney nerd. So, I mean, I used to give tours of Disneyland to friends and family.
- [32:22]
Nicole Lapin (Host)
Did you tell him that? Did you try not to be a total fanboy?
- [32:26]
Lane Merrifield
I tried to not fanboy out too much. The one thing I will say is Steve Jobs was on the board at the time and I did fanboy a little bit with Steve. And thankfully, because Bob was very gracious, he asked Steve to reach out to me and I got the chance to talk to him on a couple of different occasions before he passed. That was a big deal for me for sure. And Bob, I've run into him a few times since and we stay in touch every once in a while. I feel for what he's going through right now, but I, I do believe he's a great leader of that company.
- [32:52]
Nicole Lapin (Host)
And the luster of those experiences has never worn off. It never becomes ordinary, does it?
- [32:57]
Lane Merrifield
No, it never does. I mean, shame on me if it does. In some ways, I mean, I guess. Okay, here's what I will say. You meet enough really impressive people and you start to realize that they're just people. It's not a negative thing by any means, but let's face it, most of the people that I, I would try and name drop, I mean, I realize I just was a bit douchey and name dropped a few right there. But most of the time, most of the time that I would do that or that you could think to do it, these are people who've got teams of press people and marketers and communications execs and around them helping craft an image. And it's almost impossible for any one individual to perfectly live up to. And so what you realize is at the end of the day, they've got their own fears, their own issues, their own challenges, their own work to do, their own therapy sessions that they gotta dig into and figure things out. We're all people. But I am thankful for those experiences and I'm thankful for the friends I made. There's a lot of things I would have done differently, if I'm being honest, and a couple regrets I have, but overall, I mean, I can't complain.
- [33:56]
Nicole Lapin (Host)
And now you're paying it forward on Intro, you're a fellow coach where people can book one on one meetings on the platform with experts like you. Do you talk really openly about those regrets or things you would do differently when entrepreneurs book your time?
- [34:11]
Lane Merrifield
If it's relevant when they book time, I mean, I don't know all of their situations, but it's not cheap, you know, it's an investment. And so I want to make the best use of their investment I can. So I try not to just like wax poetic on all these stories. If it's relevant, I'll share it. One thing I talk a lot about because it's oftentimes, especially early in an entrepreneur's career, one of the Biggest things they face is fear. So I talk a lot about fear, partially because I don't think we talk about enough. We definitely don't normalize it enough in the entrepreneurial journey. And I think one of the things I love about Intro is an opportunity to sit down with such a wide variety of entrepreneurs and creatives and hear a bit of their story. I immediately try to figure out, okay, what can I plug into and relate with? What value can I add here? And then make sure that I. I use the time as judiciously as I can to add as much value as I can and hopefully give them some real nuggets to walk away with.
- [35:00]
Nicole Lapin (Host)
That's cool. We had Spencer Raskoff on the show a few months ago. He talked about how the current economic climate is making it really difficult for founders to fundraise. He gets booked a lot to talk about that. Do you think that potentially could be a good thing? Like, are we normalizing back from like the go go days of fundraising?
- [35:18]
Lane Merrifield
I mean, listen, there's some companies that fundraising is the right thing to do and the fact that it's harder, I would never wish that on anyone as having participated on both sides of that spectrum. But I do think that there's some balance that needs to come and I do think that there's. You know, part of why I wanted to share this openly here was to talk about some of the education that I think needs to happen around the fact that not everything should be venture backed. Not every project needs investors. Now, it doesn't mean you should go risk your house on it like I did. But it does mean that these decisions shouldn't be made lightly. And sometimes in a era of easy free money, it gets so easy to take it and way harder to return it. And I've seen the pain of that in entrepreneurs and I. And if I can help alleviate or avoid that pain for some, then I want to do that.
- [36:03]
Nicole Lapin (Host)
So then if you don't tap into your house and you don't tap into VCs, where would you suggest to get startup capital?
- [36:10]
Lane Merrifield
Well, yeah, I mean, first of all, there's a lot of ways to do. I mean, of course there's savings, there's also partnerships you can do. And part of why we were able to build Club Penguin so cost effectively is because of Dave Crisco saying, hey, use my office, use my equipment, use my systems, and here's even a couple of employees who part time can kind of help you out with this. It was very generous, but it also kept us focused on just creating the product. And we weren't trying to lease office space and come up with a logo and figure out, like, I see so many entrepreneurs get so obsessed around what's the company going to be like that they forget and lose sight of what the product really should be. So being capital efficient also forces you to get the product out faster and see if you've got a market there. Right? I mean, we all talk about MVPs, minimum viable products and getting it out there, but sometimes when you got a lot of money, it gets really easy to convince yourself that it's not ready yet, it's not ready yet, it's not ready yet. You know, there's friends and family, although that's always a little bit dicey. But one thing I've seen work really well with friends and family rounds and stuff is to say, like, hey, you know, invest in this. Would love to repay you. But then I'd also love to set up a trust or a fund for future kids, grandkids, whatever, for like an education fund or something like that, and have part of this equity kind of go into that in a way that now that they're not trying to pay out VCs and trying to give big capital returns, it's like, hey, if we're dropping in 50 grand, 100 grand into this fund, it's actually a way that our family and the legacy of our family can endure. There's a lot of creative things you can do around that that don't put the same stakes as high as saying, well, how can I become a unicorn in the next year? And if I can't become a unicorn, I must be a failure. Which is kind of like what I think has transpired a lot over the last 10, 15 years.
- [37:51]
Nicole Lapin (Host)
So a friend or family member wants to give me 100 grand for my company, I then take that hundred grand and say that with the returns, I'm going to put that into some sort of investment vehicle or trust to then grow for your family.
- [38:07]
Lane Merrifield
Or you could say, hey, I'm going to return the 100 grand. Or even say, hell, the goal is to return 120 grand. But then I'd love to have a piece of equity of the company that is basically just family equity. And in some ways, we did this a little bit with Club Penguin. Like, all of my nieces and nephews went to school and got their bachelor's degrees based on a fund we set up, actually trust we set up that any kid who wanted to could use it. And Now I think 24 of them have all used it and have all gotten bachelor's degrees and some are now going to med school and others. But there's just a lot of creativity you can do out there and a lot of ways that, especially when you start getting into lifestyle businesses and stuff like that. Even now, if I were approached, if someone were to say, hey, I'm going to give you a bunch of equity and I'm going to take your 100 grand and I promise you I'm going to give you a million dollars back in the next three years, five years, whatever. My first response would be like, hey, first of all, if you're friends and family, don't tell me that. Don't put that kind of pressure on yourself. I don't want you waking up tomorrow trying to figure out how to get me a million dollars back. I would much rather have you waking up tomorrow figuring out how to make a great product, how to make your customers happy, how to take care of them, how to take care of your employees, and let's figure out a mechanism that allows me to get some sort of return. But I don't need to always use purely the bottom line as a score. I think there's a lot of creative things we can do to take care of each other and to live as a community in ways that I think we've kind of lost over the years.
- [39:28]
Nicole Lapin (Host)
That's really smart. So blocking and tackling, you basically took some equity. And once you guys got liquidity, you use that trust to then pay for whoever wanted to go to school.
- [39:37]
Lane Merrifield
Yeah. And that will perpetuate on for the next generation as well.
- [39:40]
Nicole Lapin (Host)
Thankfully, it's a gift that keeps giving in so many ways. And thank you for catching on so quickly and defining mvp, as you were talking, you got the shtick of the show very quickly.
- [39:51]
Lane Merrifield
I'm trying to. Although I didn't want to interrupt you, but there was a point earlier on where you talked about SWOT analysis, and I kind of wanted to step in there, too, and go, oh, let's talk.
- [40:00]
Nicole Lapin (Host)
About strengths and weaknesses.
- [40:02]
Lane Merrifield
There we go. We should probably explain what SWOT means.
- [40:05]
Nicole Lapin (Host)
Yes. S W O T. Strengths, weakness, opportunities and threats.
- [40:13]
Lane Merrifield
Perfect. Yeah. No, it's exactly it. So, yeah.
- [40:15]
Nicole Lapin (Host)
So to end our episodes, I ask all of our guests for one tip that listeners can take straight to the bank. Lane, I'm sure you have so many, but what's one today with the economic climate, the zeitgeist that's going on right now that people can use when they're starting a business or for investing, angel investing, on either side of the equation.
- [40:34]
Lane Merrifield
Well, I guess I'll end this one on entrepreneurs, especially because you already highlighted one of the challenges, one of the headwinds that they're all facing right now, which is just where do I get capital from? I would say take a good portion of the creativity that you're going to pour into and the energy and effort you're going to pour into trying to raise money and figure out five ways that you can be more capital efficient than maybe you thought you could. Figure out a way that you can maybe work with, partner with, barter with another company in order to get some distribution. Figure out ways that you can that don't require huge cash. I mean, one of the things that we did with Club Penguin was we partnered with a company called Mini Clip and we gave them a rev share, which they hadn't done previously, or maybe they had, but not that I was aware of because we couldn't afford to buy ads and there was no way that we were going to, like, I wasn't going to go find another 100 grand to go buy a bunch of ads. So I just said, hey, we think we've got something here. They played the game. They experienced it. Like, yeah, it's pretty cool. Like, well, let's do a rev share. And I think at one point we were cutting them checks for 4, 5, 6 million dollars a year and they ended up making a lot more money than had they sold us advertising or we bought ads. It didn't cost us anything at the time, but we did cost us more down the road. But that's fine. We all won together.
- [41:41]
Nicole Lapin (Host)
Not a zero sum game.
- [41:43]
Lane Merrifield
Exactly. Find the win wins. So everybody wins. I love that.
- [41:46]
Nicole Lapin (Host)
Yeah. We're even thinking of, like, weird ways to barter too, in our business.
- [41:51]
Lane Merrifield
That's awesome.
- [41:52]
Nicole Lapin (Host)
I love a good barter.
- [41:54]
Lane Merrifield
Yeah, I think we've lost a little bit of that.
- [41:56]
Nicole Lapin (Host)
Yes. I totally agree. I mean, I grew up in Southern California, but first generation American and like, just bartering and negotiating is in my blood. And so, yeah, Morgan has seen me be like, let's barter for this. Like, I don't know, ad, whatever. Why not? If the worst thing they could say is no, I guess, absolutely.
- [42:13]
Lane Merrifield
And people love to take risks too, especially if you're dealing with other businesses owners. So for them to go, okay, I'll take a risk here and have it pay off down the road. Go for it.
- [42:24]
Nicole Lapin
Money Rehab is a production of Money News Network. I'm your host, Nicole Lapin. Money Rehab's executive producer is Morgan Lavoy. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. So email us your Money questions money rehaboneynewsnetwork.com to potentially have your questions answered on the show or even have a one on one intervention with me. And follow us on Instagramoney News and TikTok MoneyNewsNetwork for exclusive video content. And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.
- [43:08]
Lane Merrifield
Sa.