From Founder to Founder with Kun Gao, Former CEO and Co-founder of Crunchyroll: 7 Hidden Ways for Startups to Succeed  - AHN Media Group
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August 29, 2024

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This article was co-written by Edwin Ong from the AHN Ventures team and Lennie Zhu, who is the Founder of 01 Labs, a product studio that builds products with early-stage software companies serving creators (media, entertainment, social), small businesses and independents. She has worked with startups such as HIFI (acquired by Block), F*** You Pay Me, and more. One of AHN Ventures’ portfolio founders, Amartya Jha, was the lead interviewer. Amartya is the Co-founder & CEO of CodeAnt AI, a DevTool that helps companies find and auto-fix code issues and security vulnerabilities used by small teams all the way to large unicorns.

In this edition, we had the honor of hosting an exclusive advisory session between Kun Gao, co-founder and former CEO of Crunchyroll, and Amartya Jha of Codeant AI. For those who don’t know, Crunchyroll is the leading anime streaming service with over 13 million subscribers as of 2024, and was last valued at $1.5 billion when it was sold to Sony in 2020. Nowadays, Kun works on two new companies that he co-founded: GGWP, an AI-powered game moderation platform; and Forge, which rewards gamers within and out-of-game prizes for the data they generate through gaming.

We are excited to share 7 hidden lessons for founders from our conversation with Kun.

1. The consumer products that succeed are the ones that go viral – and that can be hard to predict

One of Kun’s early insights was that consumer apps with baked-in virality tend to be the ones that work out. Examples of built-in viral features are share buttons, “invite a friend/collaborator features,” or content that can be easily reposted. 

However, consumer behavior can be notoriously difficult to predict. Unless you have superior product sense like Steve Jobs, your best bet is to take your best guess, then ship quickly and avoid getting caught up in minute details. If your product truly has value, people will use it even if it isn’t polished. Need proof? Check out the screenshot below of what Crunchyroll looked like in 2006. 

Kun: “One of the lessons I learned from that experience is that you really don’t know what the consumer mindset is. You can have a guess, but with pure consumer experiences, it’s better to just try something, throw it against the wall, and see if it sticks. Then, you can collect the data, iterate, and see what works and what doesn’t.

We developed the first version of Crunchyroll in about a month. We put it out there and shared it with our friends. They started using it, and pretty soon we had hundreds, then thousands of users. At the end of the day, it’s about making something really engaging that can capture an audience and get them to virally spread it. Those kinds of consumer products just inherently grow. So my advice would be to think about how to build products that inherently have virality built in.”

2. Build something that solves your own problems

The advantage of building something for yourself is that you will have at least one user out of the gate, and likely a few others since you likely have some friends with similar issues. Furthermore, you’ll be able to understand the customers’ needs because *you* are the customer. For Crunchyroll, this allowed them to cut out hiring product people and only hire engineers at the start

Kun: “With Crunchyroll, we were trying to solve a problem that we personally had. Every Thursday, Naruto would come out on TV in Japan, and it would be only accessible in the US on unreliable torrent websites. We just wanted a place where we could watch Naruto at 6 p.m. every Thursday after work. 

We knew we could get at least a starting set of users because we had that problem, and we were our own consumers…. We also knew we could get all of our friends to use it because we knew they were experiencing the same problem. And so we built Crunchyroll.”

3. Experiment relentlessly until you perfect your conversion funnel

What is often talked about when monetization is on the agenda is “What monetization model makes sense for my company?” Subscriptions, one-time purchases, ad revenue, freemium…the list goes on. But what gets less airtime yet is arguably even more important is how to optimize your conversion funnel. While there is no glory in experimenting with things like button placement, CTA copy, and 1 vs. 3-step payment flows, those kinds of nitty-gritty decisions are exactly what separate “businesses with potential” from the real moneymakers. 

Kun: “Before [we started offering paid subscriptions], we already had a decent amount of users, around a few million. When we flipped the switch to premium content, around 10,000 people converted to paid, which is really low. We thought we would get 50,000, but we only got 10,000 people to convert to paid. The rest stayed on as free users. So then we had to figure out why more people weren’t converting.

We ran some tests on alternative business models. We tested charging per episode, and even some rental models. Those tests didn’t perform that well, so we decided to double down and optimize our subscription model. 

To tackle [conversion], we basically annotated everything on the site and figured out what users were clicking, what they were looking at, and which buttons converted better. Should we start with a free trial? If it’s a free trial, should it be seven days or four? The size of the icons—we basically tested everything, especially in the first year… Over time, we were able to convert the majority of the audience to become paid subscribers.”

4. Ride societal waves in culture and technology

It’s important for every company to have an answer to the question “Why now?” What was not true before, that is now true and enables the product to succeed? This could be something technological or societal. In the case of Crunchyroll, Twitch, and YouTube, the explosion of video streaming was a major driver for those platforms to reach the dizzying levels of success they have today. 

Kun: “Part of what separated us was that we were in the right place at the right time. If you look at all the successful video platforms today—YouTube, Twitch, Crunchyroll—they all started at basically the same time, around the 2004 to 2006 period. You kind of needed to start during that time to be successful. 

Within that time frame, there were also a lot of competitors we were competing with. Platforms like Stage Six, Veoh, and Joost were trying to go after the same space and opportunity. Speed was really important because there was a land grab for distribution at that time. When I say distribution, I mean the proliferation of consumer devices besides the PC from 2006 to 2007, all the way until the early 2010s. Because of our speed, we were able to build these platforms before everyone else and ride that wave of device growth. We were one of the first launch partners on PlayStation alongside Netflix. Being able to build on new platforms with a product engineering focus first allowed us to outgrow and out-distribute others in the space.”

5. The best companies expand their markets or create new ones

Today, Crunchyroll has over 13 million subscribers. There were a lot of external factors that drove the massive growth in the popularity of anime, including the pandemic, but Crunchyroll itself played a major part in making anime more mainstream because it made it accessible to Western audiences. 

Kun: “The thing that surprised me most was that our TAM (Total Addressable Market) ended up being much bigger than we expected. I would project that we would maybe hit 200,000 subscribers. That’s it. Then when we actually reached 200,000 subscribers, we thought maybe we’d get to a million. And then when we got to a million, we thought maybe we’d get to 3 million. The growth itself has really surprised even us. Today, it’s the largest pure vertical play among all the content verticals out there. Initially, because we didn’t expect our TAM to be so big, our approach was to super-serve our audience and do way more than just streaming, which we eventually did, but it just continued to grow even beyond our expectations.”

6. Get creative about how to finance your startup

Many founders’ minds jump immediately to venture funding when they consider how to support their companies. But raising venture money can be a long and difficult path, and it’s not always the right choice for every startup. Timing is everything, and bringing in outside capital before establishing product-market fit can be a mistake, driving founders to pivot into oblivion. Kun gave us a look behind the curtain at how Crunchyroll funded itself before venture money, which included user donations, partner investments, and- yes, credit cards. While taking on significant credit card debt may not be recommended, staying open-minded about where your financing could come from is.

Kun: [Before we were profitable, we financed Crunchyroll with] venture money, and maxed out our credit cards before that. For a period of time, we also accepted donations. Before we raised VC funding, we had pretty hefty bandwidth bills because video streaming was very expensive. At some point, we realized that we couldn’t sustain the site. At the same time, we couldn’t directly charge users because we didn’t own the content. That was the motivation behind accepting donations. To give the users some incentive to donate, we built a very sticky social product where users could create an account, participate in forums, and chat with other anime fans. Anyone who donated would get a star next to their name so people would know that the person donated. It was an appeal to social status and social proof. That was enough to offset some of the bandwidth bills in the early days before we had venture funding.

I [also went to one of] our biggest content partners, the folks who license the content to us, and asked if they wanted to own a piece of the business. It made a lot of sense because if they invested, they would also have a vested interest in the platform and could capture more of the value that their shows were generating. It was a win-win. We took in about a million dollars, which was enough to bridge us to the break-even point.

7. As an Asian founder, take advantage of your inherent cultural strengths

Asian founders starting businesses in Western countries should not underestimate their ability to globalize their businesses by capitalizing on Asian markets, which they may be much better positioned to do than their non-Asian counterparts. Fundamental cultural context that you may not even acknowledge your grasp can help you succeed overseas.

Kun: “With Crunchyroll, we obviously worked a lot with Japan. I think that because I’m Asian, they trusted me more. At the end of the day, it was also about understanding and appreciating their value system, which is very different from the US. In the US, it’s really about the value proposition. In Asia, it’s much more about relationships and trust, so we really leaned into that. Maybe part of that was influenced by our upbringing. You can’t just show up and expect deals immediately. You need to be around, be persistent, and show them that you’re committed. But that might be a bit of a unique situation for us.”

Conclusion

Thank you to Kun Gao for the interview! If you are a gaming company looking for moderation tools, please consider checking out GGWP, and if you are a gamer wondering why you aren’t being rewarded for the mountains of data you are generating, please check out Forge!

Written by Edwin Ong and Lennie Zhu

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