Startup Review

Flektor Case Study: Counter to prevailing Web 2.0 wisdom

written by Nisan Gabbay, posted on July 17th, 2007

Flektor is a unified suite of tools that enables users to create, manage, and share personal media across a variety of Internet sites. The service can best be compared to Slide and RockYou, but with a more powerful toolset for content creation, like video and photo editing tools. Users create “fleks” - photobooks, polls, quizzes, postcards, etc. - primarily for sharing in social networking sites. Flektor was acquired in May 2007 by Fox Interactive (parent company of MySpace). While the acquisition price was undisclosed, TechCrunch reported a $15-20M figure, while Red Herring is reporting a much higher figure due to potential earn-outs. Flektor’s history is rather short, as they began developing the product in June 2006 and exited less than a year later in May 2007, prior to public launch.

I had the opportunity to discuss the company’s successful exit with co-founder and COO, Jason Kay. While the company’s history is too short to write a full case study, there were still some interesting lessons to be shared.

Key success factors

Video game development approach to web app development

Flektor was acquired by Fox Interactive primarily for the great product that they built for personal media sharing. Unlike the more en vogue approach to Web 2.0 development of releasing early (and often times buggy), Flektor took an approach that is more common in the video game development business. Flektor invested time and focus up-front on building a platform (or toolkit) that would enable rapid iteration of the service in the future. The Flektor team wanted designers and product specialists to be able to edit and extend the product line without needing to go back to the development team to make improvements. This parallels the approach to game development where the game engine is built to make graphics adaptations easy. The Flektor team also placed a great emphasis on product quality, as witnessed by a staff of five full-time quality assurance employees.

The Flektor team spent eight months from June 2006 to February 2007 before releasing the product to closed beta. The result was a platform that provides two distinct advantages: the ability to go quickly both broad and deep with its products. For example, when a Flektor designer had the idea to add post cards to the product offering, it only took a few hours for the development team to add support for this new application and Flektor had a new product to offer its users. In terms of breadth, the platform approach enables Flektor to create a multitude of backgrounds, templates, and transitions for consumers to customize their content. These design changes can be implemented directly by graphic designers without need for iteration with developers.

Open dialogue with MySpace

The prevailing wisdom in Web 2.0 circles when building a service that integrates with MySpace is to fly under MySpace’s radar for as long as possible. Many Internet start-ups fear that MySpace will haphazardly block off their service with little warning, and hence the only defense is to get big quick and hope enough MySpace users will be vocal supporters if MySpace decides to block you.

Flektor took the opposite approach, engaging in open dialogues with MySpace about the service as early as November 2006 before the product was ready for beta. This was a potentially risky strategy, as some of the techniques that Flektor uses on its site are in violation of MySpace terms of use as they are documented. Furthermore, many entrepreneurs would be fearful of MySpace replicating the product on their own. However, the Flektor team was confident that they possessed differentiable technology and the ability to execute against their vision. This opening of communication channels paid dividends, as the Flektor team was able to build a strong relationship with MySpace management and demonstrate the progress being made with their product over time.

Exit analysis

Flektor co-founders, Jason Rubin and Andy Gavin had previously co-founded Naughty Dog, a studio responsible for games such as Crash Bandicoot and Jak and Daxter that yielded ~$1B in retail sales. Despite such impressive credentials that could have afforded them relatively easy access to seed capital, the founding team (Jason, Jason, and Andy) opted to primarily self-fund the company, although they did take some investment from a personal friend, Skip Paul.

The decision to self-fund was a good one, as the team had a successful exit in less than a year. When I asked Jason why they decided to sell the company so soon, he made the point that many entrepreneurs undervalue the time value of money, or the IRR (internal rate of return) in favor of the absolute dollar payoff. A quick exit with no dilution when looked at from an IRR perspective is often a better value than a larger exit in 5-10 years after raising successive rounds of capital. The Flektor team was also able to preserve some upside by negotiating the inclusion of earn-out clauses into the acquisition price.

References and further reading

“Edit, Remix, Mash Up: Share Your Online Content With Flektor”, Robin Good blog, June 4, 2007
Great product overview of Flektor functionality.

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