West called Cohler, who told him that Zuckerberg only wanted to have CEO-level conversations. If Viacom CEO Tom Freston would partic.i.p.ate, Zuckerberg would come for a meeting. It was quickly arranged. Cohler and Zuckerberg flew to New York to meet with Freston and MTV Networks CEO Judy McGrath. Freston, solicitously, explained that there seemed great synergy between MTV and Facebook because of how much their audiences overlapped. He said he"d love to find a way to work together. He suggested, for example, that Viacom could help Facebook develop content for its growing audience. "We think of ourselves as a utility," Zuckerberg replied brusquely, dismissing the idea. Viacom, Freston continued, could also a.s.sist Facebook in extending its reach into an older audience. "I"m pretty much focused on high school and college," answered Zuckerberg. Why the two had flown all the way to New York somewhat mystified the Viacom executives. "It was a no-thank-you meeting," says one Viacom attendee. But Viacom did not give up.
In early November 2005, Michael Wolf, a longtime media industry consultant at McKinsey & Company, joined MTV as president, reporting to McGrath. He almost immediately took on the task of cultivating Zuckerberg.
Whenever MTV held a focus group among the college students who were its core demographic audience, they talked incessantly about Facebook. It gave Viacom a unique and early window into the power of this phenomenon. Viacom executives fretted that this new form of media might upstage them, and they wanted to get a foot in. Freston and his executives at MTV were also worried that News Corp."s Fox networks were going to use their new ownership of Mys.p.a.ce to gain an advantage with TV advertisers. It seemed likely that a new kind of package deal including both social network and television components could soon emerge, at least for programming aimed at young people.
Wolf flew out to Palo Alto to visit Zuckerberg in his office. The Facebook CEO was in T-shirt and shorts, wearing his trademark rubber Adidas sandals. These had become so notorious that as Wolf arrived, an a.s.sistant was nailing one of the old worn-out sandals to a board. It was going to be given to one of Facebook"s programmers as an award. Wolf considered himself to be cultivating Zuckerberg, and merely wanted with this meeting to start a cordial dialogue, but he did ask whether the CEO was thinking about selling the company. "I don"t want to sell," Zuckerberg replied. "What kind of number might make you interested anyway?" Wolf asked. "I think it"s worth at least $2 billion," said the kid who had launched Facebook in his dorm room twenty months earlier.
Shortly before this, an aggressive thirty-five-year-old dealmaker from Amazon.com named Owen Van Natta had joined Facebook as vice president of business development. The upbeat veteran executive was hungry for impact and authority, and had an enormous amount of energy. After only five weeks Zuckerberg promoted him to chief operating officer. Van Natta created Facebook"s first strategic plan and immediately started bringing some order to what remained a chaotic and ragtag operation. The new COO wasn"t shy about exercising his authority, and fired a number of engineers and other employees who had been recruited pell-mell earlier in the year. But Van Natta"s greatest skill, honed at Amazon, was in negotiating deals. He would soon get a chance to prove himself.
Van Natta was annoyed that MTV"s Wolf had figured out that the best way to reach Zuckerberg was by instant-messaging him and had thus been able to make an appointment directly with the CEO. Van Natta told Wolf in the future to go through him instead. Wolf ignored the instructions. Instead he periodically IM"d Zuckerberg to say that he planned to be in Palo Alto-whether or not it was true-and suggest a dinner. If Zuckerberg agreed, he"d fly out.
Wolf was only one of many top media and technology executives pursuing Zuckerberg. Facebook was hot. The office and the University Cafe down the block-the favored rendezvous-became a parade of big names. "The guys from NBC are coming by this afternoon." "When is that meeting with Microsoft?" "Peter Chernin is here!" (He was Murdoch"s top deputy at News Corp.) "Did you hear that Zuck met with Dan Rosensweig from Yahoo?" There were meetings about a deal with AOL, which owned the AIM instant-messaging system that Zuckerberg (and most of Facebook"s users) used every day. For a while discussions centered on whether there was a way to build a special version of AIM for Facebook. Finally the companies struck a deal that enabled AIM members to invite their IM buddies to join Facebook. It quickly became a major source of referrals.
There was a lot of grumbling about all the Zuckerberg meetings, especially among the growing number of not-twenty-one-year-old executives whom recruiter Reed was helping hire. It appeared to many of these guys (they were almost all men) that Zuckerberg was willing to talk to anybody anytime about anything, especially if that person was a CEO. What did all these meetings mean? Was Zuck about to sell the company? Will we become part of Viacom or Yahoo or News Corp.? Are we all going to get rich? And for the younger, more idealistic ones-is this the end of the Facebook miracle? They sometimes wistfully discussed whether they ought to be looking for a new CEO.
Zuckerberg wasn"t bothering to explain his thinking. He thought of these meetings as a learning process and didn"t feel he had much to explain to the staff. After all, he had no intention of selling his company. And ironically, part of the problem stemmed from his good manners. He readily agreed, out of both curiosity and politeness, to meet with the honchos who came calling. And he listened politely, if impa.s.sively, during the day when Van Natta and the other older staffers were bending his ear. But late at night he continued to huddle more honestly with confreres Cohler, D"Angelo, Moskovitz, and frequently still with Parker. But so circ.u.mspect is Zuckerberg that sometimes they too were in the dark about his ultimate intentions. And everybody was painfully aware that he was in complete control of the company"s destiny.
Reed was getting frustrated. She had helped bring in most of the older men who were feeling sidelined and who were now getting worried. She was proud of the quality of the team she"d helped a.s.semble but saw the staff being overwhelmed with what she calls "dorm-room misinformation." Sean Parker may not have been an ideal company president, but he was pretty good at communicating. After Parker left, Zuckerberg gained more authority, but he didn"t necessarily want it. Reed had never gotten along with Parker, but it was almost worse without him. Communication seemed to be completely breaking down.
Politics were also getting heavy. Doug Hirsch, Facebook"s vice president for product and a Yahoo veteran, was offending some of the other executives, many of them also newly hired. They thought he was trying to lead talks with the many companies that wanted various kinds of deals. Why was he not just sticking to product issues, they complained? Part of the reason was simply that Hirsch already knew many of the players from his Yahoo days. They would call him up and suggest exploratory meetings. Hirsch wasn"t getting along very well with Zuckerberg, either. Hirsch was hired because so many people had told Zuckerberg that he needed someone else to head product development so he could focus on corporate matters. The CEO had been ambivalent all along about hiring someone as VP for product, since he considered that his own bailiwick. "Doug kind of felt he was there to be adult supervision," says Cohler, "and that was certainly not what any of us were thinking when we hired him." Hirsch himself says that some of the people he spoke to before he was hired had led him to believe he might eventually be a candidate to become CEO.
Reed had become a close observer of all the unhappiness, partly because she had one of the only private offices at the company, which she needed for candidate interviews. A copy machine had been moved out of an oversize closet and she had installed a noren noren j.a.panese door curtain for privacy. Next to her desk was a large sculpture of the Hindu G.o.d Ganesh, the remover of obstacles. But Ganesh didn"t appear to be working. Many employees came to her office to gripe. Zuckerberg wouldn"t listen, they said. Zuckerberg should be replaced. Zuckerberg didn"t know what he wanted to do with the company. j.a.panese door curtain for privacy. Next to her desk was a large sculpture of the Hindu G.o.d Ganesh, the remover of obstacles. But Ganesh didn"t appear to be working. Many employees came to her office to gripe. Zuckerberg wouldn"t listen, they said. Zuckerberg should be replaced. Zuckerberg didn"t know what he wanted to do with the company.
Finally, Reed reached the end of her rope. "The morale of the executives was imploding," says Reed. "The rumor mill was churning, and Mark wasn"t communicating with anybody about what was really happening. The team was almost ready to mutiny." Zuckerberg was on the East Coast at one of his many meetings. She decided to intercept him before he went back to the office. She instant-messaged him, asking to meet on his way home from the San Francisco airport. But his plane was delayed, and they didn"t finally get together until 2:30 A.M A.M. Reed came down from her home in Marin County, over the Golden Gate Bridge, and they converged in downtown San Francisco. Zuckerberg arrived in a stretch limo, which somebody had mistakenly ordered for him.
They sat in the neon glow of an all-night diner. Reed unleashed her frustration. "Mark-we"ve pulled together a team of thoroughbreds but they"re locked in their stalls. n.o.body knows what"s going on. If you want to sell your company, then stop d.i.c.king around and say you want a billion dollars. Owen can go and get that offer. If it"s two billion, say that. If you don"t want to sell, then say that!"
"I don"t want to sell the company," Zuckerberg answered, in his typical unflappable manner.
"Then stop taking all these meetings with Viacom and Time Warner and News Corp.! You"re sending the wrong message." Then she unleashed her final barrage. "You"d better take CEO lessons, or this isn"t going to work out for you!"
"So now you"re finally being straight with me," Zuckerberg replied, turning more animated. "This is the first time I feel like you"re telling me what you really think."
He had defanged her. She could no longer be angry. He actually was listening.
Over the next few weeks, Reed noticed a distinct change in Zuckerberg. For one thing, he did agree to start seeing an executive coach to get lessons on how to be an effective leader. He started having more one-on-one meetings with his senior executives. The week after the confrontation he called the entire staff together for Facebook"s first "all-hands" meeting. He was feeling sick so he conducted the entire meeting sitting cross-legged on the floor.
Zuckerberg took the executive team to an off-site meeting where they could talk about goals and establish better communication channels. When Moskovitz heard about this he was dubious. "Do I have to fall back into people"s hands so they catch me or something?" he said. "Because I"m not doing that s.h.i.t."
Zuckerberg started doing a better job explaining where he thought the company was going. He wanted to make Facebook into a major force on the Internet, and not see it taken over by someone else, he repeated endlessly. He was getting better at explaining his priorities to his staff. His presentations included the simplest of slides-sometimes with just one bullet point, like "Company goal: grow site usage." The team was mollified. Reed cheered up.
Zuckerberg called Doug Hirsch into his office and they agreed it wasn"t working. Hirsch wasn"t officially fired, but it made no sense to stay. He"d been at the company four months. Zuckerberg had chafed at some of Hirsch"s product initiatives, and they disagreed about some key projects Zuckerberg was planning. Hirsch was also aggressively coming up with ways to use Facebook"s product to create more revenue, which in most companies would be routine. But in this one, back then, it was near apostasy. And there was talk among employees about unauthorized meetings he had supposedly had with solicitous companies like Google. To this day, many of Zuckerberg"s young allies insist that Hirsch "was trying to secretly sell the company." But of course he couldn"t have done that.
From the perspective of Moskovitz, who observed it all up close, this was just another example of a repeating pattern. "It"s the same story with many of the executives," he says matter-of-factly. "Mark wanted to build the product out and focus on revenue as late as possible. And they wanted to make sure they had a business."
Reed brought needed structure to Facebook"s management, but very few of the staffers she hired worked out in the long run. Hirsch was just the first of many who left within a year. Those in Zuckerberg"s circle blamed her for bringing in people who didn"t appreciate Facebook"s unique mission and culture. Some of these stalwarts-the ones who survived-took to calling Zuckerberg"s new executive coach "Wormtongue," after an evil adviser to the king in Tolkien"s Lord of the Rings. Lord of the Rings. Criticism was coming from the outside as well. Tech industry bloggers pointed to Facebook"s revolving-door management and said it suggested internal chaos. But Zuckerberg"s adviser Marc Andreessen gives the CEO credit for being decisive about making changes when people weren"t working. There"s no way, Andreessen says, that a fast-growing company can consistently make the right hiring decisions. Better to quickly remedy the inevitable wrong ones. Criticism was coming from the outside as well. Tech industry bloggers pointed to Facebook"s revolving-door management and said it suggested internal chaos. But Zuckerberg"s adviser Marc Andreessen gives the CEO credit for being decisive about making changes when people weren"t working. There"s no way, Andreessen says, that a fast-growing company can consistently make the right hiring decisions. Better to quickly remedy the inevitable wrong ones.
Zuckerberg preferred working with people his own age. He believed they were superior programmers, for one thing. Sometime later, at a small conference, he showed his stripes in talking to a bunch of other entrepreneurs. "I want to stress the importance of being young "I want to stress the importance of being young and technical," he said, according to the VentureBeat blog. "Young people are just smarter. Why are most chess masters under 30?" You can imagine how reading that made the growing number of Facebook executives in their thirties and forties feel. and technical," he said, according to the VentureBeat blog. "Young people are just smarter. Why are most chess masters under 30?" You can imagine how reading that made the growing number of Facebook executives in their thirties and forties feel.
Even as he was trying to learn better how to exert authority and manage his troops, Zuckerberg wasn"t managing his own health very well. Or maybe the stress of Facebook was finally getting to him. He began fainting regularly, in the office and elsewhere, sometimes in the middle of a meeting or while he was sitting at his computer. His friends told him he should get more sleep and actually eat regular meals.
At a Fortune Fortune magazine dinner in early December 2005 that I hosted as the program director of a tech-centric conference called Brainstorm, I asked everyone at the large table to briefly talk about what was most on their minds. When his turn came, Jeremy Philips, a top strategist at News Corp. and close adviser to Rupert Murdoch, said how pleased his company was to have bought Mys.p.a.ce and mentioned that Facebook also seemed very interesting. magazine dinner in early December 2005 that I hosted as the program director of a tech-centric conference called Brainstorm, I asked everyone at the large table to briefly talk about what was most on their minds. When his turn came, Jeremy Philips, a top strategist at News Corp. and close adviser to Rupert Murdoch, said how pleased his company was to have bought Mys.p.a.ce and mentioned that Facebook also seemed very interesting.
Viacom"s Michael Wolf left the dinner in a panic. "Oh my G.o.d, they"re talking to Facebook," he fretted. Viacom chairman Sumner Redstone would hit the roof if he lost out to Murdoch yet again. Wolf immediately called Zuckerberg and asked him point-blank if Facebook was considering selling to News Corp. Zuckerberg conceded that the two companies had talked, but said that he thought News Corp. was too Hollywood, and in any case media companies like that didn"t understand technology ones like Facebook. Wolf didn"t take the message as it was probably intended-to suggest that Viacom was also not appealing to Zuckerberg.
In mid-December, Wolf got in touch with a better offer than a meal at a local restaurant. He was planning to be in San Francisco with the Viacom corporate jet, he claimed. Would Mark like a ride back to New York for the holidays?
Zuckerberg took Wolf"s bait. Since Viacom"s corporate planes were in fact unavailable, Wolf chartered an unmarked, top-of-the-line Gulfstream G5 for the trip from San Francisco airport to Westchester County Airport, near Zuckerberg"s parents" home in Dobbs Ferry, New York. Wolf flew out that morning from New York on American Airlines. The MTV executive was waiting aboard the G5 as if it were the most normal thing in the world when Zuckerberg arrived, late, about 5:30 P.M P.M. Then, as Wolf had shrewdly planned, they spent five uninterrupted hours together aboard the plane. He was resolved to find a way for Viacom to buy Facebook.
For much of the trip, however, Zuckerberg was in control of the conversation. Zuckerberg interrogated Wolf about MTV"s business. How did companies like Viacom make their money? How much did MTV charge for advertising? What amount of that was profit? How do you build your audience? Wolf tried to steer the conversation back to how MTV could work with Facebook. He talked about how MTV"s ad sales team could use its access to big advertisers to help sell Facebook ads. And he noted that MTV"s big hits like Laguna Beach Laguna Beach and and The Hills, The Hills, watched by millions of teenagers and young adults, were perfect places to promote Facebook. Zuckerberg said he had noticed that during the hours those shows aired, Facebook"s traffic slowed discernably. watched by millions of teenagers and young adults, were perfect places to promote Facebook. Zuckerberg said he had noticed that during the hours those shows aired, Facebook"s traffic slowed discernably.
During the trip Zuckerberg took to admiring the G5. "This plane is amazing," he said.
"Maybe you should just sell a piece of the company to us," Wolf replied. "Then you can have one for yourself."
Wolf invited him to sit in the jump seat in the c.o.c.kpit as the powerful corporate jet landed at Westchester. When it pulled up to the private aviation terminal, two cars were waiting. One was Wolf"s corporate black car to drive him into the city. The other was the Zuckerberg family minivan, from which Mark"s parents emerged. They beamed and gave their son a big hug. It was as if he were merely coming home from a semester at college.
Wolf flew out to Palo Alto again in January 2006 and brought MTV"s head of advertising strategy. Zuckerberg suggested they dine at the Village Pub in Woodside, the same fancy restaurant where he"d had his fateful dinner with Jim Breyer. He brought along Cohler and Van Natta. Wolf had an elaborate PowerPoint presentation showing how the two companies could work together. At the table he suggested a deal in which Viacom would buy a piece of Facebook in conjunction with a big ad partnership. Zuckerberg listened politely, but made it clear that he wouldn"t even contemplate any deal that could involve him losing his absolute control over company decision making.
In early February, Wolf made yet another trip to Palo Alto. He and Zuckerberg were becoming chums, and they took a long walk around the palmy, well-groomed streets. For some reason they stopped by Zuckerberg"s modest one-bedroom apartment. The place was messy, though mostly devoid of furnishings. There was a mattress on the floor with sheets askew, piles of books, a bamboo mat on the floor, and a lamp. Then they headed for dinner at a nearby restaurant. Wolf popped the same question he"d asked on the plane. "Why don"t you just sell to us?" he asked. "You"d be very wealthy."
"You just saw my apartment," Zuckerberg replied. "I don"t really need any money. And anyway, I don"t think I"m ever going to have an idea this good again."
The conversation wove back and forth and Zuckerberg reiterated that he believed Facebook was worth $2 billion and wouldn"t talk about selling it for less. "It wasn"t like "I want $2 billion,"" says Wolf. "It was "If you pay me $2 billion I don"t want to sell. Thank you."" Zuckerberg finally said it made more sense for them to just talk about some kind of partnership.
A thwarted Wolf went back to New York and met with McGrath and Freston. They weren"t interested in a partnership. They-and Redstone-wanted very badly to own Facebook. So Freston decided to just make an offer. He sent Zuckerberg a letter proposing Viacom would pay $1.5 billion to buy the two-year-old company. The money was to be paid out 51 percent in cash and the rest over time, depending on how well Facebook"s business performed. It was by far the most significant and concrete offer Facebook had ever received. Zuckerberg didn"t even respond.
A week or so later, Wolf called Zuckerberg and they had a few desultory conversations, to no effect. Wolf met with both Peter Thiel and Jim Breyer, complaining of Zuckerberg"s tepid reaction, but both said they couldn"t do much to intervene. Van Natta, by contrast, confided to Wolf that he himself was trying to convince Zuckerberg to sell.
Meanwhile the Viacom team had heard that Yahoo might be talking to Facebook as well. The elite precincts of media mogulhood are like a small town. It happened that Viacom"s Freston played tennis regularly in Los Angeles with Yahoo CEO Terry Semel. One day on the court Freston tried to sound out Semel to learn whether he was talking to Facebook. He got the impression the answer was yes. The pressure on Viacom increased.
Up to this point, Wolf had taken painstaking measures to keep the Facebook talks secret. Few others at Viacom even knew about them. Freston and McGrath thought one reason Murdoch had been able to swoop in and bag Mys.p.a.ce was that Viacom"s talks with that social network had been too public. But at the end of March, But at the end of March, BusinessWeek BusinessWeek"s online edition published a story t.i.tled "Facebook"s on the Block." It reported the incomplete fact that the company had turned down $750 million dollars and hoped to get $2 billion. The article didn"t say Viacom had been the bidder, but speculated about its interest. To Wolf and his colleagues, this was embarra.s.sing. They presumed Facebook had leaked the info to elicit additional bids. And sure enough, shortly after the article appeared, Zuckerberg called and said he still wanted to talk. published a story t.i.tled "Facebook"s on the Block." It reported the incomplete fact that the company had turned down $750 million dollars and hoped to get $2 billion. The article didn"t say Viacom had been the bidder, but speculated about its interest. To Wolf and his colleagues, this was embarra.s.sing. They presumed Facebook had leaked the info to elicit additional bids. And sure enough, shortly after the article appeared, Zuckerberg called and said he still wanted to talk.
Then Facebook came close to selling out. Van Natta and Zuckerberg came to New York. Wolf flew back out to Palo Alto. With several Viacom colleagues, Wolf camped out in a Facebook conference room. Zuckerberg, Cohler, and Van Natta would come in, negotiate, then retreat to another nearby conference room. The Viacom team would walk around the block. Back into the conference room. Another tete-a-tete. Mark wanted more cash up front. Viacom wanted guarantees on performance before it would pay the remainder of the $1.5 billion. Van Natta wanted fewer restrictions on the payout. Wolf finally agreed to increase his initial payment to $800 million in cash. But they continued to quibble about the remaining $700 million. Neither side had an investment banker a.s.sisting them, as would be routine in most such talks. Wolf knew Zuckerberg well enough to realize that bringing in cold-blooded Wall Street experts would only further spook him.
But Wolf"s bargaining leverage was limited. Viacom"s chief financial officer was leery of paying too much for a company that for all its online presence remained puny in financial terms. Facebook had only seen around $20 million in revenues over its entire history to that point, with effectively no profit whatsoever. It planned on $22 million in revenue for 2006 and $55 million for 2007, executives told Wolf, but the Viacom delegation was skeptical it would reach those numbers. Paying $800 million was really stretching it.
In the end the two sides could not agree on how Facebook would earn its additional $700 million. The Facebook negotiators felt the deal"s terms were too complicated and the payout uncertain. Zuckerberg seemed to be getting cold feet anyway. He was saying things like "Google was smart not to sell early. Look at how well they did." Wolf responded that Google had hundreds of millions of dollars of profits before it went public, and Facebook had none. But to Zuckerberg, what was more significant But to Zuckerberg, what was more significant was that Facebook had by then become the seventh-most-trafficked site on the Internet, with 5.5 billion page views in February, according to the measurement firm comScore Media Metrix. was that Facebook had by then become the seventh-most-trafficked site on the Internet, with 5.5 billion page views in February, according to the measurement firm comScore Media Metrix.
As the Viacom deal was petering out, Facebook did some of its own financial maneuvering. It raised more money from venture capitalists, but for this second VC round (known as Series C because it was the company"s third financing), the pre-investment valuation was $500 million, five times the $97 million postinvestment valuation Accel had agreed to eleven months earlier. Premiere venture firm Greylock Partners led the April round, joined by Meritech Capital Partners. In addition, Peter Thiel and Accel Partners each put in more money and added to their Facebook holdings. Altogether Facebook received an infusion of $27.5 million. It significantly relieved the financial pressure and made it considerably easier for Zuckerberg to walk away from Viacom.
Facebook"s success was attracting another sort of attention-from international imitators. Though the company had begun expanding to select elite schools in English-speaking countries outside the United States, it had no presence in Asia and virtually none in Europe. 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 it was a pretty shameless imitation. It launched at German universities in October 2005 and was an instant success. By January 2007 it 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 percent of Facebook"s total equity. The prospect of a purchase was made easier, ironically, because the imitation was so complete. That would make integrating the two services much easier. Another imitator, which launched around the same time in China 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 many millions of users.
Despite his Mys.p.a.ce coup, News Corp."s Murdoch grew ever more intrigued by Facebook. He and Zuckerberg got to be fairly good friends. The mogul was charmed by the pa.s.sion of the young CEO, and Zuckerberg liked Murdoch"s big-picture view of how media was changing. Murdoch, almost uniquely among media leaders, had accepted that the Internet was transforming the landscape for all media companies. He considered his purchase of Mys.p.a.ce just one in a series of major moves. But he couldn"t understand why Zuckerberg thought Facebook, which had far fewer users at that point, was worth several times what he"d paid for Mys.p.a.ce. The conversations never got as serious as those with Viacom, but they would gain momentum, then peter off as Zuckerberg"s interest declined.
Zuckerberg was getting a little c.o.c.ky. Everybody wanted to talk to him. Every company seemed to want to buy Facebook, and everybody seemed to want to use it. And he had noticed another thing-every offer he got for the company was higher than the last. Meanwhile, the service"s growth was steady. If it was going to keep getting bigger, it would keep getting more valuable. He didn"t want to sell anyway, so there was no urgency to any of these conversations.
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. Zuckerberg authorized his deputies to begin negotiations. To him it seemed like easy money. He wasn"t going to give them much onscreen real estate anyway.
Facebook was now so successful it was beginning to saturate the college market, operating at thousands of schools. At almost every school it opened, the majority of students became users. Its success at high schools reinforced Zuckerberg"s belief that Facebook had the ability to spread quickly among new groups. What mattered was that the target group needed to include lots of dense, overlapping relationships.
And what was the mother of all such communities? The workplace. Zuckerberg decided to launch what he called work networks. It would be Facebook"s first effort to recruit adults to its service. A work network would be set up at a company the same way Facebook established a closed student network at each university. The default privacy setting was that members of such a community could all see one another"s information. Zuckerberg believed work networks would extend the company"s ubiquity out of the academy into the whole country, and maybe even ultimately the world, or at least to everyone who worked for companies. It was very different from Facebook investor Reid Hoffman"s LinkedIn, which was structured more as a resume-based network and did not so much emphasize day-to-day communication or workplace social connections.
In May 2006 the work networks debuted, but not much happened. The world barely noticed. Facebook created networks for a number of companies, opening the doors, but few pa.s.sed through. One exception was the unique workplaces of the U.S. Army, Navy, and Air Force. The intensity of shared experience among young people in the military is apparently much like that in college. Facebook made sense there. But in most of the big companies where Facebook initially set up networks, there was little if any response from employees.
Few in business knew that Facebook was opening up. And Facebook was developing a bad reputation. At almost exactly the same time work networks debuted, the New Yorker New Yorker published a lengthy profile of Zuckerberg and Facebook, the most in-depth coverage the company had ever received. Author John Ca.s.sidy made the site seem like a curiosity, focused a good bit on the Winkelvosses" lawsuit, and implied that Facebook"s users were antisocial. "Clearly one of the reasons the site is so popular is that it enables users to forgo the exertion that real relationships entail," he wrote. published a lengthy profile of Zuckerberg and Facebook, the most in-depth coverage the company had ever received. Author John Ca.s.sidy made the site seem like a curiosity, focused a good bit on the Winkelvosses" lawsuit, and implied that Facebook"s users were antisocial. "Clearly one of the reasons the site is so popular is that it enables users to forgo the exertion that real relationships entail," he wrote. He also quoted a sociologist who speculated He also quoted a sociologist who speculated that the main reason Facebook was so popular was "voyeurism and exhibitionism." that the main reason Facebook was so popular was "voyeurism and exhibitionism."
Facebook still seemed to nonusers to be mostly about dating and doing pointless, possibly suspicious things like poking people. Whenever you added a new friend on Facebook back then, a box popped up that asked you how you knew them. One of the options was "we hooked up." How could this be a service for professionals? And Facebook faced a chicken-and-egg problem. Adults didn"t want to join until other adults were already there.
Perhaps Facebook only worked for students after all. Maybe adults didn"t need this kind of service, many Facebook executives worried. The mood around the office darkened. Even though growth was continuing strongly among college and high school kids, if adults didn"t want to join Facebook then perhaps something was wrong with Zuckerberg"s theories. He was disappointed and befuddled. This was a major setback. Maybe the world wasn"t becoming more transparent as quickly as he had thought. "It was the most wrong he"d ever been at Facebook," says Cohler, "and the first time he"d ever been wrong in a big way."
Zuckerberg had other big changes in mind, but if adults weren"t going to respond to Facebook some of the changes would fail. As summer began, Facebook"s board debated how serious the problem might be. David Sze, who had spearheaded Greylock"s recent investment in Facebook and was an official board observer, found himself having to rea.s.sure its members. At one meeting Moskovitz, who also attended as an observer, quizzed Sze about whether he regretted investing, given the unexpected difficulties with work networks. At that moment Sze was more optimistic than Facebook"s otherwise chronically upbeat board.
That summer of 2006, for the third year, the company rented a Facebook house, occupied mostly by recent arrivals in Palo Alto. One of Facebook"s lawyers argued that a company house was too great a legal liability, but Zuckerberg overruled him. The CEO decided the company should pay half the rent because anyone should be able to come by and use the pool. In fact the pool was only used sparingly, since its heater was broken and the water was always around 100 degrees.
Zuckerberg kept a room for himself in the house to use on weekends but the rest of the time lived separately in his own apartment. He had split up with the Berkeley undergraduate he"d been dating and reunited with his old girlfriend, Priscilla Chan, who he had met while who he had met while in line for the bathroom at a Harvard party. She had graduated with his original Harvard cla.s.s of 2006. Instead of a diploma, Zuckerberg had a company worth over $500 million and with almost a hundred employees. in line for the bathroom at a Harvard party. She had graduated with his original Harvard cla.s.s of 2006. Instead of a diploma, Zuckerberg had a company worth over $500 million and with almost a hundred employees. After some negotiation, Zuckerberg After some negotiation, Zuckerberg arrived at a deal with an insistent Chan: while they wouldn"t live together they would spend a minimum of 100 minutes of time alone each week and have at least one date, which would not be either at his apartment or at Facebook. arrived at a deal with an insistent Chan: while they wouldn"t live together they would spend a minimum of 100 minutes of time alone each week and have at least one date, which would not be either at his apartment or at Facebook.
But the company retained a collegiate air. Employees called another nearby house "the frat house." Nine people lived in its four bedrooms, many of them recently arrived Harvard-trained programmers. In the window were three big Greek letters that had originally decorated the first Facebook office on Emerson Street-Tau Phi Beta-for The Face Book.
It"s not hard to understand why the lawyer had concerns. The dining room was turned over to Beirut beer-pong tournaments, but one resident, Chris Putnam, was only nineteen. As a soph.o.m.ore at Georgia Southern University, he successfully hacked his way into the company"s servers and made two thousand Facebook profiles look like they were on Mys.p.a.ce. He inserted a note in the code saying he didn"t intend any harm. The episode impressed Zuckerberg and Moskovitz so much that they hired him.
At the frat house employee recreation could also be more productive. "People would just come over and code, or party and watch Lost, Lost," reports programmer Dave Fetterman. "We could still fit everyone in the company into the house for a party. At night we"d have beers, watch TV, think up new ideas and just start coding them right there, either in someone"s room or out in the yard. Mark or Dustin would show up. They were usually the first ones to open up their laptops." The programmers would sometimes combine partying and working at what they called "push parties." They"d load new software onto the site and "push" it live from right there at the frat house.
Big advertisers were beginning to experiment cautiously with Facebook. This wasn"t just little record companies advertising Gwen Stefani songs anymore. The giants of marketing now were getting interested in Facebook. But it was a different environment than they were used to. The company"s still-small group of ad salespeople pushed clients to craft messages and offerings unique to the service, in keeping with Zuckerberg"s near contempt for traditional advertising. (When he hired new ad sales boss Mike Murphy in March 2006, Zuckerberg told him, "I don"t hate all advertising. I just hate advertising that stinks.") Even COO Van Natta, a hard-charging industry veteran, had swallowed hard and accepted Zuckerberg"s dictate that advertising should always be useful for the user. Though his mandate was revenue, he had taken to saying things like "We almost shouldn"t be making money off of it if it isn"t adding value."
Chase credit cards was an important pioneer. Working with a small New York ad agency called Noise Marketing, it created the Chase +1 card, specially designed for college students and only available to Facebook users. The card was black, because that"s what students said they wanted. It offered something Chase called Karma points, which you could redeem for modest rewards like concert tickets. But unlike most rewards cards, you could acc.u.mulate points without spending large amounts. That made sense for students because they typically make only small purchases. Each purchase, no matter how small, garnered twenty points. You also got points for joining Chase"s sponsored group on Facebook, as well as for taking an online course on how to manage your credit. And Chase made its card "social." You could give your Karma points to your Facebook friends.
A week after the program launched, 34,000 students had already joined the group, and Chase soon issued thousands of cards. The bankers were pleased, and Facebook had taken an important step toward proving that customized advertising could work.
A few months later, Procter & Gamble tried something similar. Its CEO, A. G. Lafley, had begun talking about the need for P&G to get closer to its consumers. After reading about this, Facebook ad salesman Colleran did one of his masterful cold calls to find out if P&G was targeting any of its brands at the college market. It turned out that while P&G"s Crest White Strips teeth-whitening product had never been aimed specifically at college students, company data showed that the strips sold particularly well at Wal-Marts located near campuses. Colleran and P&G marketers came up with a Facebook campaign called Smile State.
Much as Chase and Apple had done, P&G created a sponsored group on Facebook for Crest White Strips. It advertised the Smile State group only to users who were students at one of twenty large state universities located near Wal-Marts. Any student who joined got tickets to an upcoming college-oriented Matthew McConaughey movie called We Are Marshall. We Are Marshall. In addition, the schools that enrolled the most members in the Crest White Strips group got a concert organized by Def Jam Records. Over 20,000 people joined. To have 20,000 people explicitly expressing affinity for Crest White Strips using their real name is the kind of thing that gives marketers goose b.u.mps. It was a huge win for P&G and for Facebook. In addition, the schools that enrolled the most members in the Crest White Strips group got a concert organized by Def Jam Records. Over 20,000 people joined. To have 20,000 people explicitly expressing affinity for Crest White Strips using their real name is the kind of thing that gives marketers goose b.u.mps. It was a huge win for P&G and for Facebook.
Zuckerberg remained uninterested in advertising that interrupted the Facebook experience and distracted users" attention, no matter how lucrative it might be. In May 2006, Sprite was relaunched with new packaging and a tongue-in-cheek ad campaign aimed at young people that was meant to be brash and obvious. The soft drink"s ad agency offered to pay $1 million for a banner ad that would turn Facebook"s entire home page green for one day. Zuckerberg didn"t even consider taking the money. Nor was the CEO interested in impressing people to get their business. The first time the top executive of a big San Francisco digital ad agency visited Facebook, he ran into Zuckerberg, who was barefoot and wearing NBA basketball shorts that hung below his knees.
Most advertisers were still uncertain what exactly Facebook was, not to mention how to take advantage of it. But in June the world"s third-largest ad agency declared itself in Facebook"s camp with a dramatic gesture. The Interpublic Group committed to spend $10 million on Facebook ads over the coming year on behalf of its clients. As part of the deal the ad giant As part of the deal the ad giant also bought half a percent of Facebook"s stock. "Young and tech-savvy consumers are increasingly shunning traditional media vehicles and defining themselves and their community online," Interpublic CEO Michael Roth said in a statement. He also noted that 65 percent of all U.S. college students by now were maintaining a Facebook profile. also bought half a percent of Facebook"s stock. "Young and tech-savvy consumers are increasingly shunning traditional media vehicles and defining themselves and their community online," Interpublic CEO Michael Roth said in a statement. He also noted that 65 percent of all U.S. college students by now were maintaining a Facebook profile.
In August, Facebook got another major acknowledgment-this time from a t.i.tan of the tech industry. First, Mys.p.a.ce announced a major three-year, $900 million deal with Google to operate a search function inside Mys.p.a.ce and to place advertising there. It was such a large deal that by itself it turned Murdoch"s investment in Mys.p.a.ce profitable. It was the second time a huge Mys.p.a.ce transaction shed reflected glory onto Facebook. The first time-when Murdoch bought it-it had made Facebook look valuable. This time it made Facebook ad inventory look like a gold mine.
COO Van Natta and newly hired Vice President of Business Development Dan Rose, whom Van Natta had hired from Amazon, had already begun talking with the companies with the biggest online display ad operations-Google, Microsoft, and Yahoo. Facebook already had a small deal with Microsoft"s MSN online division to sell ad s.p.a.ce.
Nothing motivates Microsoft like the desire to best Google. A day or so after the Mys.p.a.ce-Google deal was announced, Rose called up Microsoft, knowing the software colossus had battled for the Mys.p.a.ce deal and lost.
Rose immediately got a positive reaction to his inquiry. Yes, the Microsoft executive he spoke to said, he would love to talk about a similar deal with Facebook. "What are you asking for?" he asked. Van Natta and Rose huddled and quickly came up with what they thought would be a juicy deal. They proposed that Microsoft use its ad sales network to represent Facebook"s banner ad inventory and guarantee a certain CPM for every ad it placed. They didn"t even get an argument. "Okay, we"ll be down there tomorrow to iron it out," said Rose"s eager Microsoft counterpart. It took some work to finalize the details. Says one Microsoft negotiator: "Mark was adamant about preserving the user experience and the layout. It drove our ad people crazy because it made it very hard to deliver standard Internet ad units."
It was a transformative deal. Facebook now had a large and lucrative new revenue stream. Instantly Microsoft turned 2006 from another money-losing year for Facebook into a highly profitable one. A few months earlier, Viacom"s Wolf had been shown internal projections aiming at $22 million in 2006 revenue, but Facebook ended up at least doubling that. Microsoft"s payments accounted for well over half of company revenue for 2006. For 2007, the Microsoft deal guaranteed Facebook $100 million in revenue.
Perhaps Zuckerberg"s CEO lessons were paying off. He was letting the experienced Van Natta play a role not unlike the one Parker had played earlier-serving as Mr. Outside and building the business, letting Mark focus on improving Facebook"s product. Van Natta was managing bigger and bigger deals with partners like Interpublic and Microsoft. The executive team-purged of some of Robin Reed"s hires-was coalescing. Though her in-house recruiting stint had been extended more than once, by now she was gone. The team didn"t want to admit it, but she had helped the company grow up.
Viacom had abandoned trying to buy Facebook, but his talks with Michael Wolf had taught Zuckerberg a lot about deals and about how the media industry works. That would serve him well in the coming years. And inside the company he seemed more like a leader.
9.
2006.
"I can"t find out what"s going on with my friends!"
The astonishing success of Facebook"s photos application led to a bout of soul-searching at the company. What was it, Zuckerberg and his colleagues asked themselves, that made photos so successful? Well, one thing was that you could so easily find new photos your friends uploaded. Each person"s profile included a "dashboard page" that showed which photo alb.u.ms 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," and it won raves from users. Each time someone changed their profile picture, it quickly led to an average of twenty-five new page views.
What people did on Facebook was look at other people"s information. They were eager to learn what was new, what had changed, what had happened that they didn"t already know. Studying your friends" profiles was an obsessive activity, but not a very efficient one. Click through and try to figure out whether anything had changed since the last time you visited. Was he still single? Did this photo mean she"d been to the Caribbean? How come he went to that party and didn"t tell me? Click click click. The information was good-you wanted to know it-but it was tedious to find.
So the company"s young leaders came up with the idea to build a page that showed not just the latest photos your friends had added, but all the things that had recently changed on the profiles of your friends. "We started asking, "How do we get people the information they most care about?"" says Moskovitz. "We wanted to build a screen that showed everything. So we came up with the idea for the News Feed."
The new tool they arrived at would help users find the information that most mattered to them at any given moment. That might include everything from which party a friend planned to go to on Friday to updates about the political situation in Tajikistan someone might have posted as a Web link. The point was to make sure you saw what you cared about, whatever it might be. The order in which information would be presented would depend on what you had shown-by your behavior-you liked to look at. Zuckerberg explained it to colleagues: "A squirrel dying in front of your house may be more relevant to your interests right now than people dying in Africa."
All this brainstorming took place in the early fall of 2005. Shortly afterward, Adam D"Angelo talked to a new hire, Chris c.o.x, about building the News Feed. "I saw a glimmer in his eyes," says c.o.x. "I could tell that for him it wasn"t about wanting to make money. He said, "Look, this is such a broken problem-I can"t find out what"s going on with my friends!" The Internet could help you answer a million questions, but not the most important one, the one you wake up with every day- "How are the people doing that I care about?""
They set to work on the News Feed. "For the next eight months, it was our labor of love," says c.o.x, a tall, laconic, and brainy Stanford grad who had studied computer science, psychology, and linguistics. The idea was audaciously ambitious: to write a set of software algorithms to dissect the information being produced by Facebook"s users, select the actions and profile changes that would be most interesting to their friends, and then present them to those friends in reverse chronological order. Each person"s home page would thus be completely different, depending on who their friends were. "It was the biggest technology challenge the company had ever faced," says Sean Parker.
The average user of Facebook at that time had about 100 friends. The software would have to watch every action generated by every one of those people. Then, each time you went onto the service, it would rank the activity of all your friends based on the likelihood that you would see it as interesting. That calculation would be based on, among other things, your previous behavior. Perhaps you noted that you were feeling glum or that you were going to the movies, or you uploaded a photo, indicated you like the new Wilco alb.u.m, or posted a link to a segment of the Daily Show Daily Show. Facebook"s software would detect this new information and decide whether to send it to your friends, based on what it calculated is likely to interest them. It would infer this based on its observations of your friends" previous behavior. If they liked hip-hop they might not get the Wilco info. If they never watched videos they might not see the Daily Show Daily Show link. It would apply such logic to every sort of information and activity on the site. It would repeat this process every fifteen minutes or so. Now multiply all this by 6 million-the number of active users Facebook had at the project"s outset. This was a ma.s.sive engineering and product design challenge. link. It would apply such logic to every sort of information and activity on the site. It would repeat this process every fifteen minutes or so. Now multiply all this by 6 million-the number of active users Facebook had at the project"s outset. This was a ma.s.sive engineering and product design challenge.
The News Feed would be a radical change. "It"s not a new feature, it"s a major product evolution," said Zuckerberg at the time. It would remake Facebook. It was necessary as a foundation for future innovations he was already thinking about. He evangelized it with conviction to the company"s engineers and product designers, not always successfully. "Many of us were "No no no, we hate this!"" says product manager Naomi Gleit.
Though Zuckerberg remained opposed to selling the company, many in his...o...b..t at Facebook felt it was just good business to learn what other potential buyers might pay. Owen Van Natta was expert at ferreting out offers. In the late spring of 2006, following the demise of the Viacom talks, which topped out at $800 million cash, Zuckerberg and the board concluded that if someone bid $1 billion cash for Facebook they would consider it seriously. Zuckerberg agreed partly because he was worried that the failure of the work networks might mean that his baby wasn"t destined to be as big as he"d thought.
Meanwhile, a few towns south, in Sunnyvale, Yahoo"s executives were worried. They saw social networking taking deeper and deeper hold even though they had no position there. CEO Terry Semel was becoming increasingly enamored of Facebook. Chief Operating Officer Dan Rosensweig had become a fan earlier and had gone out of his way to get acquainted with Mark Zuckerberg in 2005. On more than one occasion Rosensweig made it clear that Yahoo would talk about an acquisition if Zuckerberg were interested. He wasn"t.
By June, Yahoo"s executive team unanimously concluded they should buy Facebook. Semel approached Zuckerberg and they began talking. It quickly appeared possible that Yahoo might be willing to pay $1 billion. Semel, Rosensweig, and Yahoo Chief Strategy Officer Toby Coppel embarked on a series of negotiations with Van Natta, Cohler, and Zuckerberg, many of the meetings taking place at Van Natta"s Palo Alto home. (The CEO"s furniture-free one-bedroom apartment wasn"t suitable.) Zuckerberg didn"t know whether to feel celebratory or defiant. To express a little bit of both he had one of his product managers buy $500 worth of illegal fireworks for an all-company July 4th party. Setting them off in a Palo Alto park led to an awkward but fleeting encounter with the police. The next day Yahoo formalized its offer in a term sheet Semel messengered to Zuckerberg.
From the perspective of the CEO and allies like Moskovitz, this development was jarring. Moskovitz, like Zuckerberg, had no real interest in selling. "The way it was pitched to me," he recalls, "was "It would be irresponsible not to figure out what our valuation is. We"re not trying to sell the company." And that quickly s...o...b..lled into, "Okay, now there are term sheets and we"re going to have to pretend to talk.""
Board member Breyer saw it differently. This was potentially a major opportunity for a lucrative "exit," to use the term VCs use when they make a lot of money. If the deal went through, Accel would make more than ten times its investment in just fourteen months. "I was calling for board meetings, calling for discussion," Breyer remembers. "I said, "We have to doc.u.ment this, and go through a process where we talk about the pros and cons. You can"t just dismiss this out of hand. We have a lot of employees who we"re representing. This is real money to them."" Of the company"s young leaders, he says, "Once the offer came in, even though that had been our number, they didn"t want to do it. Mark was definitely feeling at that point that he didn"t want to sell. So there was absolutely tension."
At one board meeting, Zuckerberg lost his patience. "Hey Jim, we can"t sell it if I don"t want to sell it," he said bluntly.
"I know that, Mark," replied a piqued Breyer. "But we said our number was $1 billion. Let"s go through the a.n.a.lysis."
Breyer was by no means the only person lobbying for a sale. Again, there were two camps, and it was mostly older employees versus younger ones. The relatively older Van Natta and Cohler (in their early thirties and late twenties respectively) both wanted to sell. Sean Parker, still a major shareholder, was allied with Zuckerberg and Moskovitz. He thought Facebook was just getting started. Peter Thiel, older but very sympathetic Peter Thiel, older but very sympathetic toward Zuckerberg, spent hours talking with the CEO about whether it made sense to sell. Thiel wanted Zuckerberg to consider it, but remained deferential to the founder. "In the end Peter was willing to support me," recalls Zuckerberg. "Jim pushed a bit harder. Pretty much everyone else wanted to sell the company." toward Zuckerberg, spent hours talking with the CEO about whether it made sense to sell. Thiel wanted Zuckerberg to consider it, but remained deferential to the founder. "In the end Peter was willing to support me," recalls Zuckerberg. "Jim pushed a bit harder. Pretty much everyone else wanted to sell the company."
Moskovitz, Zuckerberg"s longest-standing partner, was one of the few others firmly opposed to selling. "I was sure the product would suffer in a big way if Yahoo bought us," Moskovitz says of that time. "And Sean was telling me that ninety percent of all mergers end in failure." He and Zuckerberg were also closely following the outcome of Google"s acquisition in early May of Dodgeball, a company that used cell phones to help you track the physical location of your friends. "We saw that Dodgeball was going to s.h.i.t," says Moskovitz. "And Google was the mecca of start-ups. If an acquisition there was going to fail I didn"t feel great about going to a company that was known for being kind of behind the times."