Facebook is a social networking website launched in February 2004 that is operated and privately owned by Facebook, Inc., with more than 1,400 employees and 500 million active users in July 2010. A January 2009 Compete.com study ranked Facebook as the most used social network by worldwide monthly active users, followed by MySpace. According to comScore, Facebook is the leading social networking site based on monthly unique visitors. According to Alexa, the website’s ranking among all websites is currently 2nd. Quantcast ranks the website 4th in the United States in traffic, and Compete.com ranks it 2nd in the United States. The website is the most popular for uploading photos, with 14 million uploaded daily. As of December 2007, Facebook had approximately 800 employees—35% of whom work virtually—and had offices in 18 countries.
The media often compares Facebook to MySpace, but one significant difference between the two websites is the level of customization. MySpace allows users to decorate their profiles using HTML and Cascading Style Sheets (CSS), while Facebook only allows plain text. Facebook users can add people as friends and send them messages, and update their personal profiles to notify friends about themselves. Additionally, users can join networks organized by workplace, school, or college. The website’s name stems from the colloquial name of books given to students at the start of the academic year by university administrations in the US with the intention of helping students to get to know each other better. Facebook allows anyone aged 13 or older to become a member of the website. By default, the viewing of detailed profile data is restricted to users from the same network and “reasonable community limitations.” Currently, users post on average 20 billion pieces of content including 3 billion photos per month.
A. Financing and Ownership Structure
Brazilian Co-founder Eduardo Saverin initially bootstrapped Facebook with thousands of dollars for his friend and co-founder Mark Zuckerberg. For seed funding, Facebook received $500,000 from Peter Theil, co-founder of PayPal. A few months later, it was also able to get $13 million from Accel Partners, who are also investors in 15 other Web 2.0 startups, and $25 million from Greylock Partners, making their overall venture equal to approximately $40 million. Mark Zuckerberg owns 24% of the company, Accel Partners owns 10%, Dustin Moskovitz owns 6%, Digital Sky Technologies owns 5%, Eduardo Saverin owns 5%, Sean Parker owns 4%, Peter Thiel owns 3%, Greylock Partners and Meritech Capital Partners own between 1 to 2% each, Microsoft owns 1.3%, Li Ka-shing owns 0.75%, the Interpublic Group owns less than 0.5%, a small group of current and former employees own less than 1% each, including Matt Cohler, Jeff Rothschild, Chris Hughes, and Owen Van Natta, while Reid Hoffman and Mark Pincus have sizable holdings of the company, and the remaining 30% or so are owned by employees and outside investors.
B. Business Model
The website is free to users and generates revenue from selling virtual goods and services, and advertisements that are served from the website’s Flyers application. Microsoft is Facebook’s exclusive partner for serving banner advertising, and as such Facebook only serves advertisements that exist in Microsoft’s advertisement inventory. According to comScore, Facebook collects as much data from its visitors as Google and Microsoft, but considerably less than Yahoo.
Facebook generally has a lower click-through rate (CTR) for advertisements than most major websites. For banner advertisements, they have generally received one-fifth the number of clicks on Facebook compared to the Web as a whole. This means that a smaller percentage of Facebook’s users click on advertisements than many other large websites. For example, while Google users click on the first advertisement for search results an average of 8% of the time (80,000 clicks for every one million searches), Facebook’s users click on advertisements an average of 0.04% of the time (400 clicks for every one million pages). Sarah Smith, who was Facebook’s Online Sales Operations Manager, confirmed that successful advertising campaigns can have click-through rates as low as 0.05% to 0.04%, and that CTR for ads tend to fall within two weeks. Competing social network MySpace’s CTR, in comparison, is about 0.1%, 2.5 times better than Facebook’s, but still low compared with many other websites. Explanations for Facebook’s low CTR include the fact that Facebook’s users are more technologically savvy and therefore use ad blocking software to hide advertisements, the users are younger and therefore are better at ignoring advertising messages, and that on MySpace, users spend more time browsing through content while on Facebook, users spend their time communicating with friends and therefore have their attention diverted away from advertisements. On brand and product pages, however, some companies have reported CTR as high as 6.49% for Wall posts. Involver, a social marketing platform, announced in July 2008 that it managed to attain a CTR of 0.7% on Facebook (over 10 times the typical CTR for Facebook ad campaigns) for its first client, Serena Software, managing to convert 1.1 million views into 8,000 visitors to their website. A study found that for video advertisements on Facebook, over 40% of users who viewed the videos viewed the entire video, while the industry average was 25% for in-banner video ads.
C. Estimated Revenues (in millions US$)
Year Revenue Growth
2006 $52 -
2007 $150 188%
2008 $280 87%
2009 $800 186%
2010 $1,100 38%
II. The Pre-Facebook Era
One of the early seeds of Facebook was planted by Adam Grossman in 1989 while Grossman was a student at Williams College. Grossman developed a “facebook” of his fellow freshmen that included photos, addresses and birthdays. The day after he graduated in 1993, he started offering it to other schools. He pitched the idea to businesses as well, extolling the virtues of having employees get to know each other better, to work together better. He reasoned that many companies have directories of people and departments, but they don’t include much more information and are often out-of-date. Businesses, especially large law firms, were responsive to the idea, but they suggested it would work better as software than printed copy. So Grossman took a project job with Boston’s Goodwin, Proctor & Hoar to develop an internal application for the law firm. After a successful run there, he offered it to the firm’s downstairs neighbor, Choate Hall & Stewart. The software program culminated in a platform called AboutFace that began to replace printed directories in companies throughout the United States. As was the custom of the time, the site was free to organizations with less than 20 people but cost at least $30 a month for organizations with more. Privately-held Atlantic Media – the owner of AboutFace – had been profitable since inception and hadn’t pursued the venture capital that lifted Grossman’s Williams College classmate Bo Peabody, founder of the then fast-growing Web community company Tripod. It also held the domain name, facebook.com, which meant that Facebook initially had to call itself Thefacebook.com.
Later in 1995, Classmates.com debuted as a way to help people, identified by their real names, find and communicate with former school friends. By 1999, Chai Ling – a former student protester in Tiananmen Square and founder president of Cambridge-based Jenzabar.com – introduced the site as a “virtual facebook” to help university and college communities get good prices on everything from textbooks to airline tickets, access class schedules and campus event calendars, acquire class notes, find jobs, and profile individuals. The company had 30 employees at the time but was hiring and training 300 to 1,000 campus representatives throughout the country to market the effort. In that same year, The Daily Jolt, a sort of discussion community, had been started as a kind of bulletin board and operating at a number of schools. Similarly, another website named “Steamtunnels” attempted to digitize Stanford’s facebook and distribute it to students. The site got its name from the legendary steam tunnels beneath the campus that students explored for decades, almost as a rite of passage, until the tunnels were ordered sealed some time ago. Stanford University blocked the student-run website from displaying thousands of student photos scanned from the university facebook that used to be distributed to freshmen every fall. The university contended that Steamtunnels violated Stanford’s copyright on its publication and invaded the privacy of students whose names, photos and hometowns went online without their consent. The creators of the disputed site identified only as “DJ Monkey,” “The Sultan” and “Drunken Master” said that they had set the site up to put some life into Stanford’s “stagnant social scene” and that they had considerable student support for what they were doing. The students ultimately gave in to the university’s demand. The only way the “Steamtunnels” authors could have restored the pictures of Stanford students to their Web site was to have obtained the individual OKs from students and had them submit new photographs of themselves.
Around 2001, Mascot Networks also emerged at Columbia University and obtained venture capital financing to provide online facebook services to college campuses. Columbia University became one of the first schools to adopt the service. Mascot Networks, however, quickly ran out of venture financing and was unable to close another round, which led to the death of the fledgling college website. By November 2001, a new effort had started on the Stanford campus called Club Nexus. A Turkish doctoral student in computer science named Orkut Buyukkokten started the service as a way for Stanford students to improve their social life, and he brought an undergraduate political science major, Tyler Siemann, on board to manage the nontechnical side of the project. Club Nexus was revolutionary and had a raft of features – probably too many. It allowed users to create a profile using their real names, and then list their best on-campus friends, who were known as “buddies” in Club Nexus lingo. Buddies who were not already users then automatically received an email inviting them to join the service. Only students with a Stanford-issued email address could join, and that email authentication ensured that each person was who they said they were. You could chat, invite friends to events, post items in a classifieds section including personal ads, write blog-like columns, and use a sophisticated search function to find people with similar interests. Students used it to find study partners, running buddies, and dates. Buyukkokten himself once bragged that what made it different from any other website was “you can create really big parties.” Within six weeks, Club Nexus had 1,500 users at Stanford, whose student body totaled about 15,000. But after it reached about 2,500, usage leveled off. The service was just too complicated. Buyukkokten was a talented programmer who had loaded it with every interesting feature he could think of. But that made it difficult to use and diffused activity among many different features. You didn’t get the sense there were many others in there with you. Once the two men got their degrees in 2002, Buyukkokten and Siemann decided to focus on alumni. They created a company called Affinity Engines, which began marketing a modified version of Club Nexus called InCircle to college alumni groups. Their first client was the Stanford Alumni Association. But not long after Affinity Engines started, Buyukkokten left the company and went to Google, within which he founded Orkut.
By the 2003-2004 school year, there was a palpable need for online, interactive facebooks among students throughout the United States. Student governments at Cornell, Dartmouth, Princeton, Penn, Yale, and Harvard, among others, were all complaining to college administrations that their campus facebook was not in digital form. Moreover, social networking was becoming big business in Silicon Valley, and students on college campuses all across the country were racing to start the next dorm room success story in this area. By the fall of 2003, Silicon Valley investors had put a total of $36 million into four high-profile social networking startups – Friendster, LinkedIn, Spoke, and Tribe. In particular, students everywhere had been influenced by the rapid ascendancy of Friendster; many were dismayed to see it stumbling due to server outages caused by its extraordinary growth. Some universities set out to create them, but privacy advocates sounded the alarm that such centralized information repositories could be used by universities for nefarious purposes: to violate privacy or to take disciplinary action against students. Leary university administrators were thus slow to provide the service.
The fact that universities did not quickly build their own services, however, did not matter because college-specific social networking sites began popping up at a number of schools around the country. In 2002, two Wesleyan students created WesMatch, focusing exclusively on matchmaking. The service required students to fill out humorous questionnaires that then translated the results into compatibility ratings. Its entrepreneurial founders had launched a version at Williams College and were expanding to Bowdoin, Colby, and Oberlin. Around the same time, Charlie Cheever had been brought before Harvard’s Administrative Board for downloading student information into a database to let a few friends search through his program to find out who roomed with whom, or which dormitory that cute girl lived in. It was an early version of Facemash, which Zuckerberg was to create the following year, with similar consequences. In August 2003, two University of California at Irvine alumni founded Collegester.com, “a virtual community of free, useful, and enjoyable services ‘for the students, by the students.’” That same fall, a student named Aaron Greenspan became the first to create a social networking site at Harvard. Greenspan first got in trouble for getting kids to join an information-sharing bbs that had used their Harvard emails and IDs as passwords. Then, Greenspan went on to develop a simple web service he dubbed houseSYSTEM, which was ultimately used by several thousand Harvard students including Facebook founder Mark Zuckerberg for a variety of online college-related tasks, such as buying and selling books and reviewing courses. Zuckerberg in fact helped Greenspan at one point, and Greenspan invited Zuckerberg to merge whatever it was he was working on into the HouseSYSTEM. But Zuckerberg declined, saying that Greenspan’s site was “too useful,” which confused Greenspan. An e-mail message, circulated widely from Greenspan to Harvard students on Sept. 19, 2003, described the newest feature of houseSYSTEM as “the Face Book,” an online system for uploading photos and quickly locating other students. But only a few hundred people had paid any attention to “the Face Book.” By January 2004, Adam Goldberg had founded CUCommunity at Columbia. At Yale, the student-run College Council was to launch a dating website called Yale Station on February 12, only a week after Thefacebook’s debut. (Thefacebook was the precursor domain to Facebook.com.)
Zuckerberg was a psychology and computer science double major at Harvard and a middle-class kid, son of a dentist and a psychiatrist from New York. During high school at the prestigious Exeter Academy, Zuckerberg had supposedly been such a good master hacker breaking into computer systems that he had ended up on an FBI watch list. He built his first website at age 15 on Geocities, a popular web community company like Tripod back in the 1990’s. There, Zuckerberg had made a name for himself by creating a computerized version of the game of Risk, he wrote a program to help people in his dad’s office communicate with one another, and he and a high school friend named Adam D’Angelo had created a software program called Synapse, or “The Brain,” a plug-in for MP3 players that allowed the players to “learn” a user’s preferences and create tailored playlists based on that information. Essentially, the program guided users to discover what was new to them. Zuckerberg posted Synapse as a free download on the Web – and almost immediately, major companies such as Microsoft and AOL tried to buy Zuckerberg’s creation. Rumor was that Zuckerberg had turned down an offer by Microsoft of one and two million dollars to go Harvard instead.
Once at Harvard, Zuckerberg spent time in his dorm room writing programs. He created a website called CourseMatch that proved incredibly popular because users could see others who were taking the same courses or majors. Students supplied Zuckerberg with information of the classes they were taking, and Zuckerberg’s program used this information to make lists of classes in common. You could click on a course to see who was signed up or click on a person to see the courses he or she was taking. If a cute girl sat next to you, you could look up next semester’s courses to see whether she had enrolled in any of those as well, or you could just look under her name for the courses she had enrolled in. The status-conscious students of Harvard felt very differently about a class depending on who was in it. Zuckerberg had written a program they wanted to use.
In early November during his sophomore year, Zuckerberg arrived drunk one night, and while blogging scorned over a girlfriend who had just dumped him, decided to start Facemash, Facebook’s predecessor. The site represented a Harvard University counterpart of UC Berkeley’s HotorNot.com that compiled photos from the online facebooks of the various “Houses” at Harvard and placed two next to each other at a time asking users to choose the “hotter” person. Zuckerberg’s roommate, Billy Olson, came up with that concept. The program used an algorithm otherwise used to rank chess players. Harvard at that time did not have an online student directory with photos, so Zuckerberg hacked into protected areas of Harvard’s computer network and copied the houses’ private dormitory ID images. Zuckerberg said he got the idea from the physical facebooks profiling students and staff that were distributed to freshmen at the beginning of the year. The facebook had photos and details about the students, such as their hometowns. Within its first four hours online, Facemash generated 450 visitors and 22,000 photo-views, causing the Harvard servers to crash. And Zuckerberg had only sent the link to a few of his friends. Those who were ranked alerted all their friends, who then went on to rank as well. The site had viralized immediately and become an instant hit. The website brought Zuckerberg notoriety and further scorn from the Harvard female community. Zuckerberg said:
Perhaps Harvard will squelch it for legal reasons without realizing its value as a venture that could possibly be expanded to other schools (maybe even ones with good-looking people…). But one thing is certain, and it’s that I’m a jerk for making this site. Oh well. Someone had to do it eventually…
A few days later, Harvard shut down Facemash, though Zuckerberg claimed to have pulled the plug himself. The Harvard Administration charged Zuckerberg with breach of security, violating copyrights, and violating individual privacy, and Zuckerberg faced expulsion, though ultimately the charges were dropped. Zuckerberg probably did not know it at the time, but Steamtunnels had attempted a similar stunt in 1999 at Stanford, with similar consequences.
Zuckerberg’s programming skills, however, impressed the founders of the Harvard Connection (or ConnectU), which was supposed to become a form of Harvard-focused Match.com with additional social networking functionality. The idea for the service was that it would tell you about parties and provide discounted admission to nightclubs, among other features. The founders hired him to complete their fledgling social networking site after their lead programmer resigned. Zuckerberg took the job and worked ten hours but lost interest in the site and was never paid for his work. He dragged his feet, allegedly because he was busy with other activities, though the founders of ConnectU suspected he was stealing their code and ultimately sued him for damages. (Not surprisingly, so did Greenspan, claiming he had been the original inventor of “The Face Book.”) But all sorts of social networking sites were popping up in dorm rooms throughout Harvard, including one named HarvardParties.com, which linked students to the House facebooks to help them find the girls they had randomly hooked up with the night before. So ConnectU did not have a strong case. By the time ConnectU launched in June 2004, the site had pretty much stalled at the gate and could not compete against Thefacebook in spite of the fact that ConnectU was chock-full of features, was backed by wealthy Harvard families and societies, and had national coverage.
In the meantime, Zuckerberg was so busy with computer projects that he did not have the time to study for the final exam of a history of art class. Zuckerberg had rarely attended the class all semester. So he built a website that would serve as a study guide for the class by uploading 500 Augustan images, with one image per page along with a comments section. He invited others to write notes, and once open, the site proved to be very popular. In the end, the professor said the grades that semester were the highest ever for that class.
Zuckerberg also wrote a program called “Six Degrees of Harry Lewis,” an homage to a favorite computer science professor. He used articles in the Harvard Crimson to try to identify relationships between people, and created a whimsical network of connections to Lewis based on these links. You could type in any Harvard student’s name and the software would tell you how they were connected to Professor Lewis. At one time, Zuckerberg had twelve different computer programming projects going on simultaneously. Zuckerberg said:
I had this hobby of just building these little projects… Most of them were about seeing how people were connected through mutual references.
Zuckerberg’s interest in building websites with social components had arisen undoubtedly from his major but more importantly from the previous summer while living at a Harvard Business School dormitory with D’Angelo, who had launched a provocative project of his own the previous year from his dorm room at Caltech. Called Buddy Zoo, it invited users to upload their AOL Instant Messenger (AIM) buddy lists to a server and compare them to the lists belonging to people who had also uploaded theirs. You could see who shared which friends, thus illustrating your network of social connections. Hundreds of thousands of AIM users tried out Buddy Zoo, and it had a brief online celebrity. But D’Angelo made no effort to commercialize it, and eventually let it die. But it pointed in a promising direction
In January 2004 during the Harvard winter break, Zuckerberg began writing code for a new website, which would eventually evolve into Facebook. Zuckerberg did so in lieu of his other idea of uploading student resumes and letting companies for a fee search for Harvard job applicants. The timing for the site was right. There had been a debate at Harvard the semester before about putting the printed facebook online, students were demanding it, but the university administration was dragging its feet over privacy concerns. On January 11, Zuckerberg bought the domain Thefacebook for one year and used Harvard Crimson editorials to draw ideas about how to build the online version. The fact that so many people had clicked onto Facemash, and voted, had already showed Zuckerberg that there was real interest in checking out classmates in an informal online setting. With Thefacebook, Zuckerberg hoped that people would go online and check out their friends in an online community that they could click into, visit, and browse around. Many Harvard classmates including Zuckerberg were already actively using Friendster, and Zuckerberg believed an exclusive Friendster dedicated to the Harvard community could be a hit. But Thefacebook was not to be “clunky” like Friendster, which had so many users that the site was slow; it was to be simple and clean like Google. It was to follow good design principles such as making the service easy to use and minimizing the number of clicks for users to get things done. And unlike Friendster, Thefacebook would put Harvard’s real social network online and act as a real communications tool aimed at keeping track of your schoolmates and what was going with them. Features such as the classes students take, the dormitories they live in, and what they planned to do over the summer were to give Thefacebook a closer-knit feeling than Friendster, which cast a much wider net. Thus, Thefacebook was meant to combine the best of Friendster, CourseMatch and FaceMash as one integrated and centralized site. But it also drew inspiration from the so-called away messages that users of AIM posted when they weren’t at their computers. These messages became the inspiration for Thefacebook status updates.
By late January, Zuckerberg had modeled the concept of Thefacebook on Friendster, worked on it for a week as a hobby, and with the financial help of his friend Saverin, launched the website on February 4, 2004. Zuckerberg purposefully launched during “shopping week” at Harvard, when classes had begun, and students could maximize the Course Match aspects of Thefacebook. Saverin invested the first $1,000 to get the site off and running by paying $85 for servers in upstate New York in exchange for a 30% stake in the company, responsibility over all business operations, and the title of Chief Financial Officer (CFO). Zuckerberg promised to match this amount. To keep costs low, Zuckerberg used free open-source software like MySQL database, Apache Web server tools, and PHP, the special programming language for website development that governed how Thefacebook’s pages worked. Within one month, half the Harvard student population had joined, and professors and alumni also liked the program because it had met the needs of the Harvard community. Zuckerberg explained the project as follows:
There has been a bunch of hype at Harvard for the last few months about the administration putting together an online facebook for everyone in the school… Everyone’s been talking a lot about a universal face book within Harvard… But what they’re doing isn’t interactive or anything. It’s not what I’m talking about at all. And the Facebook is a pretty generic name. I don’t think it matters where else it’s being used… I think it’s kind of silly that it would take the University a couple of years to get around to it. I can do it better than they can, and I can do it in a week… I got tired of waiting for them to finally put it up, so I just threw this site together myself.
Speaking on behalf of Zuckerberg, Hughes explained:
We originally just released it thinking it was a fun project. But so many people signed up so quickly we were blown away.
According to Saverin, Thefacebook was immediately compelling because of three items on the profile page; every member had to list what they were looking for on the site, their relationship status, and what they were interested in. In Saverin’s view, those three concepts defined college life from parties to classrooms to dorms. Like Facemash, the driver of Thefacebook would be the same thing that drove life at college – sex. The ability to poke people, like the ability to wink in Match.com, added a way to express a general interest in another person without verbalizing it. The feature was reminiscent to the popular “fingering” feature of the earlier Mozilla system, with similar humor related to the ambiguity of the term. As an article in the Stanford Daily noted:
The site seems to be expanding students’ romantic options. According to one account, an anonymous… male, a sophomore, invited an attractive girl that he didn’t know to be his friend. She “confirmed” the friendship… and proceeded to ask the male out. They were set to go out on their first date Friday night. Zuckerberg has also received e-mails from people telling him about new relationships they’re in as a result of the site.
Another former student called it “a giant collection of personal ads… I originally signed up because I found out that this guy I thought was cute was on it.” Likewise, Hughes admitted:
There’s definitely a lot of people who send messages to people in their class that they’d like to have coffee with. I think most everyone knows of a few people who have gone on a few dates because of Thefacebook. By examining profiles of potential love interests, students can attempt to determine if they’ll get along before setting off on a first date.
But the Harvard Crimson noted that there were plenty of other primal instincts at work including “an element of wanting to belong, a dash of vanity and more than a little voyeurism.” There was also a competitive element and a very intuitive user interface that required little or no explanation.
To allay privacy concerns, the Harvard.edu email was crucial because you could only join the site if you were a Harvard student. It proved critical for Thefacebook to use the .edu domain for registration, but other sites at colleged had already begun taking a similar approach. For example, Club Nexus limited itself to Stanford-only addresses as early as fall 2001. Restricting Thefacebook to Harvard made the site exclusive but also more trustworthy because it enhanced the idea that users’ information would remain private in a closed system. Privacy was important; people wanted to have control of what they put on the web, so Thefacebook allowed students the option of how accessible their personal information was to be: Users could make their profiles available to anyone registered for the service or restrict them to students at their own colleges, residents of their dormitories, or only people they recognized as friends. This was especially important for women who needed a sense of security to join the site. Likewise, choosing your own password was integral to avoid the problems Greenspan had had with the Harvard Administration. Zuckerberg emphasized the importance of privacy to the site though with a caveat:
I really went out of my way to build robust privacy settings so users have control over who gets to see every part of their information. People really haven’t complained much about privacy at all.
But how did adoption become viral? Saverin claimed that had Zuckerberg tried to send it to his social groups, the computer science department and the Jewish fraternity, not many girls would have joined Thefacebook, which would have stymied the site’s growth. But Saverin had recently joined the Phoenix Finals Club, a long-standing and prestigious society at Harvard, and he forwarded the link to the Phoenix mailing list, the members of which were all social stars on campus. Saverin believed that getting social stars on the site ensured that Harvard girls joined as well. The Kirkland House mailing list was also useful. Roommate and later Thefacebook programmer Dustin Moskovitz explained:
When Mark finished the site, he told a couple of friends. And then one of them suggested putting it on the Kirkland House online mailing list, which was… three hundred people. And, once they did that, several dozen people joined, and then they were telling people at the other houses. By the end of the night, we were… actively watching the registration process. Within twenty-four hours, we had somewhere between twelve hundred and fifteen hundred registrants.
From there, Thefacebook spread like a virus, with those most susceptible to social influence joining first, thereby creating contagion effects that ultimately compelled those with higher social influence thresholds to join after. Like with other successful innovations, some students who resisted Thefacebook craze called it “a waste of time” but ended up joining anyway after their friends joined. Thus, the mechanism was having friends ask you to join. By Sunday after launch, 650 people registered. 300 more registered on Monday. Within two days of launch at Northwestern, for example, Thefacebook had registered 1,688 students. Northwestern alumnus Erica Birnbaum called it “an epidemic… my whole hall is infected.”
Ultimately, however, Facebook’s success owed a lot to the fact that it began at colleges, which have extremely dense social networks and where people socialize more vigorously than at any other time in their lives. Moskovitz discovered most users of the site had two degrees of separation, as opposed to six on average in the non-college world. Then of course there’s the allure of something that began in the most exclusive halls of academia, as a Harvard connection makes a product less suspect. It also didn’t hurt that college students are preternaturally status-conscious, and the service served as a validation of the scale of your social ambitions even as it measured your success.
In just a couple of weeks, Zuckerberg estimated that more than 5,000 had joined, representing at least 85% of the Harvard undergraduate class. After three weeks, 6,000 had joined. According to Saverin, what neither Zuckerberg nor he had known when they started was just how addictive Facebook was. Users were not visiting the site once but multiple times a day. And they were visiting the site every day. Users spent an inordinate amount of time adding to their sites, their profiles, changing pictures and interests, and most of all, updating friends. Users remained longer on Thefacebook than on any other site. Repeat trial was also astronomical; of those who tried Thefacebook, 67% would come back. Thefacebook had changed the Harvard social scene by successfully moving a large portion of college life onto the Internet. Harvard alumnus Olivia Ma recalled the competitiveness among students of those days:
I remember people competing to see how many “friends” they could accumulate and how quickly, and tracking how many “friends” they shared in common with other “friends.”
Stanford alumnus Mike Rothenberg recalls the sweeping adoption of Thefacebook he lived through on his college campus:
It’s a brilliant idea because it connects names to photos and provides a way to find out about someone without even approaching them. I signed up on Tuesday morning, and I was immediately addicted. Nothing validates your social existence like the knowledge that someone else has approved you or is asking for your permission to list them as a friend. It’s bonding and flattering at the same time.
By mid-February, Saverin and Zuckerberg had a meeting to discuss the future growth of Thefacebook. Saverin, who was paying for the growing server costs, was beginning to see Thefacebook as a business and viewed advertising as the appropriate business model to pursue. But Zuckerberg, who viewed Thefacebook more like a hobby, was more interested in sustaining the site’s explosive growth and did not care for advertising at the time. For that purpose, he brought his roommates on board: Moskovitz as head programmer (though he had yet learned how to program and simply mimicked Zuckerberg’s code and reapplied it to launch the site at other colleges with the help of D’Angelo), and Chris Hughes, a flamboyant gay Southern Democrat, as the head of publicity and outreach. Zuckerberg’s classmate and fellow CS major Andrew McCollum also joined as graphic artist. With the expanded management team, Moskovitz was to get 5% of the company, which was to come entirely from Zuckerberg’s 70%. Hughes’s share was left to be determined later. At that first meeting, they decided to open Thefacebook up to other schools, with Yale, Columbia and Stanford to start.
As the site’s popularity grew, it created controversy. When the founders of ConnectU complained to the Harvard Crimson that Zuckerberg had stolen the Thefacebook code from their site, the newspaper began an investigation. Zuckerberg used his site, Thefacebook, to look up users of the site who identified themselves as members of the Crimson. Then he examined a log of failed logins to see if any of the Crimson members had ever entered an incorrect password into Thefacebook. In the cases in which they had entered failed logins, Zuckerberg tried to use them to access the Crimson members’ Harvard email accounts. He successfully accessed two of them. In any case, Zuckerberg got glowing reviews as a result of some IT work he had done for the student paper during his freshman year.
Thefacebook’s expansion began in late February when the site opened its doors to Columbia (February 25), Stanford (February 26), and Yale (February 29) as part of Zuckerberg’s strategy to confront the existing homegrown social networks available at those schools head on. Launching in the Ivies was easy because Zuckerberg could leverage the interlinked student network among schools to give him access to other schools. Thefacebook was even better-received at Stanford than at Harvard given the school’s Internet-savvy student body in spite of the existence of Club Nexus. Zuckerberg got the help of a childhood friend to get into the Stanford network as well as a list of student email addresses and dormitories. Within twenty-four hours of an article being printed in the Stanford Daily, 85% of Stanford had joined. In fact, Stanford was where Thefacebook’s wide appeal was proven, and Club Nexus fizzled out. Columbia was harder to penetrate because Goldberg’s CUCommunity had 1,900 of the school’s 6,700 students as users. At Yale, Thefacebook faced a similar situation with a dating website and online Thefacebook named YaleStation. Within a month of launch, the site had 10,000 active users.
The expansion of the network sustained the site’s explosive growth. Zuckerberg launched at both Dartmouth and Columbia on March 7. At Dartmouth, a friend of Zuckerberg’s from Exeter was chair of the Student Assembly’s Student Services Committee, and he agreed to promote Thefacebook using the Student Assembly mailing list. The message went out at 10 pm, and by the following evening, 1,700 of Dartmouth’s 4,000 undergraduates had joined. By March 18, the site had a total of 19,600 users, and the process of expansion continued and culminated with the opening of the site to all Ivy League and Boston area schools through March and April. By the end of March, the site had 30,000 students, and Thefacebook was paying $450 per month for five servers. Zuckerberg and Saverin then agreed to invest another $10,000 of seed capital in the company.
Thefacebook, however, had to pace its growth lest it suffer the same issues of scalability that had plagued Friendster when the site began to slow and go down under the strain of insufficient server space. But Thefacebook pacing its growth had another unique advantage: By not launching nationally at all colleges and following an exclusive .edu domain strategy, Thefacebook created a rabid, pent up demand that generated enormous buzz, which increased demand even further. It was positive feedback at its best. Students from schools were Thefacebook hadn’t yet launched regularly came to the site and tried to sign up. They would go on a waiting list and be alerted when Thefacebook came to their school. When the number on the waiting list passed 20% or so of the student body, Thefacebook would turn that school on. As a sophomore of Duquesne later recalled, students knew the date when Thefacebook was to launch on their campus because “we were on the waiting list for months. We were number seven on the waiting list.”
Although Zuckerberg kept each private college apart from other private colleges, the link that permitted users to grant a “friend request” enabled outsiders to get in. The Harvard, Princeton, or Stanford student who ran into an old acquaintance, or met an outsider over a holiday break, could easily permit that person into her hush-hush page and she, in turn, could bring in anyone who would otherwise have been “included out.” In other words, links among people from different schools could be created by the mutual agreement of both people. This agreement became the template for how Facebook connections are established to this day.
The original strategy for adding schools was a “surround strategy,” focused on places where many students who were already Thefacebook users had friends, so the site could spread quickly through free word-of-mouth advertising. By means of example, Hughes explained that after opening at Harvard, Yale was a logical choice as a school where many Harvard students had friends. Boston schools were the obvious next choice. Similarly, Zuckerberg told the Baylor story – how the little Texan university had at first refused to adopt Thefacebook because the school had a social network of its own. So instead of attacking Baylor head-on, they’d made a list of all the schools within a hundred-mile radius of it, and had dropped Thefacebook into those schools first. Pretty soon all the kids at Baylor were seeing all their friends on the website – and they practically begged for Thefacebook on their campus. Within days, the Baylor social website was history. Thus, like a locust, Thefacebook followed a strategy of geographic propinquity, gobbling up every college student market in sight. Through this strategy, Thefacebook was able not only to stem the growth of ConnectU and CUCommunity (which had renamed itself the Campus Network) but also a third one called CollegeFacebook.com. CollegeFacebook.com was a pure copycat in look and tone, and its strategy had been to go after less elite schools that Thefacebook had yet to target.
An accident in March 2004 was to have enormous repercussions on the development of Facebook as a company. Sean Parker – not quite as famous as Shawn Fanning, his original business partner at online music file-sharing site Napster – believed he was being pushed out of his second innovation, Plaxo, a sort of constant and self-renovating online business card system, by Sequoia partner Michael Moritz, and Parker was looking for the next big thing. He had become part of the growing number of Silicon Valley executives who were convinced that social networking would become very big business. Just a few months before, Parker made some connections at the social network site Friendster. He’d convinced Peter Thiel, the guy behind PayPal who had also experienced some run-ins with the gang at Sequoia, to bring Friendster some series D venture capital funding. But Friendster was not going to be Parker’s next home run because the company was already too far along. Plus Friendster had its limitations as it was practically a disguised dating website. Then there was MySpace, the ascendant fledgling site that was growing really fast. Parker had looked into MySpace but decided against the company because he believed the site was a branding tool, not a true social network. One morning at his apartment, Parker noticed Thefacebook while trying to check his email on the laptop computer of a female Stanford student who had spent the night. Parker went on Google and searched for Thefacebook and Zuckerberg, coming up with many articles in the Harvard Crimson. Parker tracked Zuckerberg down and sent an email, playing up his Napster bona fides and offering to introduce Zuckerberg to savvy San Francisco investors who understood social networking. In early April, the email led to a posh dinner in New York City with both Zuckerberg and Saverin.
By April 27, 2004, there were 26 participating schools on Thefacebook social network. At the time, Hughes was differentiating Thefacebook from Friendster. Whereas Friendster was large and anonymous, he said, Thefacebook was grounded in real college communities. More tangibly, whereas people could post pictures and interests on both sites, only Thefacebook allowed students the option of posting their class schedules and seeing the profiles of class rosters. Hughes said:
Anyone you see in your Facebook network you can see in real life. Every day you could eat next to them in the dining hall, pass them on the street.
Parker was only the first of many who would track down Zuckerberg and Saverin for a chance at Thefacebook. By the spring of 2004, Zuckerberg was fielding calls from people interested in investing, and one of Zuckerberg’s classmates had his father – a well-known investor – take Zuckerberg around New York to meet with venture capitalists and executives in the finance and media industries. In the meantime, Thefacebook crossed the 150,000 member mark and was adding thousands more every day. Thefacebook had grown large enough that it had become a full-time job for the management team. Saverin was aggressively soliciting on both national and local levels for advertising and had already run free test ads for a handful of big companies such as AT&T Wireless, America Online, and Monster.com. He’d also sold some advertisements to a few Harvard undergraduate organizations. But the modest advertising revenues were not enough to offset the rapidly-growing server costs.
On April 13, however, Zuckerberg and Saverin officially incorporated Thefacebook as a limited liability company in Florida, under the terms to which the management team had agreed: 65% for Zuckerberg, 30% for Saverin, and 5% for Moskovitz. Again, Hughes’s shares had yet to be formalized. With the incorporation and the continued viral growth, the management team discussed their summer plans. Zuckerberg had looked for an internship but nothing had materialized, so he had decided to move the development efforts to Silicon Valley for the summer, since McCollum had already landed a summer job at EA Sports. Moskovitz gave up a summer job in the Harvard computer lab as a user assistant. Zuckerberg thought Palo Alto would be a good place for Thefacebook, as the town is at the heart of Silicon Valley, which is the center of the computer industry in the United States. Zuckerberg added two interns to go work with the Thefacebook team in Silicon Valley for the summer, paying them $8,000 each from Saverin’s funds. By the summer, the team had decided to take a leave of absence from Harvard to continue working full-time on Thefacebook. In the meantime, Saverin would work in investment banking in New York City, while courting advertisers for the company on Madison Avenue.
In addition, together with McCollum and D’Angelo, Zuckerberg had started developing a side project called Wirehog. Wirehog was basically a bastard child of Napster and Thefacebook, a sort of file-sharing program with a social network feel. Wirehog would be downloadable software that would allow people to share anything from music to pictures to video to documents with friends, via personalized profile pages linked to other friends in a personally controlled network. The idea was, when Zuckerberg was finished with Wirehog, he’d merge it into Thefacebook as an application. One of the other applications Zuckerberg thought of was a mobile interface. You could send messages with a person’s name to m@Thefacebook and include special codes to get friends’ phone numbers or other information sent back to your phone. The only problem was that was unwieldy for ordinary users as they would need to carry around a folded-up cheat sheet to remember how to use it. It was a heady task, especially combined with the Wirehog project. Cool as these were, the features didn’t last long. Meanwhile, both Zuckerberg and Moskovitz would also be continuing to upgrade Thefacebook; they hoped to increase the number of schools using the website from about thirty to over one hundred by the end of the summer.
On May 13, Hughes announced that Thefacebook was getting over 10 requests a day to open at schools not already connected, and he projected that Thefacebook would eventually encompass more than 100 schools. Thefacebook was still emphasizing, however, that it was not a commercial venture. Hughes said the site was primarily about “the recreational aspect of building an identity online.” Maintaining a grassroots feel was clearly an important part of the marketing strategy at the time and contrary to what was taking place behind the scenes – i.e., meetings with potential venture capitalists, investors, and advertisers. But by the end of May, Hughes had to admit the site was weighing offers from a few advertising firms, but only – he said – in an effort to offset the costs of the growing network. By May 25, Thefacebook had 34 schools in its network comprising 120,000 people. The word “facebook” had already become a verb at Harvard, meaning to look someone up using the website.
By May 28, competitors were proliferating on college campuses across the United States. At Dartmouth, students had set out to create a Dartmouth-exclusive site. Campusnetwork.com is another example. As mentioned earlier, ConnectU had been founded at Harvard but was not gaining traction, though by August it had registered 1,660 users and was growing by 5-10% per day. These sites had ill timing; they were launching similar sites at a time when everyone wanted to join Thefacebook, which already had established itself with a strong first-mover advantage.
Toward the end of May 2004, Zuckerberg had another chance encounter with Parker with whom he had been in contact over email but had not seen since their dinner in New York. Now that the semester had concluded, Parker was moving his girlfriend into her parents’ house, and he told Zuckerberg that he was going to be staying with her for a couple of days and after would be temporarily homeless. Zuckerberg invited Parker to move in with them at their cheap sublet right near the Stanford campus on La Jennifer Way in Palo Alto, which was to be paid by an $18,000 contribution from Saverin’s investments. In exchange, Zuckerberg asked for the management team’s right to share Parker’s BMW. Over dinner, Parker related to Zuckerberg he had been pushed out of Plaxo and left with nothing, which served for the young Zuckerberg as an early chastening story of the pitfalls of venture capital financing. Parker knew everyone, and everyone knew Parker, and he took Zuckerberg under his wing. Parker was well connected in Silicon Valley and soon became the front man with investors, introducing Zuckerberg to major venture capitalists, Silicon Valley players, and Internet celebrities. Zuckerberg even went down with Parker to Southern California for high-profile Hollywood bashes. It wasn’t uncommon for fancy cars to park right outside the apartment; it usually meant someone with money was inside. Some guys from the Benchmark venture capital firm wanted to know whether there was a chance of an equity investment. The answer was no, for the time being. A couple of Google executives showed up at Thefacebook to see whether they could work with or even buy the company. Again, the answer was no. Zuckerberg also fielded a $10 million offer from an unnamed New York financier but never seriously considered it. He also fielded a $10 million offer from Friendster, which he also turned down at some point. Thefacebook was becoming the talk of the town, and everybody wanted to meet the whiz kid behind it.
In the meantime, in New York City, Saverin had landed a deal with advertising network, Y2M, in New York City and was getting a few other big media players to make pretty impressive promises. Y2M was a good fit because it sold ads for college newspaper websites. But when Zuckerberg shared Thefacebook’s traffic data, the ad company thought Thefacebook was tracking it wrong. Zuckerberg invited Y2M to monitor the traffic and see for itself. The stunning numbers were not an error, and Y2M began placing ads for their clients immediately, retaining a 30% commission. One of the first advertisers was MasterCard, which received in one day twice the applicants it had expected for the entire four-month campaign. Thefacebook had the right customers – wealthy undergrads at the best schools. Given the results, Y2M offered to invest. But Zuckerberg gave a valuation of at least $25 million, and Y2M decided to hold off.
Maximizing revenue by selling ads was less important to Zuckerberg than keeping users happy. He would allow advertisements, but only on his terms. Advertisers could only use a few standard-size banners. Those who requested customized treatments were refused. Zuckerberg turned down ads from companies he thought were out of keeping with the playful student mood of Thefacebook, including consulting firms and investment banks. Zuckerberg even put little captions above the display ads reading, “we don’t like these either but they pay the bills.” Of course it wasn’t unusual for contemporary Web thinkers to be uninterested in advertising. Sites like Craigslist and Wikipedia were at that time rapidly becoming the Internet’s largest by taking a patently noncommercial approach.
By June 2004, the programming team was working around the clock at adding features to the site and signing up more and more schools. The specter of Friendster’s failure to manage its own growth loomed large. Thefacebook was growing quickly, it was expensive to run mostly due to the heavy use of servers, and thus the company quickly accumulated $50,000 in debt. Zuckerberg invested $20,000 of his own money mostly to add servers at the hosting facility, money he had made and saved by doing programming and website jobs over the summers and in his spare time. Saverin opened a bank account and deposited more than $10,000 of his own money as working capital and also began depositing advertising revenues there. And more spending was clearly going to be necessary. But Zuckerberg, who kept fielding offers, refused to accept any of them. Fortunately, Zuckerberg and Moskovitz had other ways to manage Thefacebook’s growth. They did so by deciding when to launch at new schools. Traffic growth followed a clear pattern – launch at a new school, watch usage and traffic surge and then level off. It was the typical statistical S-shaped growth curve. It allowed Thefacebook to grow methodically even thought it was being run by a bunch of inexperienced kids. Also, the fact that college kids were timed on the semester (or quarter) system ensured that there were peaks around the beginning of the semester/quarter and troughs during exams and toward the end of the semester/quarter, including the holiday periods such as summer and winter breaks.
One area where Parker and Zuckerberg clashed was over Wirehog on which development continued. Parker thought it was a huge distraction from the main work of growing Thefacebook, and having a file-sharing service in the portfolio could be a strike against Thefacebook as it courted early investors, as it had earlier for Parker with Napster. With Wirehog engineer McCollum, Parker flew down to Los Angeles where they met with the chief executives of Warner Bros, who were unsurprisingly wholeheartedly opposed to Wirehog. Ultimately, Parker swayed Zuckerberg, who dropped the project but only after Wirehog did not take off fast enough during its product launch in the fall of 2004. The site was too complicated for most users of Thefacebook, just as Parker had predicted. Still, the philosophy behind Wirehog— using Thefacebook identity and social connections as the instant foundation for another application— remained tightly woven into Thefacebook’s fabric and became the basis for the launch of the company’s developer platform in 2007.
While the young engineers worked to bolster the site and refine its features, Parker started thinking about what it would mean to turn Thefacebook into a company. He hired the lawyer who’d helped set up Plaxo. He started looking for someone to manage “operations,” a fundamental task in Internet companies that involves making sure the data center and servers are operating properly. Up until then, all the work had been outsourced to third-party companies, but Thefacebook was getting too big for that. Parker discovered that his young colleagues didn’t even know the basics of network management, like what a router was. He found an engineer named Taner Halicioglu, who had experience at eBay and worked from home in San Jose.
By June 29, 2004, Thefacebook had a presence at 37 schools comprising more than 170,000 users. It also became clear by then that incoming freshman were considering Thefacebook a rite of passage to college, and thus many high school students wanted to join.
As the fall semester of 2004 loomed, Thefacebook was experiencing significant growing pains and was on the verge of a serious crisis in spite of the fact that its membership over the summer had doubled from 100,000 to 200,000 and grown to 47 colleges and universities. On the social front, the management team practically destroyed the company’s house in Palo Alto, resulting in additional expenses. The neighbors complained about the noise, and the landlord asked them not to throw furniture in the pool, talk outside after 10 pm, or climb on the roof. There was a fair amount of pot smoking at the house in which Zuckerberg did not partake and frowned upon. At a corporate level, Faceboook also experienced difficulties. The company was forced to cancel its national $10,000 Beirut (beer pong) tournament – an idea that came from playing the game at Casa Facebook– following complaints from college administrators. And worst of all, ConnectU sued Thefacebook, a lawsuit that took four years to settle at a value of $65 million from the erstwhile social network’s assets. Advertising revenues were not growing as quickly as expected either and stood at only $3,000 per month. Tension was also growing among the company’s team members about whether Thefacebook ought to be their only priority, since they knew that if they didn’t have enough servers when school opened the service might grind to a halt. On July 28, 2004, Saverin – who was resentful of Parker’s involvement and Zuckerberg’s pursuit of angel capital investment without Saverin – cut off Thefacebook from its bank account, thereby leaving Thefacebook in a desperate situation. Zuckerberg also took $85,000, which his family had sent to him to pay for his tuition but which he used instead to keep the company afloat. For twenty five servers alone, Zuckerberg spent $28,000.
To protect the company from Saverin’s whims and begin the restructuring that would be necessary to raise angel financing, Parker recommended to Zuckerberg to reincorporate the company as a Delaware, LLC. (Parker was averse to venture financing because of his bad experience at Plaxo.) Parker’s most important intervention, however, came in the form of his connection to Reid Hoffman, the CEO and cofounder of LinkedIn, as well as an angel investor and former employee of PayPal. Hoffman had coached Parker through the painful denouement of his relationship with Plaxo and had become a close friend. Parker connected Hoffman to Thefacebook for he knew it was important to keep the social networking patents Hoffman owned close to Thefacebook’s camp. Hoffman could not invest in Thefacebook himself, for such an investment could be viewed as a conflict of interest given his position at LinkedIn. So Hoffman arranged for Parker and Zuckerberg to meet with Peter Thiel, who had co-founded and led PayPal and was now head of multibillion-dollar venture fund Clarium Capital and one of the richest angel investors in the United States. Thiel turned out to be the perfect investor for Thefacebook. He had been a successful entrepreneur, was a fan of Sean Parker, whom he’d gotten to know at Plaxo and through Friendster, and he had already invested in both Friendster and LinkedIn. Parker made a pitch to Thiel to invest in Thefacebook, which he did by agreeing to invest $500,000 of convertible debt capital for a 10.2% stake and a board seat. Hoffman invested an additional $40,000, as did his friend Mark Pincus, and a couple of friends invested small amounts bringing the total financing to around $600,000. The investment gave Thefacebook a $4.9 million valuation. Zuckerberg would still control the majority of the board seats and thus the company itself. As part of the deal, Parker became President of the company.
Thiel’s money enabled Thefacebook to buy new servers on an almost daily basis. To deal with the housing difficulties, Thefacebook decided to move to a nearby town, Los Altos, where the seven members of the management team rented another home that they labeled “Casa Facebook” whose yard backed onto Interstate 280. Thefacebook purchased a company car for which Thiel’s guideline was to keep the cost under $50,000. Thiel’s money also helped the company pay the $20,000 per month in lawyer’s fees the company needed to fend off the ConnectU lawsuit. Thefacebook hired a sales executive to pick up the slack and handle some of the things that Saverin had previously been handling in New York. Y2M scored a coup with a breakthrough ad deal from Paramount Pictures amounting to $15,000 for 5 million impressions to promote the November premiere of The SpongeBob Square Pants Movie. Paramount also pioneered a concept that would later become a critical piece of Thefacebook’s commercial structure – a special group for fans of the movie. Over 18,000 users joined and 2,500 added the movie to their profiles.
In the first week of the fall semester, Thefacebook expanded furiously, adding fifteen or so new colleges. By September 10, the list included many state schools. Students were so entrenched in their Facebook use that they began to abandon their address books because they could use the service to contact anyone by simply entering their name. Users didn’t need to remember or store anyone’s contact information. And users were transfixed with the site, spending more and more time on it as time went by. Two new features gave students more reason to spend time on Thefacebook. Now included on user profiles was the Wall application, which allowed anyone to write whatever they wanted right on your profile. The other new addition was Groups. Now any user could create a group on Thefacebook for any reason. Each group had its own page, much like a profile, which included its own wall-like comment board.
In September alone, Thefacebook doubled membership, to around 400,000. The number hit half a million on October 21 and 750,000 by the end of the month, as growth began to accelerate. The team had figured out over the summer how to automate much of the process of adding a new school, so the painstaking assembly of dorm lists and class schedules was gone.
Parker quickly realized that the demand was so great that Thiel’s money would not be enough to cover all the costs of the company’s rapidly-growing infrastructure. So he contacted a firm called Western Technology Investment, which he knew from his Plaxo days. WTI, as it is known, is in the business of “venture lending.” It makes short-term loans – usually repayable within about three years – to startups at interest rates ranging from 10 to 13 percent. Maurice Werdegar, a partner at WTI, negotiated with Parker a $300,000 three-year credit line that was specifically allocated to cover Thefacebook’s costs of computer hardware and other physical assets, which WTI put a line on until the loan was repaid. The loan closed in December 2004 with its credit line expected to run out by the following July. Werdegar, who was a big fan of Parker’s and had not had any difficulty dealing with Parker at Plaxo, liked what he was hearing from Parker about Thefacebook’s prospects. He asked if WTI could in addition invest $25,000 at the same company valuation Thiel had gotten. When the company’s governance was restructured to accommodate the additional investment, Parker got a board seat, which protected Parker from the fate that had befallen him at Napster and Plaxo.
In the meantime, Zuckerberg took a utilitarian approach to advertising. If costs were going to go up, ad revenues needed to as well. He wanted to make sure Thefacebook earned enough to cover its costs, which were hovering at around $50,000 a month. But he did so by monetizing groups and users, rather than banner ads, which he detested. Thefacebook also allowed students to buy modest ads called flyers, which could be targeted just for students at your school. At even the largest campus, the ads cost less than $100 per day, and it was an effective way for campus groups to promote activities or for a fraternity to announce a big party. Parker extended the system so merchants in college towns could buy ads that targeted students.
By November, Thefacebook had amassed more than 900,000 registered users on 256 campuses. Daily hits on the site had topped 40 million, and 90% of new users logged on a daily basis. (Only 50% of existing users logged in on a daily basis.) On November 30, Thefacebook registered its millionth user, and the site had existed for just ten months. Peter Thiel had recently opened a nightclub and restaurant in San Francisco called Frisson, and he offered up its VIP lounge for a party. Parker, the organizer, piggybacked on it a celebration for his own twenty-fifth birthday on December 3.
By December, Y2M had attracted a number of advertisers including Sprint, AOL and eBay to Thefacebook at an estimated $40,000 a month. Then, Y2M also signed a landmark deal with Apple Computer, which not only sponsored a group on Thefacebook for fans of its products but also paid $1 per month for every user who joined, with a monthly minimum of $50,000. The group was immediately popular, and the minimum was easily exceeded. This was by far the biggest financial development in Thefacebook’s short history, and it alone covered the company’s expenses. Since Apple paid $1 per month per member, as the Apple group grew Thefacebook made more and more. Soon it was generating hundreds of thousands of dollars per month. Rather than make money like Google off of cost per impression (CPM), Thefacebook was beginning to develop a model of cost per acquisition (CPA). The model became the basis for having products, brands, and media properties receive a “home” on Thefacebook, a model that came to be known as “Adseed,” a play on Google’s Adsense. Other companies that sponsored groups, which required a minimum monthly payment of $25,000, included Victoria’s Secret.
One of Hughes’s friends at Harvard’s Kirkland House was Olivia Ma, whose father Chris was a senior manager for acquisitions and investments at the Washington Post Company. Ma’s daughter urged him to take a look at Thefacebook, and between Christmas and New Years of 2004, Ma took Zuckerberg to a Sunday lunch in Menlo Park, near Facebook’s new offices in Palo Alto. The Post was already an investor in a social networking site called Tribe.net, and Ma found Thefacebook enticing because of its focus on a promising demographic: college students and offered an investment. Two weeks later, Zuckerberg visited Ma in Washington and was impressed with the honesty and long-term focus of the Post’s CEO, who immediately made an offer of investment, which by mid-March was $6 million for 10% ownership.
By early 2005, the use of Thefacebook had already become so ubiquitous that the generic verb “facebooking” had come into use to describe the process of browsing others’ profiles or updating one’s own. Thefacebook was getting a lot of media attention. And as soon as word got out that Thefacebook was contemplating an investment, Silicon Valley kicked into high gear. Inquiries started pouring in. Ron Conway, one of the most connected men and a veteran angel investor, was giving Parker advice about who to talk to and what to say. He was also making email introductions to established Silicon Valley companies and key venture capital firms. Investors were most impressed with the fact that 65% of users were returning to the site daily, and 90% came back at least once a week. Growth was so torrid that it occasionally hit 3% per day.
By February 9, twelve venture capital firms, four major technology companies, and the Post were actively pursuing Thefacebook for some kind of deal. Parker had decided not even to pursue investors who needed convincing. A few well-known outfits were out of the running. Kleiner Perkins and Benchmark, two of the Valley’s most eminent firms, were both already up their ears in social networks thanks to their troubled investments in Friendster. They wanted nothing to do with Thefacebook. In the meantime, Thefacebook needed money right away, so Parker borrowed an extra $300,000 from his friends at WTI. By mid-February, Thefacebook had 2 million active users and had been deployed at 370 schools.
In late March, Viacom entered the picture, expressing interest in buying the entire company for around $75 million in order to combine Thefacebook with MTV. Zuckerberg declined the offer, as he had no interest in selling. In the spring, MySpace put out feelers about possibly buying Thefacebook.
By April, Thefacebook was ready to take the Washington Post’s offer, when venture capital Accel stepped in and matched it. Then, Tim Draper of Draper Fisher Jurvetson matched Accel, but Accel went even higher. Accel had lost some status as a VC in the 2000’s and saw Facebook as a good opportunity to restore its mojo. It was down to Accel and the Post. Ultimately, Facebook made a deal with Accel that not only valued Thefacebook at slightly less than $98 million post-investment with an Accel investment of $12.7 million, but also ensured that Zuckerberg, Parker, and Moskovitz would each take a special bonus of $1 million, something unheard of in venture capital circles at the time. Accel partner Jim Breyer said: “I knew the price was just way too high but sometimes that’s what it takes to do the deal.” The Accel cash meant new blood, but it also meant that the small, ragged band of coding brothers who’d been building the site on rickety furniture from rented flats around the area would have to give up their alternative lifestyles and move into real offices, though Zuckerberg insisted on maintaining the young, casual corporate culture that had characterized the company until that time.
After the Accel investment in May 2005, Thefacebook had a presence at 800 colleges and made a big push to improve its product management. One Accel partner proposed that Thefacebook bring on a part-time consultant named Jeff Rothschild, who had co-founded the big business-software company Veritas. Rothschild had both a deep knowledge of data centers and the maturity of a fifty-year-old. Zuckerberg realized that Rothschild could help Thefacebook prevent a Friendster-like breakdown under the strain of growth. Getting veteran Rothschild on board helped legitimize the company.
One thing that became clear quickly was that in the hectic efforts to keep everything operating despite all the rapid growth, many of the young engineers made serious errors. Some risked bringing down the entire site, since its underlying software code consisted of one very long file of instructions, violating elementary design protocols for such a long project. As shown later, this resulted in numerous privacy breaches and potentially-damaging, intellectual-property disclosures. D’Angelo later worked with the other engineers to break up the code into a more conventional segmented structure. Moreover, Thefacebook’s design was awkward and inefficient, reflecting the additive way it had evolved since its dorm-room days. New features were also not being tested; they were simply launched as developed, which sometimes caused serious problems.
Rothschild, trying to figure out who was doing what, discovered that all of Thefacebook’s customer support was being done by a student at Berkeley working part-time from home. The student had a backlog of 75,000 customer support requests. Rothschild advertised on Thefacebook for a customer support representative and hired a recent Stanford grad. The two quickly concluded they needed a larger staff. They rustled up six more applicants. Rothschild then held a group job interview and hired them all. Even still, the queue of unanswered requests grew to 150,000 before it started dropping. People had questions about everything from how to change their profile picture to whether they could change their name once they got married.
Another major new figure who joined the life of the company around this time was investor and entrepreneur Marc Andreessen, who became a close Zuckerberg adviser. Andreessen was one of Silicon Valley’s most revered innovators and entrepreneurs as a result of his co-founding Netscape Communications and later two more important and successful companies, while investing in scores more. Thiel and his former aide Matt Cohler introduced Andreessen to Zuckerberg, thinking Andreessen could help the young CEO how to grow Thefacebook.
Inside the company, the young pioneers began to realize that they had a unique database about people that could be tapped for many purposes, including micro-targeting. The combination of real validated identity information and extensive information about individuals could yield insights no Internet service previously had seen. Thefacebook team spent hours writing algorithms for pattern matching within Thefacebook’s data. This resulted in the introduction of Thefacebook Pulse, which enabled users to track the books, movies, and music that were most popular on Thefacebook as a whole and/or on given college campuses. But Thefacebook was still unable to capitalize on the monetization opportunities provided by its data analytics at that time.
Another major project in the summer of 2005 was acquiring the Internet address Facebook.com so the service could change its name. Parker, especially, was offended by the awkward inclusion of the article the in Thefacebook. He spent weeks negotiating with AboutFace, which as mentioned before used its Facebook.com address to market software that companies used to create employee directories. AboutFace was willing to sell, but they wanted $200,000 cash. Thefacebook paid the price, and on September 20, 2005, officially became Facebook.
Rebranding Facebook would turn out to be Parker’s last important act as company president. In the last week of August, Parker was on a kite-boarding vacation in North Carolina, where he had rented a house right by the beach with several friends, including a young woman who wasn’t twenty-one and who was his assistant at the company. One night midway through their vacation week, they threw a party and invited the kite-boarding instructors who in turn invited a bunch of their local friends. The party got so big that people began dropping in off the beach. Then two nights later, the final night, they hosted another, smaller gathering with the instructors. The group was drinking beer when a horde of police burst in with drug-sniffing dogs and a search warrant naming “Scott Palmer.” Facebook CEO Parker was arrested on drug charges and was forced to resign, lest Breyer file a lawsuit for the other board members not being informed earlier.
In the fall, Facebook decided to launch the service for high school kids by authenticating people on the basis of existing users. So college freshmen and sophomores were encouraged to invite their friends who were still in high school. Then those users could invite their own friends. It meant a slower start for the high school version of Facebook, since the company could no longer follow the approach of launching on a school-by-school basis. But Facebook did create separate “networks,” or membership groups, for every one of the country’s 37,000 public and private secondary schools. Initially, the high school site operated as a separate “Facebook.” Though high school users also logged in at Facebook.com, they couldn’t see college users’ profiles. Membership grew painfully slow at first, but by late October thousands of high school students were joining the service each day. Once again, Facebook capitalized on the inherent coolness of college kids, but it extended the coolness factor to capitalize on the pent up demand of high school kids who looked up to them. Overall, at that point, about 20,000 new users were joining daily, and the site went from 3 million users in June to 5 million by October 2005, with over 1,800 schools in the network. At almost every one, Facebook had at least a 50% penetration rate. Users were viewing 230 million pages daily on Facebook, and revenue climbed to about $1 million per month. The 5-million user milestone led to another celebration at Thiel’s Frisson San Francisco nightclub.
A few weeks after Facebook hit 5 million users, the company added a new feature that would transform its service: Facebook Photos. To keep the feature simple, facebook decided that the photos would be tagged in only one way: with the names of the people in them. People who were tagged then received a message alerting them about it, and an icon appeared next to their name on the lists of friends that appeared on each user’s page. Now there were two ways on Facebook to demonstrate how popular you were: how many friends you had, and how many times you had been tagged in photos. The tags on a photo automatically linked the photo to people throughout the site. In short order, the photos feature became the most popular photo site on the Internet and the most popular feature of Facebook. A month after it launched, 85% of the service’s users had been tagged in at least one photo. Everyone was being pulled in whether or not they wanted to be. Immediately, the question shifted to whether Facebook could handle all the new data and traffic. The feature put a massive burden on the storage and servers. Within six weeks, the photos application had consumed all the storage that Facebook had planned to use for the coming six months. Having data center software veteran Jeff Rothschild on hand proved fortuitous. By late 2009, Facebook was hosting 30 billion photos, making it the world’s largest photo site by far.
What was it that made photos so successful? Well, one thing was that you could easily find new photos your friends uploaded. Each person’s profile included a “dashboard page” that showed which photo albums had most recently been updated. It seemed that users wanted to know what was new. Another recent innovation had been to order the list of friends on each user’s home page according to which profiles had been changed the most recently. They called that “timesorting,” which won raves from users. Each time someone changed their profile picture, it quickly led to an average of twenty-five new page views.
In the meantime, Facebook’s success began to attract international imitators. A site called studiVZ (from the German for “student directory”) in Germany now borrowed Facebook’s design, making red the elements that on Facebook were blue. Otherwise, the site was a pretty shameless imitation. It launched at German universities in October 2005 and was an instant success. By January 2007, studiVZ had 1.5 million users and sold to the powerful Holtzbrinck publishing firm. Facebook was so worried that this might preclude its ultimate success in Germany that in late 2007 it came close to buying studiVZ for about 4% of Facebook’s total equity. The prospect of a purchase was made easier, ironically, because the imitation was so complete, making the integration of services much easier to implement. Another imitator, which launched around the same time in China, called Xiaonei, blatantly copied some of Facebook’s software code and even initially included at the bottom of each page “A Mark Zuckerberg Production.” Xiaonei too was a hit, garnering millions of users.
By November, Viacom was again making overtures to buy Facebook, so were NBC, Microsoft, Time Warner, News Corp., and Yahoo. In February 2006, Viacom offered $1.5 billion to buy Facebook. In June 2006, Yahoo offered $1 billion. In July 2006, Time Warner tried to divest two businesses to put enough money together for a $1.1 billion bid for Facebook. Facebook declined both times. In the meantime, Zuckerberg reached a deal with Time Warner – which owner AOL – to enable AIM instant-messaging (IM) system users (many of whom were also Facebook users) to invite their IM buddies to join Facebook. It quickly became a major source of referrals. But Facebook was still burning tons of cash. It couldn’t keep endlessly pulling in investment money to cover its losses, no matter how much contempt Zuckerberg had for ads. Luckily, Google, Microsoft, and Yahoo all wanted to talk about a deal to place display ads on Facebook, so Zuckerberg authorized his deputies to begin negotiations. Facebook ended up signing a deal with Microsoft for display ads and later sold a 10% share to Microsoft for a $15 billion valuation (plus Microsoft’s veto power to block any potential deals between Facebook and Google).