Max Levchin on Slide’s big virtual goods bet, scams and — mating

Slide, which started in photo-sharing, moved into Facebook widgets and then raised funding at a reported $550 million valuation last year, shifted gears this year and went aggressively into virtual goods. The company’s looking to become a  mainstream version of Second Life, where there’s a virtual economy at work of real people buying and selling goods.

Instead of churning out new apps like many of its competitors, the company has focused its existing ones — including seven on Facebook like SuperPoke, Top Friends and FunSpace, with about 27 million users between them. Slide introduced a virtual currency into its SuperPoke! Pets application, where you can raise and care for a virtual pet. You can earn gold through the game or you can purchase 10 pieces of Slide Gold for $1.

So is the strategy shift paying off? I sat down with CEO Max Levchin to ask about how his vision for the company has evolved and how he’s changed as an entrepreneur since launching the company four years ago. Slide is the company he started after selling PayPal to eBay for $1.5 billion in 2002. (You can compare his answers to interviews we did last year and the year before.)

VB: You mentioned that your revenue had tripled in a recent CNBC interview. What does that mean? What base were you starting from?

Levchin: The tripling is irrelevant. We went from 90 percent of our revenues coming from advertising to 50 percent coming from virtual goods. And we were starting from zero with that. So the relevant part is that we were able to build a virtual goods business.

We’ve taken a very long-term view of how people interact in these virtual worlds. We wanted them to create a personality, become attached to a character or an avatar that represents them. Essentially all the purchases that people are making — we don’t want to think of these as fleeting, quick decisions. We want to treat them as buying decisions, ones that people aren’t too scared to admit to themselves about. The virtual goods that we sell are about self-expression.

With advertising, which makes up less than half our revenue, we have a basic ad network but it brings in so little. The relevant part of advertising comes from these large-scale sponsorships, like the deal we have with Katalyst [Ashton Kutcher’s new media production company] and Hot Pockets (click here to see an episode). But these campaigns are more complicated — you can only do so many of them at one time. And it’s tricky. You have to meet the advertiser’s needs without pissing off the customers.

VB: Where do you plan to take these campaigns over the next year?

Levchin: You might see better product placements. Maybe we’ll have our pets drinking from special bottle — I can’t really go into a lot of detail.

VB: So you also said that you’re close to profitability? How soon will that happen?

Levchin: I was somehow goaded into saying that. Pretty close. I said what I wanted to say.

On a sidenote, a lot of users actually got mad at us for that interview because I said SuperPets was targeted at soccer moms. Our users got very angry. Dads, teenagers and older users were upset. I was thinking about regular folks and I thought of soccer moms. The community we’ve built is really connected. People have met real friends there. What we provide is a context. It’s not a diversion. We’re not just about cute pets. People talk about religion and the meaning of life.

Anyway, back on profitability — we’re not there yet.

VB: When do you think it will happen?

Levchin: But I could say it will happen in less than a year. We’re very superstitious about saying these things.

VB: So I wanted to ask about the big controversy this week — offers. Where do you stand on them and why?

Levchin: We don’t do offers.

It’s harder to establish a long-term relationship if you monetize them through offers. It’s really a business decision to me — when someone is willing to pay for this product, it’s very powerful. It’s an opportunity ultimately to become closer with that user. And the financial side of the longer-term relationship is very nice.

But with offers, it’s like I’m going to send you off into some other site — and not all of them are bad — but I’m potentially kicking users off into a scary territory where I can’t promise it will be happy or healthy. It’s just dangerous. If you’re trying to build a relationship with the user, it’s super important. You can’t piss them off.

How would they think of us if they had a horrible experience with a business we referred them to?

For example, we actually did a partnership with FTD on Mother’s Day. If you bought a bouquet of flowers, we got an affiliate fee and then we’d just give that to the users in turn, in the form of game currency. We ran that for a couple days on Mother’s Day and in general, we had a very warm, fuzzy experience. The vast majority of our users said they liked it. But one person said their bouquet wasn’t delivered, and I felt bad.

It made me think that I’d rather be a lot more in control of the user experience. In general offers can be a good thing, but there’s just this slippery slope.

VB: You stress this user relationship quite a bit. Some of your rivals have a slightly different approach by maximizing user churn and distribution. Why take your strategy?

Levchin: There’s a highfalutin’ answer — I’m not sure I want to be involved in something like that. The idea of churn is fine. It’s just not something that’s to my liking.

The business side of the decision is that if you look at entertainment industry, there’s a content treadmill. If you have something that starts and ends, be it a movie, a book, or whatever you’re in, there’s this cycle of anticipation, launch, blitz of consumption and then a fast fall. If you’re really lucky, you build a franchise. You can build a sequel, but there’s still a ramp-up and that whole process, plus there’s the risk that tastes have changed.

The whole idea of bracing for impact every time you launch a product is hard and the content treadmill in the social entertainment is by far the fastest running one of them all. As a result, you have this non-stop cycle. You’re building, you’re launching, and you’re planning something else at the same time. It’s an endless pipeline of content.

You could run a business like a movie studio or a newspaper. But the long-term value of a business like that is relatively low. There’s no guarantee you’ll be able to churn out hits and it’s less predictable. We like the idea of trying to create a content-driven business where the majority of the content comes from users.

The theme of Slide from beginning was to build systems or tools to let people express themselves and entertain their friends. If we can shift the means of production, make them decentralized and have a sufficient amount of content, interesting things can happen. Our role is to provide the best tools to help people broadcast their creativity and as a result, we’ll have hopefully a near infinite supply of content.

There’s a pretty significant debate about how involved a company should be in this process. Are we hands-off? YouTube and to some extent, Facebook and Photobucket are like this. They stay away from content production and make it easy for people to consume and share it.

The tack we’re taking is we’re closer to the creation process. We give you the tools to create content. We help create an environment where the content can be of high-quality. Secondly, the products are very family-friendly. We have a more controlled environment, where people can create things for the rest of the community.

[Below is an example of a SuperPoke! Pets environment made out of virtual goods to look like Van Gogh’s Starry Night.]

VB: How would you say your relationship with Facebook has changed over the life of the company? Developers end up being very dependent on their network, yet Facebook can change the rules at will like we saw last week.

Levchin: Facebook is so ubiquitous now that it’s like another manifestation of the web itself. If you’re building a social product, you’re still living in the last century if your product doesn’t work on Facebook. That’s an important consideration.

The flipside is that the web is still very large, and your product needs to work there as well. When we take a look at all these segments, we think the more important ones are through web, Facebook and MySpace.

VB: What about Twitter?

Levchin: Twitter is tricky. What’s interesting is that Twitter has yet to have a really huge explosion of content marketed in social entertainment. There’s all sorts of memes that rip through Twitter, but I have not seen a successful social game blow up around Twitter.

If we compare the two, Facebook is currently a superior place to market a product like Slide. Twitter is more like a general distribution agent. It’s like broadcast radio. I guess I’ll frame this more tightly: Facebook is better place to market social entertainment.

I don’t think we’ve waffled in terms of our relationship with Facebook. We have destination sites and we have Facebook apps. Users who are not on Facebook have found our products and have had fun with them.

Facebook has evolved their platform approach over the last two years. Originally when they launched, they said take your app and put it on Facebook. But at a certain point, you start thinking, what if I don’t want to stick it in all the way. Then they added APIs that you could use to leverage the social graph. We had to figure out ways that users could enjoy products both inside and outside Facebook.

VB: What about Facebook’s changes to the platform last week? How will they affect you?

Levchin: We don’t want to be premature with any pronouncements. We generally feel pretty positively about all those changes. If you look at the user experience side of it, the rationale makes a lot of sense. The only negative is that it will add some work for us. It’s a little bit like Microsoft releasing a new operating system. It remains to be seen what will happen. Obviously they’re de-emphasizing notifications and emphasizing the inbox. We have a lot to learn.

The long and short of the answer there is that if you believe you’re building a product that people like, it’s not that crucial that ‘Oh My God!’ notifications are going away. We want the vast majority of communications from our users to be deliberate. We err on the side of being careful. For example, is three clicks to posting a message enough?

And if it becomes too complicated for developers to reach users, we expect that Facebook will fix it. They want people injecting interesting and valuable messages into the community, so our interests are pretty well-aligned. This is a self-correcting process.

VB: You’ve started companies before, including PayPal. What have you learned this time around as an entrepreneur?

Levchin: [Laughs.] The list is very long.

Media is very different from financial services. People are very fickle and very vocal. They believe that things should be one way and not the other. It’s still very rewarding to build products for huge audiences. It feels like you’re making an impact.

What’s also different is that at PayPal, I was CTO, not CEO. My management issues were around engineers who are typically very straightforward humans.

VB: So business people are overly complicated?

Levchin: I’m an engineer. If someone comes over and presents a problem, it’s highly likely that I have had the same problem. If someone comes in with a complex business development problem, I have to think through it with them.

At PayPal I always felt like I was an equal partner with Peter [Thiel]. I never felt I had to defer to Peter. We felt equal all the way through, and I never though I would feel any different with Slide.

But the title CEO puts the ultimate authority squarely on you. You can be a co-founder, but CEO is very different. Every thing — whether little or huge — you’ve got to make a call. You have to make an A or B decision.

VB: Do you think you’ll ever do a media company again?

Levchin: [Pause.] Ask me again later.

I don’t know if we’re really a media company. To some extent, we’re in a similar category. We are desperately trying to avoid the content treadmill where we’re making the content all day long.

The idea of outsourcing all the content creation into the user base, giving them the best tools and determining who wants what is the unifying theme here. Our tack is different. We want to stimulate an economy and create opportunity for people to build content that interesting and engaging where there’s real economic supply and demand.

VB: How do you protect and establish the value of these goods when the marginal cost of production is near zero?

Levchin: We create scarcity, we only make 1,000 of a certain item, for example.  A large portion of tangible goods in the world aren’t truly that scarce, aside from maybe precious metals or oil. When luxury brands like Burberry produce bags, they ask themselves how unique they want to let a particular item be? How many should they make?

And people buy goods these goods because ultimately have the desire to be different. All of this sounds kind of sketchy, but people need to stand out in a crowd. A large number of these desires center around procreation and the need to attract a mate.

There are all these mechanisms we’ve created around ourselves to feel special and to evaluate fitness. People want to stand out or find their voices in a community. They want to be heard, noticed and talked to.

VB: But doesn’t it seem a little absurd to want to buy a virtual Burberry bag over a real one?

Levchin: That’s a naive view of virtual goods. People are shifting their lives to virtual goods and virtual things are encroaching into the real world very rapidly. For example, I have shares in this company. I have never physically seen them. Hopefully they will be worth a fair amount of value. I have seen them in various records. So are they real?

The vast amount of financial transactions are done electronically. I did have to get fingerprinted to buy a house but that seemed horribly archaic. So there’s this general push into value being stored as a virtual thing without a physical footprint.

And it permeates down into the society. It changes behavior in fundamental ways. Tonight I’m going to watch a movie. But I could participate in an interactive movie or create something for my friends. They’re substitutes for each other. At the end of the day, when you’re watching a movie, you’re just consuming pixels. You’re taking them in with your optic nerve.

You could also consume these pixels by participating in an online economy, by making items that other people want to buy. The point is we’re trying further the arrival of a digital society where people ultimately can earn real value inside our product. They will receive a cut of the sale. At a certain point, someone will sell enough virtual goods that they can quit their real job.

Today’s press critics aren’t ready for it. But it’s perfectly reasonable substitute. It’s a bummer I can’t film a feature-length film but maybe I can create content for my friends. I can go draw something and put it on the market. Some other users can say, ‘That’s so cool, I need to own it right now.’ Not all these things are live yet. We still have trials going on right now.

VB: You have secondary markets right?

Levchin: Yes, we’re enhancing our secondary markets. I think the subtle difference between us and other companies like Zynga is that we’re focused on virtual words. The difference between virtual worlds and games is subtle but important. Games have an end. You enter them and then you leave. With us, you have no reason to leave. We think of our virtual worlds as real economies where people can trade and participate in the in both the consumption and production of value. We’ve sold about 30 million user goods.

Ultimately the goal is for the company is to push this as far as it will go — the idea of a value generation by consumers who are deriving real income and real monetary value.

VB: Like a more mainstream Second Life?

Levchin: Second Life did a lot of these things right. They’re a huge inspiration. The only critique I have is that they kept it slightly too —

VB: Niche?

Levchin: Yea. Somehow they never reached the mainstream. We think they might have been better served being a family-friendly community instead of going the zero censorship route. The adult-oriented content scared people away.

I think that we could end up making these ideas mainstream. We’ve created a real community where people aren’t just talking about applications, but about religion and life. People have found genuine friendships and it went from being just a cute virtual pets thing into a community, that was more about self-expression. We have users spending several hours using virtual jelly beans and ribbons to make paintings.

Now our question as a business is how do we turn that into a profitable activity? The people in these games are supremely talented. How do I turn this into an environment where people create content for their friends? How does it become a suitable alternative for the Friday night movie?

Photo by Geoffrey Ellis