Tapulous investor letter - leaked

$1 mln raised, breakeven achieved, and lessons learned

Tapulous, the popular maker of iPhone apps, such as Tap Tap Revenge, sent out an update to investors this week. The letter, which revealed a lot of optimism about the new year, was leaked to TechCrunch. 

In the letter, Tapulous co-founders Bart Decrem and Andrew Lacy outline the startups achievements, including a $1 million financing round in December. (Embedded is Decrem's video pitch)

The founders also claim that Tapulous is the No. 1 most popular game for iPhone and iPod and the No. 3 most popular app overall. On metrics and revenue, Tapulous has 5 million unique installs on Tap Tap Revenge, with 100,000 paying customers. Importantly, December was a break-even month, a goal Decrem told me he was on track to achieve. As he said to me in an interview back in August, "By the end of the year, we'll be self-sufficient."

As for the team's biggest lessons learned? "One of the most exciting things about being one of the first on a disruptive new platform is that a new set of rules is being written, and the iPhone and iPod touch have offered no shortage of surprising lessons!" said the founders in the letter.

A big lesson is on what apps make money. "Yes, the iPhone is great for social networking and location-based services. Facebook is the #1 app on the App Store. And you can build a nice business in any number of application categories. But if you want to get really big audiences, and tap into all those users with iPod touches, GAMES it’s where it’s at!"

Here's the full email letter:

Dear Tapulous investor,

It’s been just about a year since we created our crazy little company, six months since the launch of the App Store, and we’re kicking off a new year, so what better time to check in with all of you and provide our thoughts on the year that just passed, and 2009?

Highlights
One of our goals when we started the company was to be an early leader on a disruptive new platform. The platform has proven to be disruptive, and we are one of the leaders, arguably the leader, on the App Store:
#1 most popular game for iPhone & iPod touch for 2008
#3 most popular app overall for the US (since #2, the amazing Pandora app, is only available in the US, we have a strong feeling that Tap Tap Revenge is the #2 most popular app on the App Store worldwide, after only Facebook)
5 million unique installs on Tap Tap Revenge! (that doesn’t double-count when a user upgrades TTR)
100,000 paying customers
On December 31, we closed another financing, with most of our leading investors joining to invest another $1 million+ in the company. Not bad, in the midst of a huge economic downturn!
Tremendous buzz, including press coverage last month alone in the New York Times, BBC, Fortune, Techcrunch, Billboard, AFP, Reuters
A break-even month in December! Both advertising in Tap Tap Revenge and app sales contributed majorly, together with strong holiday sales of iPhone/iPod and iTunes gift cards

Biggest Learnings
One of the most exciting things about being one of the first on a disruptive new platform is that a new set of rules is being written, and the iPhone and iPod touch have offered no shortage of surprizing lessons!

1. It’s disruptive alright
100 million app downloads in 90 days. Holy cow. In late December, on one crazy day, we added 200,000 (!) new users to Tap Tap Revenge. When we started the company, our fundamental bet was that the iPhone was going to be different, and truly ring in the mobile decade. The first decade was about the PC revolution, the second decade was about the network, and the third decade, we believed, would be about mobile computing. It’s happening alright. The iPhone, with the new price points, is a huge hit, and the App Store has been a success beyond anyone’s dreams. When we started the company, people asked us why we didn’t focus on SMS and WAP, and some rolled their eyes when we told them our goal was to get to 1 million users in 18 months. Six months after launch, we’re at 5 million users. This technology is disruptive, and that means big new companies will be created.

2. Not just the iPhone –two hit platforms
Flying back to Southern California on Sunday after a vacation in Mexico, I looked around me on the plane and counted 6 (six!) iPhones and iPod touches in use just in the 12 seats right around me. Ever since the 3G iPhones launched, it’s started feeling like a few years back, when all of a sudden iPods were popping up everwhere. But it’s not just the iPhone that’s on fire, the iPod touch is just as important to our company. There were an awful lot of iPod touches in those stockings: we’ve heard rumors that some ad networks were seeing a million new iPod touches get activated right around Christmas day. The majority of our users are now using an iPod touch. Leave Silicon Valley (or just hang out with your younger cousins), and you’ll find a world of teenagers and consumers who weren’t ready to take the plunge on the iPhone (maybe they don’t have a phone yet, or they’re locked in multi-year contracts with their current carrier), but have now upgraded their iPods to a shiny new touch. In the process, they’ve upgraded from a great music player to a networked handheld music and gaming device.

With the iPhone and iPod touch, Apple is winning in two formerly very different spaces:
The smart phones market… really, the mobile phones market: Apple is already one of the largest phone makers in the world (#3 in revenues after only Nokia and Samsung), and hands-down the leader in smart phones and next-gen devices
The handheld gaming devices market. Who’d've thunk in July of 2007 that Apple would be rivaling Nintendo and Sony for leadership in the handheld games devices market? Well, six months into the App Store, there are three times more games available on the App Store than for the Nintendo DS, five times more than for Sony PlayStation Portable - and, says BusinessWeek , Apple is on track to sell as many game-capable handsets in twelve months as Nintendo, the current market leader, has sold in its most recently reported 18 months.
At Tapulous, we’re still getting used to that idea, and trying to shake our habits of assuming that all our users are above the legal drinking age, on an iPhone, and always online.

3. Games games games
Yes, the iPhone is great for social networking and location-based services, Facebook is the #1 app on the App Store, and you can build a nice business in any number of application categories. But if you want to get really big audiences, and tap into all those users with iPod touches, GAMES it’s where it’s at! Focus on those spare minutes people have as they wait for their friends, when they’re stuck at the airport, or between classes. 3 minutes (the length of a song) is not a bad chunk of attention to grab - as long as you can make sure users remember to come back for more later. So the “I’m looking for something while on the go with my networked, location-aware device” is still a valid use-case, and successful businesses will be built there, but the “I’m bored for a minute or two, and I may not be online” use-case is where the action is if you’re trying to build a really big audience.

4. The hybrid model works for us
We went from no revenues in September to a break-even month in December, so we wouldn’t dare predict what our mix of revenues will look like at the end of 2009, but so far, the hybrid model is working for us.

Our free game, Tap Tap Revenge, is bringing new users onto our platform at the rate of tens of thousands per day. We are able to monetize those users through non-intrusive ads and point those 5 million users to our premium games. Over 100,000 users have already upgraded to one of those premium games and we hope to entice many more in 2009. Ad-supported free apps vs paid apps? We’ll take both.

4. Breaking thru the noise: virality, buzz
With more than 10,000 apps on the App Store, it’s getting harder by the day to break through the clutter. Efforts to deploy Facebook-style viral strategies have largely failed because the platform isn’t inherently viral - only a fraction of your friends have an iPhone and Apple doesn’t create viral channels in the way Facebook and other social networks do. Things will start changing in 2009 as Facebook Connect becomes more popular, but good old fashioned word of mouth is back!

Fortunately, we’ve been able to break through the noise. It’s been a combination of getting there early (Tap Tap Revenge had a fanbase even before the App Store launched), offering a great product, listening to users, working the phones, and a healthy dose of good luck! The payoff: a good number of people who buy an iPhone or iPod touch have heard about Tap Tap Revenge, and go look for it on the App Store as one of their first apps to download, and we now have our own distribution channel in the form of millions of users on Tap Tap Revenge.

Up next: Tap Tap Revenge II, which is slated for launch in early February. TTR II will bring the innovations of Tap Tap Dance and some other great new features to the free game. We hope the launch will bring even more users into the game and deepen user engagement.

Thank you for being part of our family in 2008 - we look forward to working with you to make 2009 even more succesful!

Bart and Andrew