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Monday, May 27, 2013

GameFounders : Full of GameFailures

GameFounders : Half a Million Euros Wasted

Does Estonia really need another incubator, paid for by the taxpayer?

GameFounders was launched last year with great fanfare, billing themselves as "The First Gaming Accelerator in Europe", a claim disputed by some in France, where a gaming accelerator was launched the year before that.

GameFounders attracted a lot of attention, and in the end, 122 gaming startups from 41 countries applied to join the 3-month program in Tallinn, which provided funding of up to 15,000 euros per company, along with coaching and access to a mentor network.

Speaking about the high interest in the program, Dimitri Burnashev from Enterprise Estonia said "I am happy to see that so many gaming startups see the benefits of bootstrapping in Estonia." (Apparently his definition of bootstrapping is different from ours.)

The Teams

While there was talk that up to 10 teams may be accepted in the first intake, in the end only 6 out of 122 applicants were selected.

With all that interest, and such selectivity, the teams must have been pretty good, right? That selection took place last summer, so let's see where they are now.

Our friends over at PocketGamer wrote their own analysis of the teams in November. They know a lot more about games than we do, so their analysis is helpful from that perspective.

So it's been been about half a year since these teams finished up at GameFounders. How are they doing?

  • Akira Mobile. Last update to their website was in September 2012, when they joined GameFounders. No updates since then. We tried to find their game online, but no luck with that either.
  • Bad Seed Entertainment. This is an interesting one. Their apps are listed on their website as "Coming Soon!", and what did they do after GameFounders? They joined another gaming accelerator, this time in Silicon Valley. This accelerator appears to have provided some benefit, as their app was finally released on Apple's App Store about 2 weeks ago.
  • Baila Games. This Estonian company makes a physical game (yes, some people still play those) and also has an app. Their app has not been updated in over a year and ranks below the top 200 in the gaming category in their home country (Estonia). On another note, they also received 6,092 euros from Enterprise Estonia. 
  • GlowForth. No game released. They did receive 4,000 euros from Enterprise Estonia, which apparently they used to make a trailer video that reminds us of only a slight improvement over Super Mario Bros on the original Nintendo.
  • Mind on Games. Their Manager Mania product was supposed to be released for Android, but we couldn't find it.
  • Plan B Labs. On the plus side, this company has actually released some apps. On the minus side, there doesn't seem to be much success. Based on App Annie statistics, their apps rarely make it even into the top 1,000 in their category and also by revenue. We have not heard of ThinkInvisible nor LearnInvisible (their apps) before. Have you? Oh, and they received 5,000 euros from Enterprise Estonia.
So let's re-cap. These were the very best teams that GameFounders could find, after carefully reviewing 122 applications from 41 countries. What did GameFounders provide to these teams, in terms of experience and mentorship? Based on the results, not much.

Inexperienced Management

We've had a lot of requests from readers to write about GameFounders, including from some teams who were planning to apply to the program. One reader pointed out that none of the people behind the GameFounders organization actually have any experience in the gaming industry!

The only member of the team with real experience and a successful track record is Paul Bragiel, who does not even list GameFounders on his LinkedIn page. Perhaps he doesn't want to be associated with them any longer?

A Risky Business

Some may say we're being too critical. After all, isn't the gaming industry risky to begin with? Sure it is, and we even wrote about that in our profile of Creative Mobile, which is an example of a successful Estonian gaming company. Not only are they successful, but they did it without taxpayer money.

Others may point out that we looked only at the first batch of GameFounders teams, and they have since accepted another cohort of teams that is currently being incubated. We feel that it is too soon to look at their success, compared to the first batch which have had at least 9 months (a lifetime in this industry) to produce something.

Bring in the Taxpayer

What do we have? An incubator with little to no success in nurturing successful gaming companies, with an inexperienced team running it, and in a country with plenty of incubators already.

What kind of project does that sound like? One that EAS (Enterprise Estonia) would eagerly fund, of course!

We said the management of GameFounders was inexperienced, but not when it came to riding the taxpayer-funded gravy train. Here's a tally of all the funding they were able to obtain:

  1. 501,000 euros from the Start-Up Estonia program via EAS.
  2. 5,305 euros for Summer of Games program from EAS (section VII.3.2)
  3. 7,700 euros for IGDA program from EAS (section VI.3.2)
  4. 1,900 euros for start-up from Tallinn city government.
  5. 1,500 euros for start-up from Tallinn city government.
That brings us to 517,405 euros of taxpayer money, just for Gamefounders.

Then add in the EAS money for their incubated companies and that's another 15,092 euros, bringing the total taxpayer money wasted to 532,497 euros.

Should incubators receive taxpayer money at all? The co-founder of TechStars thinks they shouldn't, and he's probably a lot smarter than the people who decided to give money to GameFounders.

An EAS Cover-Up?

One reason it took us a while to get this post written is it took us a while to track down all the numbers. Let's just look at the EAS funding for GameFounders, so numbers 1-3 in the list of funding above. A search on their database of funded projects will reveal no results related to GameFounders.

Other incubators, like the Viljandi incubator we reported about earlier, are listed there.

Let's just give them the benefit of the doubt for a moment. They would probably say that the GameFounders funds were provided via a special program, so were not loaded into their standard database of funded projects.

Surely then, they would mention it in their press releases about the program instead, right?

The answer to that would be no and no. They do mention how the funds are provided by ERDF (EU money), but not how much. Isn't that an important fact? Why was it left out? Are they trying to hide how much money is being wasted?

Well those are old press releases. Maybe they've learned from their mistakes (perhaps even from reading this blog - imagine that!).

Sadly, nothing has changed, and in fact it's gotten worse. Earlier this month, EAS announced a second stage of the same program that provided funding for GameFounders. They must have liked how well GameFounders is doing, according to the press release:

"In the summer of 2012 Enterprise Estonia provided financial support to launch the first gaming accelerator in Europe, Gamefounders. Positive results of the first batch of start-ups completing the Gamefouders [sic] program have proven suitability of vertical accelerator format." (emphasis ours)

Again, EAS never mentions the amount of money involved, but luckily that can be found in the public tender. They have increased funding by 40%, to 700,000 euros!

Is EAS trying to cover up how much money they waste? Wouldn't it be better just to stop wasting the money in the first place?

Monday, May 6, 2013

Fits.Me : Unfit for Success?

Fits.Me : An Ill-Fitting Waste of Taxpayer Money

Fits.Me was in the news recently, after closing a 5.5 million euro round of Series A financing.

A recent article in the Business of Fashion blog, titled "Is There a Fashion-Tech Bubble?", drew our attention, and in particular this paragraph:

“Yes, too many companies don’t have a business model and don’t understand this industry,” Lawrence Lenihan, managing director of FirstMark Capital, an investor in Pinterest, Ahalife and Sneakpeeq, told BoF. “We have to stop backing stupid, business school whiteboard businesses that are ignorant of the industry and lack heart, soul and beauty. Moreover, companies that have gotten some degree of success have been so overcapitalised and their ultimate returns so overestimated that those investments will never create a return and will detract from the returns that founders and early shareholders should have gotten,” added Lenihan. (Emphasis ours)

Could this be the case with Fits.Me? Let's have a look.

The Product

Fits.Me calls themselves a "virtual fitting room." Their key product is a robot mannequin, and here's a picture from their website:

Basically, the mannequin can resize itself to mimic the size of a particular person. So what an online retailer can do is put a shirt of a particular size on this mannequin, punch a few buttons on a computer, and the mannequin will resize to all possible permutations of measurements (like varying neck size, chest size, etc.). They can take a photo of each variant, and then if a customer wants to see how that shirt will look on a person with a 33-inch waist, 28-inch chest, and 18-inch neck, the retailer can show the photo of the mannequin wearing each size (small, medium, large) of that shirt.

This sounds like a lot of photos and work, but apparently the photography part is mostly automated, so the entire process for one size of one shirt can be completed in a few minutes.

We think this robot mannequin is pretty cool. If this fashion retailer thing doesn't work out, maybe they can adapt it to be a sex doll and compete with Realdoll! (NSFW link)

The Business Case

We've written in the past about companies that were a solution in search of a problem. We don't think that's the case here. There is indeed a real problem they are trying to solve. For online retailers, returns are a costly part of doing business. It takes a lot of staff time to process returns, and it's costly in terms of shipping costs and restocking.

It's such a big problem that in our eyes, if someone came up with a solution to consistently reduce returns by 50%, we'd invest in them.

The big question here is: Does Fits.Me have the solution?

Their Solution

So far, the main mannequins from Fits.Me are of a man's torso. They probably chose to start with that because it's the easiest in terms of the simplicity of shapes. As any teenage boy can tell you after vast internet research, women have a lot of curves, and in all sorts of places. The variation in women's bodies is just much greater.

Fits.Me has indeed recently released a women's version, but as far as we can tell, it's barely (or not at all) used in a real environment by retailers.

We think that it's going to be tough to perfect the product for women. There is just too much variation in all places. Can they really manage to simulate a muffin top? How about a Jennifer Lopez booty? Pear-shaped vs. apple-shaped women? Octomom?

Who has more curves?

At best, they would need to ask a customer to take a large number of different measurements before trying the virtual fitting room. Suddenly the process gets a lot more complicated. We think this is one of the big weakness of their solution.

Why do we focus on women? They spend by far much more on clothing than men. Ever notice that when you walk into a department store, the women's section is at the entrance, and the men's section is in the basement, wedged between the bathrooms and the employee break room? Fashion retailers know where the money is.

Let's look at the actual process involved. Here's what TechCrunch had to say about it:

"And with 1,500 to 2,500 photographs required per garment — and a cost that’s in the “mid to low £100s” to capture all the data required for one garment in all its size permutations — it’s not cost effective for every type of garment or scalable for every fashion retailer." (emphasis ours)

So let's think about this. There is a cost involved to photograph each garment on the mannequin, and we presume it also takes time to get things set up, get it loaded into the Fits.Me tool, etc. Meanwhile, fashions change at least every season, or in some cases, every few weeks (like with Zara). This is especially the case with women's fashion, where a new style or color becomes popular every season (we're still waiting for leg warmers and football player-sized shoulder pads to come back into fashion).

This process seems like a lot of work and expense for a garment that may only be offered for sale for a month or two anyway.

So are fashion retailers interested in such a solution? Maybe not. In February, they announced a lower-market product called Fit Advisor:

"Fit Advisor uses a shopper’s measurements to generate and display intuitive graphical indicators showing how an item will fit, but – unlike the Fits.me Virtual Fitting Room – does not display a photograph of the item to show how it will fit."

So basically, you give it your measurements and they compare it to the dimensions on file for the garment you would like to buy, and they indicate if it will fit well or not.

Not much of a virtual fitting room any more, is it? What's worse, without all the fancy robot mannequins, what makes Fits.Me so special? How difficult is it for a competitor, or even just a fashion retailer, to do the same as Fits Advisor? It's not that difficult to figure out that if the customer has a 17-inch neck, and the shirt you want to try has a 16-inch neck, that it won't fit that well.

Let's go over this again. We have a flagship product (the mannequins) that is costly to retailers, has questionable accuracy for the largest part of the market (women), and is a lot of effort for products that go out of fashion in a short period of time. Then, we have their the secondary product (Fits Advisor) which is not very unique.

This doesn't sound very promising to us, but what do we know about fashion? Our idea of dressing up is a wifebeater and pair of Levi's 501's. What do fashion retailers think?

Customers - Don't Believe the Hype?

Many of the company's press releases tout all the big-name customers they have. Let's look at a press release from January. In it, they state they signed some new customers, and also who their existing customers are. Let's look at those existing customers specifically. We realize it can take a while for a customer to implement their solution, so by using their list of existing customers from January, those should surely be using it by now. From that press release:

"Its roster of clients includes Barbour By Mail, Boden, Ermenegildo Zegna, Gilt Group, Hawes & Curtis, Otto, Pretty Green and Thomas Pink."

Want a challenge? Go to their sites and try to find the virtual fitting room they claim to have. Where would you look? We figured it would be on the sizing guide, which helps us determine the best size for us. Here's our results:
  • Barbour By Mail - Didn't find it in the sizing guide.
  • Boden - Didn't find it, and instead found a link to an outfit maker from MixMatchMe, a competitor making online dressing rooms.
  • Zegna - Their site is difficult to navigate and didn't seem to have a sizing guide, but we clicked on the first men's shirt and found no virtual fitting room.
  • Gilt Group - We got frustrated with this one. Apparently you have to register and log in to even look at stuff for sale. Maybe we should write a post about them.
  • Hawes and Curtis - Didn't find it in the sizing guide.
  • Otto - We hit a wall on this one, because Otto is too common of a word. We couldn't find their online site, though we did find plenty of photos of babies named Otto.
  • Thomas Pink - Didn't find it in the sizing guide.
  • Pretty Green - Success! Sort of. We got discouraged with the above sites, so we really worked our way through Pretty Green's site (it was so pretty, we just couldn't resist!). We found this nice trendy Lennon jacket. Looks nice, huh? Click on the Try It On Size Guide to be taken to the Fits.Me fitting room. Notice one big issue? The jacket in the fitting room isn't a Lennon jacket at all!
Product Photo: Cool as Lennon

Fitting Room Photo : Cool as a chav in winter

So is this virtual fitting room really providing a benefit? You want to buy one jacket, and you are taken to an image of an entirely different style of jacket for fitting purposes.

Some may argue that this is fine, especially in cases when the goods are quite similar, like a man's button-down shirt of varying colors and cuff styles. We don't think this is fine, and the reason has to do with how the garment industry works. Have you ever gone to a store to try on a size Medium in a shirt, and then picked a different color of the same style and size of shirt, and it fits differently? The reason is that nearly all clothing is produced by subcontractors in many far-away countries and production is a labor-intensive process. Retailers are always looking for the lowest costs, so you may find that one color of the shirt was produced by a supplier in Pakistan, while the other color of the same shirt was produced in Bangladesh. Small variances in quality and sizing are sure to occur between different subcontractors, and even by the same subcontractor (there's not a lot of ISO9001 quality certifications in the industry).

It should be noted that we didn't spend a lot of time going through retailers' sites above in search of their virtual fitting room. We shouldn't have to. If this is such a great technology, then it should be prominently features and easily accessible. It wasn't. Why?


Seven Years of (Market) Solitude

Maybe the issue here is the company is really new, and so they haven't had time to really develop and market their product. We're just being too critical of this new company, right?

Wrong. Turns out they started business in June of 2006. Massi Miliano OÜ (that's the company name - Fits.Me is the trading name) with registration code 11259853, has been in business for 7 years!

We think this is an important indicator. What this means is the public has been aware of their technology for many years now. If it's so great, why haven't a bunch of smart Stanford engineering grads developed the same thing, then gotten funding from the VCs in the Silicon Valley? Even if there are patents in place, any engineer will tell you it's fairly easy to "engineer around" a patent.

Companies that have been around many years without big success are basically treading water. In the case of new technology, it's often an indicator that the product simply isn't right for the market. It appears Fits.Me management is aware of this, as their company history page refers to being "launched in 2010." While it may be technically true the brand Fits.Me was launched in the UK in 2010, the company and their technology has been around for seven years, and by using 2010 on their webpage, it gives us the impression they're trying to hide their many years of no success.

Taxpayers Weep

Now for the fun (or sad) part. The money.

As you probably guessed, they had a dip into the pockets of Enterprise Estonia (EAS):

It turns out they reached into the pockets of EAS on 6 different occasions, from July 2006 to October 2010. Total EAS money: 903,456 euros.

But wait, that's not all! SmartCap (Estonian Development Fund) put in 1 million euros! The information on Estonian Development Fund's site (which is slightly outdated) shows a slightly lower number, and their 2011 annual report shows that some of this was convertible debt, but our sources tell us that the number as of the latest round means that it's now an all-equity investment and the total is 1 million. SmartCap is a sovereign wealth fund owned 100% by the Estonian government/taxpayer.

So in total, they have received 1,903,456 euros in taxpayer money, over the course of seven years.

In fact, the number is a bit higher when it comes to government money, since their most recent round included an investment from Conor Ventures, and their Technology Fund II is funded from the EU money, but we'll leave that out of our calculations since we don't have the data.

A Future Fit for a King?

In summary, we have a company that has been around for many years with little success, a questionable product, and few customers. This doesn't seem like a recipe for success.

We could be wrong of course. Maybe a large retailer like Amazon will just buy them out. Maybe robot mannequins will take over the world, and form the new ruling class. The future is hard to predict.

It should be emphasized that we have no problems with private venture capitalists giving money to risky ventures. What we do have a problem with is taxpayer money being used on these ventures, especially when the numbers are so large, like over 1.9 million euros in this case.

Even worse, it seems like there is no limit to the amount of funding or the number of times companies can get this money. Not only is this unfair to the taxpayer, but it's also unfair to other companies, outside of Estonia, who compete in the same industry. They're forced to contend with the real world of venture capital and making a profit, instead of riding the free money gravy train of no-strings-attached taxpayer money that is available to Estonian companies. How does this promote the free market and fair competition?

June 13, 2013 Update


Since originally publishing this post, we uncovered another 1.8 million euros of taxpayer money that was given to the company. So the updated total of taxpayer money is now 3,773,456 euros.