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Becoming a Company

Monday, April 4, 2011


Suddenly there seemed no limit to what Thefacebook could achieve.
Money had been removed as an obstacle. The service continued to
grow rapidly among students. Any lingering doubts Zuckerberg had
about Thefacebook had been vanquished. Now was the time to make it
into a real company! But wait—how do you make a company?
Mark Zuckerberg and Dustin Moskovitz were still only twenty-one
years old. For all their vision, creativity, and commitment, they retained
the mind-set of college kids. They knew next to nothing about how to
organize a business. Sean Parker, twenty-five, had been in several startups
but detested their restrictions and was an instinctive rebel. His willful
disregard for business conventions was as thorough as Zuckerberg's
ignorance of them. That left Yale graduate Matt Cohler, twenty-eight,
by default the old man and official level head of Thefacebook's inner
circle. He had been a McKinsey consultant and a jack-of-all-trades at
Linkedln for veteran entrepreneur Reid Hoffman, so he had a pretty
good idea of what start-ups were supposed to do. But this was not an
ordinary company. It did not face ordinary challenges.
Facebook's first priority was hiring more people. Now there was
money for it. But people weren't sure they wanted to work at Thefacebook.
Most in Silicon Valley in early 2005 still saw social networks as
faddish, despite the success of MySpace. It was unclear if they could
ever be businesses. What seemed hot for Internet companies around
this time was blogging and podcasting. And since Thefacebook was a
closed network, any adult that Thefacebook wanted to hire couldn't
easily get on the site to check it out.
Compounding these problems, the still-nascent company already
had a reputation for rambunctiousness. Cohler, who quickly turned his
attention primarily to hiring, tried to convince a well-known recruiter
for start-ups named Robin Reed to help the company find a vice president
of engineering. Reed, middle-aged with short blond hair framing
a round face and a New Age propensity to wear wooden beads wrapped
around her wrist, wasn't interested. "I had heard wild stories about
them. It was too woolly for me," she says. "Sean Parker was quite notorious
at the time." Parker's reputation for partying and his forced departure
from Plaxo had stereotyped him in the Valley as a bad boy. Reed
talked to friends who had already tried and failed to help Thefacebook
with recruiting. "It's Lord of the Flies over there," one told her.
While that—whatever it meant—was an exaggeration, a bunch
of college kids was definitely in control. Zuckerberg had to be careful
which business card he handed out at business meetings. He had two
sets. One simply read "CEO." The other: "I'm CEO . . . bitch!" Not
only were college administrations all over the country up in arms over
the planned national beer pong competition, but closer to home, Tricia
Black refused to join the company if it wasn't canceled. Black, the
saleswoman from the Y2M advertising firm, had been begging Eduardo
Saverin to hire her since mid-2004. She finally got her offer to join Thefacebook
and set up an in-house advertising department. As for the office
art, Parker's girlfriend's painting of the naked women and bulldog in the
ladies' room got painted over soon after Accel invested its $12.7 million.
Recruiting tactics weren't very professional. The main method initially
was a wooden figure of an Italian chef out on the sidewalk. He
held a chalkboard that displayed, rather than varieties of pizza, a list of
job openings like "VP of Engineering."
Cohler's first hire was Steve Chen, a former PayPal programmer.
But after only a few weeks Chen decided to leave to start a new company
with two PayPal friends. It was to be a video start-up, and Cohler tried
to dissuade him. "You're making a huge mistake," Cohler said. "You're
going to regret this for the rest of your life. Thefacebook is going to be
huge! And there's already a hundred video sites!" Chen went ahead and
left to start a company called YouTube.
It quickly became apparent to Zuckerberg that Google, at the top
of the Silicon Valley food chain, was Thefacebook's primary competition
for talent. After all, that was where just about every great software
engineer aspired to work. Those were the people Thefacebook should
be hiring. Simply learning that someone was interviewing at Google
made Zuckerberg want him more.
Cohler visited his younger brother at Princeton and heard about
a Google recruiting meeting there. He printed out a bunch of flyers
about Thefacebook and stood by the door handing them out. Not long
afterward Zuckerberg set up a card table in a Stanford computer science
department building with a sign reading WHY WORK AT GOOGLE?
COME TO THEFACEBOOK. Even Adam D'Angelo had to be convinced
not to take a summer internship at Google he'd been offered. Parker
persuaded him to rejoin Thefacebook instead.
After Accel made its big investment, Kevin Efrusy, who had spearheaded
the deal, began visiting regularly to advise Zuckerberg. He proposed
bringing 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 fiftyyear-
old. Zuckerberg realized that Rothschild could help Thefacebook
prevent a Friendster-like breakdown. Efrusy suggested offering him
some stock in exchange for a day a week. "Would he work full-time?"
Zuckerberg asked. "No, never. He's retired," Efrusy replied. The next
time the two got together, Zuckerberg proudly announced, "I got him
full-time." Telling him something couldn't be done was like holding
up a red flag to a bull. "I thought these guys had created a dating site,"
Rothschild says, recalling how fascinated with Thefacebook he quickly
became. "But once I understood Mark's vision, I realized this wasn't
like MySpace. It had nothing to do with meeting people. It was the
most efficient way to stay in touch with your friends." Getting veteran
Rothschild on board helped legitimize the company.
. Rothschild's acceptance of Thefacebook helped Cohler persuade
Robin Reed to help with the recruiting. She finally agreed to come see
Zuckerberg. When she walked up the graffittied stairs to Thefacebook's
Palo Alto offices at the appointed hour of 11 A.M., she found the door
open and the place deserted. After a while she left. Cohler spotted her
on the street and brought her back. It turned out Zuckerberg had been
there all along—on the roof. If you stood on a table in a room they
called the dorm room (it also had an Xbox and a futon), then shimmied
out a window, you arrived at a big flat area on the roof covered with
gravel. Beach chairs were set up. It was a favorite spot on sunny days and
a place to get a little privacy for phone calls or meetings. Reed climbed
out. Zuckerberg pleaded with her to undertake the engineering job
search. She found the whole scene quite charming and finally agreed.
But Thefacebook had its own unique criteria for hiring. For one
thing, there was a strong bias toward youth. Leaving school was considered
a virtue among this crew of dropouts, iconoclasts, and autodidacts.
"Why would you study it when you could be doing it?" Zuckerberg
would ask graduate students he was trying to recruit. He even began to
guarantee that the company would pay someone's tuition if they quit
school to come to Thefacebook and later decided to go back. Cohler
advertised for summer interns, then sometimes told promising applicants
when they came for an interview that Thefacebook was only hiring
full-timers. That forced people to consider dropping out. That's how
he got Scott Marlette, a top early hire, to quit Stanford graduate studies
in electrical engineering.
Adam D'Angelo, tall and soft-spoken with mussed-up hair and
the concave posture of an introvert, remained the house egghead and
programmer par excellence. He had long since stopped focusing on
Wirehog. Now he was Thefacebook's top engineer. No matter who else
they'd spoken with first, Zuckerberg always wanted candidates for important
tech jobs to interview with D'Angelo. If he thought they were
smart, they'd get hired.
When somebody did get hired, their first responsibility was to go
buy their own laptop. There wasn't enough furniture, either. Scott Marlette
sat on the floor his entire first week. Only two small tables stood in
the middle of the main room, already tightly packed with other people's
stuff. Later Marlette visited Ikea to buy his own desk and chair.
The site went from 3 million users in June to 5 million by October
2005. This was unbelievable growth, but even as they celebrated it,
the growing Facebook staff had to work hard to keep it from destroying
them. Their technology had to grow as quickly as their membership.
Fighting the Friendster curse was a constant obsession. Adam D'Angelo
became consumed with daily crises. He remembers what it was like:
"This database is getting overloaded. We need to fix that. You can't send
email. Fix that. This week we came this close to the edge. Next week it's
going to hit the edge and the site's not going to work. We have to raise
capacity." There were frequent drives down to the data center in Santa
Clara to plug in more servers. By year-end Facebook had spent $4.4 million
on servers and networking equipment in its data centers.
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 project. (Marlette and D'Angelo later broke
the code up into a more conventional segmented structure.) At one
point, source code—the company's elementary intellectual propertywas
streaming onto student profiles. One engineer accidentally introduced
a bug that briefly enabled any user to log into any account. On
another occasion a summer intern made a coding error that meant that
no matter which ad on the site you clicked, you were directed to only
one advertiser—Allposters.com.
Dustin Moskovitz was responsible for keeping things running
smoothly day to day, so anytime one of these disasters hit it was his job
to remedy it, even if doing so took all night. When confronted with a
particularly stupid error he sometimes lost his cool, banging angrily on
his desk and throwing things. But he always got things fixed. He commanded
universal respect for his dedication and work ethic. "Dustin
was always the rock," says Ruchi Sanghvi, a beatific Carnegie-Mellon
computer engineering graduate with a round face and long black hair.
She was the first female engineer hired by Thefacebook and for years
the only one in the company's inner core.
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 ThefaceBecoming
a Compariy
book for a customer support representative and hired a recent Stanford
grad named Paul Janzer. 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.
Efrusy tried to play the role of company conscience. In return
Zuckerberg gave him a business card with the title "Chief Worry Officer."
But he had cause to worry. New features weren't tested before they
were inaugurated. He found it nerve-racking to sit casually conversing
with Zuckerberg while he typed away on his laptop making live changes
to the site.
Recruiter Reed was taking longer than she expected to conduct her
search. For one thing, experienced engineers didn't like the idea of working
for a twenty-one-year-old who'd never held a real job. And many interested
candidates were daunted to discover Parker's reputation, especially
once they learned that his title at Thefacebook was president. It also was
unclear to Reed exactly what Zuckerberg wanted. His description of what
kind of person he wanted kept changing. He made it clear that he himself
would remain in charge of product development. But despite the seeming
immaturity and enveloping chaos of daily life at Thefacebook, Reed
noticed that things seemed to keep moving forward.
Zuckerberg asked her to come and work with the company fulltime
for six months or so, until it filled out its staff. She had never done
that before, but she liked the idea of stock options in Thefacebook. She
was becoming a believer. "I thought I'd stood at the elbows of a lot of
great entrepreneurs and knew how it was done," she says. "But when I
got to Thefacebook I was struck by how much I didn't know about how
twenty-somethings worked. Everybody called them irresponsible. They
didn't come in until late. Some worked only at night. But Mark was
actually incredibly responsible. All of them were. So I decided to forget
what I knew and have a beginner's mind."
Reed, a Buddhist and meditator, sat in the cafe of San Francisco's
Museum of Modern Art one Saturday morning with Zuckerberg and
made a deal. She would join the company for a few months and he
would agree to meditate. She was starting to take a kind of motherly
interest in his managerial success. She gave him special software for
his computer that came with little biofeedback monitors that clip on
your fingers and are connected by wires to your computer to measure
whether you have calmed down. When they finished and came to an
agreement, Zuckerberg said, "I think it's time for a hug."
Though the stresses on him these days were legion, Zuckerberg
didn't seem freaked-out. In fact, he remained peculiarly placid. Even
in these most hectic company days, he never lost his temper. (And he
shortly reported back to Reed that he was actually using her meditationassistance
apparatus, to good effect.)
This outward placidity is one key to the peculiar charisma that both
draws people to Zuckerberg and vexes them. Not only is he unemotional;
he seldom betrays his feelings. His typical way to listen is to stare
at you blankly, impassively. It is never obvious whether he hears you.
He seldom gives any reaction to what someone says to him right away.
If you need to know what he thinks, you may be out of luck. "He's really
hard to read," says Chris Hughes, the former roommate who during
this period was managing PR for the company from his Harvard dorm
room. "It's difficult to have sort of basic communication with him."
Thefacebook had stopped being small enough for everyone to know
what was going on. Now Zuckerberg had to focus more consciously on
communicating, making sure his messages were passing down through
the growing number of layers. Efrusy urged Zuckerberg to write down
his thoughts about strategy and process. The next week Zuckerberg
brought to their meeting a little leather-bound diary. "It looked like
what Chairman Mao would carry around," says Efrusy. "He opened it
up and it was page after page of tiny two-point handwritten text." Zuckerberg's
handwriting is extremely precise, like that of an architect or designer.
But he refused to let Efrusy read his notes. "I told him the point
was to communicate to everybody else," says Efrusy. "He sort of looked
at me like that was a new thought and said, 'Oh really?'"
This book was held closely by Zuckerberg, but some colleagues did
get a peek at it. It revealed in detail where he was hoping to take his
company. On its cover page it listed Zuckerberg's name and address,
with a note: "If you find this book, return it to this address to receive a reward
of $1,000." It was titled "The Book of Change," and just below that
was a quote: "Be the change you want to see in the world—Gandhi." Inside,
in Zuckerberg's precise and beautiful cursive script, were lengthy,
detailed descriptions of features of the service he hoped to inaugurate in
coming years—including what would become the News Feed, his plan
to open registration to any sort of user, and turning Thefacebook into a
platform for applications created by others. In some sections it became
almost stream of consciousness, according to those who have read it.
Even Zuckerberg occasionally notes in the margin, "This doesn't seem
to be going anywhere." But for many of those who read it inside the
company it seemed as weighty as Michelangelo's sketchbook.
A major new figure joined the life of the company around this
time —investor and entrepreneur Marc Andreessen, who became a
close adviser to Zuckerberg. Andreessen, one of Silicon Valley's most
revered innovators and entrepreneurs, had come to California as a mere
boy, much like Zuckerberg, after he helped invent the first Web browser
at the University of Illinois. He co-founded Netscape Communications
and later two more important and successful companies, while investing
in scores more. Matt Cohler and board member Peter Thiel introduced
Andreessen to Zuckerberg, thinking he could help the young
CEO figure out how to grow Thefacebook. Zuckerberg immediately
took a liking to the tough-minded Andreessen, who never showed the
slightest hint of obsequiousness. He was consummately confident himself,
in fact, never suffering fools very well. He didn't care what people
thought of him, and Zuckerberg liked that. He was as blunt with Zuckerberg
as he was with everyone else.
Prodded by Parker and Cohler, as well as Andreessen and Efrusy,
Zuckerberg started trying to behave like a leader. He had been living in
one of the company houses, but moved out in midsummer. Around the
same time he proclaimed he would stop writing software. Zuckerberg
needed to start focusing on bigger issues. There was a little ceremony
to mark the day he installed his last piece of code. At a talk he gave at
Stanford shortly afterward, he conceded, with a hint of disappointment,
that "the dynamic of managing people and being CEO in a company
is a lot different than being college roommates with someone." Some
weekends Cohler, Moskovitz, and Zuckerberg could all be found reading
Peter Drucker, the consultant and teacher often called the father of
modern management.
Zuckerberg decided to study his newfound management idol —Don
Graham. He asked if he could come visit the Post to observe how Graham
worked. Even though at this point he barely knew the difference
between profit and loss, he wanted to see what a CEO does. Zuckerberg
flew to Washington and spent four days with this mentor. He shadowed
Graham for two days at headquarters, then flew with him up to New York
to watch him make a presentation to financial analysts. The Post Company's
stock is divided into public shares and a separate class of shares
controlled by the family with significantly enhanced voting power. It's a
structure intended to reflect the unique sensitivities of a public company
that runs a newspaper—making it a hybrid of a for-profit enterprise and
a public trust—and it gives the Graham family effective veto power over
company decisions. Because of this family control, Graham has the ability
to enforce a long-term view. Zuckerberg started thinking he might
someday want a structure like that for Thefacebook.
Zuckerberg had to figure out how to respond to the people-management
challenges that arise in any organization. His approach sometimes
was to make a joke out of things others might treat more gravely. A young
woman complained to him that an employee had harassed her in the
lunch line. His response was to publicly embarrass the perpetrator in
front of everyone. "It has come to my attention," he announced at a
company meeting, "that one of you said to a girl, 'I want to put my teeth
in your ass/" He paused. The room was silent. "So, like, what does that
even mean?" Everyone laughed. Then the matter was dropped.
The corporate culture was an institutionalized, dormlike casualness,
oddly fused to intense devotion and exertion. The twenty or so
employees moved in packs—to the nearby Aquarius Theater, where
they could get in for free because one of the engineers worked there
part-time; to the McDonald's a few miles away in East Palo Alto; and to
the University Cafe around the corner, which was the unofficial comBecoming
a Company
pany meeting room. "We worked here all the time," says Ruchi Sanghvi.
"We were each other's best friends. Work was never work for us.
We worked through Christmas, over the weekends, and until five in the
morning." She herself worked so hard that one night driving home in
the wee hours to her apartment in San Francisco she twice ran into the
center divider before pulling over and falling asleep on the side of the
highway. After that she moved close to the office. Thefacebook offered
a $600-a-month housing subsidy to those who lived nearby in Palo Alto,
which encouraged the conflation of work and personal time.
Hardly anyone came in before noon. In his self-published Inside
Facebook, Karel Baloun, a company engineer back then, writes that
Zuckerberg himself set the tone: "Zuck would come into the office and,
seeing every chair full, just lie down on the thin carpet on his belly,
sandals flapping, and start typing into his little white Mac iBook." The
place settled into a productive rhythm only in the evening. Programmers
fueled by Red Bull would tap steadily into laptops while conversing
via instant message. Fiftyish recruiter Reed started staying up at
home until 3 or 4 A.M. to engage in the late-night IM back-and-forth.
She realized that was when many of the important decisions got made.
Zuckerberg preferred instant messaging, using AOL Instant Messenger
(AIM). One employee a few years older who sat about six feet
from Zuckerberg in those days received an IM from the boss. "Hey,"
it read. It was the first time he'd gotten such a message. So, seeking to
be convivial, this guy stood up from his chair, turned to Zuckerberg,
and said out loud in a friendly voice "Hey!" Zuckerberg continued staring
blankly at his screen. It wasn't even clear if he had heard. If you
wanted to communicate, you IM'd. Zuckerberg became slightly more
animated in the evening when many people had left.
Thefacebook made explicit efforts to be a cool place to work, almost
to the point of caricature. Appearance mattered. When Jeff Rothschild
started at Thefacebook he dressed like a typical middle-aged, nerdy
Silicon Valley engineer—clunky running shoes and a shirt tucked into
khaki pants or loose jeans. About a month later a friend ran into him at
the airport. He was wearing designer jeans with his shirttail untucked
in the hipster manner. "Jeff, what happened?" his friend asked. "They
the facebpok effect
said I was making them look bad," Rothschild replied. "They weren't
going to let me back into the office." The other employees started calling
Rothschild "J-Ro." "Part of our company mission was to be the coolest
company in Silicon Valley/' says Parker. "I played up the idea that this
should be a fun, rock-'n'-roll place to work." That's why he hired graffiti
artist David Choe to paint the office and had his girlfriend add a little
special something in the ladies' room. (Choe got a tiny bit of stock for his
efforts, now worth tens of millions.) The company continued to rent several
houses that employees shared, one of them walking distance from
the office. Everybody partied there on weekends.
Zuckerberg headed to New York to meet with the new ad salesman
Tricia Black had hired, Kevin Colleran. Colleran had previously
worked in the record industry, and the photo on his profile showed
him beaming at a party with his arm around the shoulder of rapper 50
Cent—who was goateed, impudent, and decked in bling. Zuckerberg
arranged to meet Colleran in front of the Virgin Megastore on New
York's Union Square. Colleran showed up late and was walking toward
Zuckerberg when he got a phone call from his new boss. "Where are
you?" Zuckerberg asked. "Zuck! I'm right in front of you!" Colleran
replied. Zuckerberg looked crestfallen. He thought Thefacebook's ad
salesman was the tough-looking black guy in the profile photo.
The unique social functions of Thefacebook were occasionally deployed
on its behalf. On the day a new Stanford grad named Naomi
Gleit started work at the company, Matt Cohler asked her to get all her
sorority sisters to poke Jim Breyer on his profile page. It was a way to
keep the board feeling good about the product.
Zuckerberg's dry wit and classicism showed then, too, according
to author-engineer Baloun. "Around the end of May 2005," he writes,
"Zuck painted the word 'Forsan' on his office wall in huge letters. . . .
The word comes from Virgil's Aeneid: 'Forsan et haec olim rneminisse
iuvabit,' which can be loosely translated to read 'Perhaps, one day, even
this will seem pleasant to remember.'"
More and more technology and media companies were taking note
of Thefacebook's torrid growth and trying to figure out how they could
get a piece of it. In the spring, MySpace founders Chris DeWolfe and
Tom Anderson had come up to Palo Alto from Los Angeles to put out
feelers about possibly buying Thefacebook. Zuckerberg, Parker, and
Cohler met him in a University Avenue coffee shop, but only because
they thought these were interesting guys and they were curious about
MySpace. Then, in July, MySpace itself was bought. Rupert Murdoch's
News Corporation purchased the social network's parent company for
$580 million to get MySpace and its 21 million users.
At Thefacebook there was celebration. Not only did the deal proclaim
that services like theirs were important and valuable, but they
were pleased to think that a big old-line media company would now be
mucking around with MySpace. They presumed News Corp. would
slow it down tremendously. Parker called DeWolfe and his partner
Tom Anderson that day and put them on speakerphone so everyone
could hear. The team in Palo Alto was expressing condolences. Since
DeWolfe and Anderson didn't own much of the parent company, they
weren't going to get much money from the sale of their creation.
The last thing Zuckerberg wanted to do was to sell his baby. At
his Stanford talk, someone asked him what he thought might be the
best way to "monetize" or make money from Thefacebook, "as an exit
strategy." Zuckerberg's reply was his only curt one of the night. "I spend
my time thinking how to build this and not how to exit," he replied.
"I think what we're doing is more interesting than what anyone else is
doing, and that this is just a cool thing to be doing. I don't spend my
time thinking about that. Sorry."
Though Zuckerberg put minimal priority on advertising, a fair
amount was coming in anyway. But even at this early date it was apparent
that Thefacebook wasn't like a typical website when it came to
advertising. That was both a good and a bad thing. For one thing, ads on
Thefacebook didn't get clicked very often. Some believed that was because
when users were focused on finding out about friends they were
unreceptive to commercial messages. A version of the Google model,
which charges advertisers only when their ads are clicked on, did not
look promising here.
Colleran, the new ad salesman in New York, was working hard to
find brand advertisers who would pay on the basis of CPM, or cost per
thousand views. That's how television ads are priced. The goal of this
kind of ad (as opposed to the pay-per-click ones that Google specializes
in) is not to get clicked, but rather to be seen by lots of people. But
Thefacebook was still an exotic site for college kids that few on Madison
Avenue had heard about and even fewer understood.
For some months Colleran was the site's only full-time ad salesman,
and he quickly became frustrated. This big chummy guy with a
blond crew-cut was a gung-ho cold-caller who could get in almost any
door. He turned up plenty of advertisers willing to try Thefacebook. But
many of their ideas were rejected out of hand by Zuckerberg. He vetoed
anything that smacked of interference with the fluid use of the site, no
matter how much revenue it might generate. Common practices like
pop-up ads that displayed before you saw the content of a page were absolutely
anathema, for example. Colleran learned to be cautious about
what he even suggested.
It drove Colleran crazy that Zuckerberg wouldn't add new schools
to Thefacebook more quickly. To the ad guy, more users just seemed
better. Zuckerberg andMoskovitz, however, were methodical. Students
from schools where 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 it came to their school. When the number on the waiting
list passed 20 percent or so of the student body, Thefacebook would
turn that school on. "I always thought it was wrong," says Colleran,
"but now I realize it was a major reason for our success." By keeping
the gates closed and only opening at schools once there was proven
demand, Zuckerberg and Moskovitz, the expansion guru, ensured that
when Thefacebook did open, usage would explode.
Colleran found one company willing to pay big bucks for ads. It
was his first big deal. British online gaming company Party Poker didn't
buy its ads on a CPM basis, but rather on what's called CPA—cost per
acquisition. Party Poker paid a flat fee of $300 for each new subscriber
who signed up for its service and put at least $50 into a gambling account.
This proved to be hugely lucrative for Thefacebook—it was soon
reaping $60,000 each month just for the 200 new members, on average,
who signed up. Salespeople at Y2M, which was also still selling ads for
Thefacebook, were astonished. They had never before seen a college
advertiser spend so much on the Internet. A year or so later, though,
online gambling was outlawed in the United States and Thefacebook
dropped Party Poker.
Those interested in banner ads on a CPM basis included some
companies that targeted college students as employees—like housepainting
operations and door-to-door retailers that hired students for
summer work. One big client sold kitchen knives. Businesses that provided
products sold by fraternities and sororities for fund-raisers also saw
a good response on the site. Ads started at $5 per thousand views and
advertisers had to spend a minimum of $5,000 per month.
But aside from the lucrative Party Poker deal, the main revenue
was still coming from sponsored groups, especially Apple's. 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. That was the single biggest source of revenue the
company had in 2005. Other companies that sponsored groups, which
required a minimum monthly payment of $25,000, included Victoria's
Secret.
But there were also early signs that this new kind of social network
offered uniquely powerful tools for advertisers. In 2005, Interscope Records
released a single by Gwen Stefani called "Hollaback Girl." The
song takes the form of a sort of cheerleading chant, and Interscope's
marketers got the idea of promoting it explicitly to college cheerleaders,
hoping they would adopt it for their routines at games. Where better
to find college cheerleaders than at a college-only website? Dustin
Moskovitz had become good at mining profile data on Thefacebook for
advertisers, so it was little trouble for him to target cheerleaders.
This approach might seem obvious, but few sites on the Internet
before this could offer targeting based on information that had been
explicitly provided by users. Interscope could have instead hired a firm
that targets users on other sites based on inferential analysis of Internet
behavior. Such ad networks watch what people do using tiny pieces
of software called "cookies," which are installed in consumers' Web
browsers. They can know, for example, you have been to the kinds of
the ratebook effect
sites a twenty-year-old girl might go to, or that you have shopped for pop
music online. If you did both, they might place ads on pages you visit.
Such an approach infers who you are and what you're interested in by
supposedly savvy guesswork.
While such targeting has been considered acceptably accurate, it's
a shotgun approach. Many such ads are seen by people who aren't the
real targets. Even gender targeting is often inferred incorrectly online.
One longtime Internet ad executive estimates gender targeting errors at
35 percent. If you are sharing your boyfriend's laptop, for example, this
approach won't work very well. Another way an advertiser like Interscope
could achieve tight demographic targeting would be to find a site
just for college cheerleaders, if one existed, and run its ad there. But it
wasn't likely to get large numbers that way.
On Thefacebook, by contrast, Interscope could be given a guarantee
— its ad would only be seen by college girls who are either cheerleaders
or who have mentioned something about cheerleading in their profiles.
The company told Interscope exactly how many times it displayed the
ad on pages seen by such girls. "Hollaback Girl" did become a popular
cheerleading anthem at football games that fall. It's impossible to prove
the ads on Thefacebook were determinative, but it's a fair bet that just
about every cheerleader at the schools where Thefacebook operated
saw them.
Targeting of this type is enormously promising. A media kit used by
Colleran right after he started lists the following parameters an advertiser
could use for targeting college students: geography, gender, course,
keywords in profile, class year, major, relationship status, favorite books,
movies or music, political affiliation, and university status (student, faculty,
alumni, or staff). The house-painting and knife-peddling advertisers
could show their ads only to male students at colleges in regions
where they wanted to increase their workforce. Or they could aim more
tightly—at freshman males on the football team who had gone to high
school in northern Ohio.
Inside the company it was starting to sink in on these young pioneers
that they had a unique database about people that could be
tapped for many purposes. The combination of real validated identity
information and extensive information about individuals could yield
insights no Internet service previously had seen. A math whiz friend
of D'Angelo and Zuckerberg from Exeter spent the summer writing
algorithms to find patterns in Thefacebook's data. He was able to create
lists of user favorites. Movies were the top interest of the service's 3 million
users. Their five favorites were Napoleon Dynamite, The Notebook,
Old School, Fight Club, and Garden State. Favorite book: The Da Vinci
Code. Favorite musician: Dave Matthews. Soon the service began offering
something called Pulse. It tracked which books, movies, and music
were most popular on Thefacebook as a whole and on a given college
campus.
For all the promise Thefacebook's unique data held for advertisers,
most of the ads that were selling on the site at that point were generic
banner ads. Facebook had contracted with several ad networks, which
were posting ads willy-nilly. None of it was generating very much revenue.
The company was steadily burning through the money it had
raised from Accel. By year-end, it had $5.7 million left from the $12.7
million it had raised. Thefacebook had not yet become a real business.
These highly intellectual dropouts would spend endless hours debating
what Thefacebook was really doing. After all, there had never been a
website quite like this before. They took a serious, almost grave view of
the significance of what they were building. Zuckerberg referred to it as
a directory of people. That was, he said, what he had originally set out
to build. Parker put it more imaginatively. He said Thefacebook was
like a little device you carried around and pointed at people so it would
tell you all about them. Cohler's analogy was that it was like your cell
phone—a gateway to the people in your life. Even back then they often
heard the criticism that Thefacebook was a waste of time. Zuckerberg's
standard rebuttal: "Understanding people is not a waste of time." He
started saying that the goal of Thefacebook was "to help people understand
the world around them."
They loved to talk about how Thefacebook showed what economists
call "network effects." And it did, just as have many of the great
communications and software innovations of the last hundred years.
A product or service is said to have a network effect when its value
grows greater to all users each time one new user joins. Since every
incremental user thus in effect strengthens the service, growth tends to
lead to more growth, in a virtuous cycle. That was surely the case with
Thefacebook, just as it was with instant messaging, AOL, the Internet
itself, and even the telephone. Businesses or technologies with network
effects tend to grow steadily and to have a durable market presence.
While they wanted working at Thefacebook to be seen as cool —
that helped in recruiting—the product was another matter. Friendster
had lived by its coolness and was now dying. Thefacebook, Zuckerberg
began declaring, was "a utility." No term could sound more boring,
though he was really thinking in grandiose terms. He meant it as a way
of claiming Thefacebook's affinity with the telephone network and other
communications infrastructure of the past. "We wanted to build a new
communications medium/' says Parker. "We knew we'd be successful
when we were no longer cool—when we were such an integral part of
peoples' lives that they took us for granted." Dustin Moskovitz adds that
it was important for the company to escape the associations that came
with its campus roots. "It was always very important for our brand to get
away from the image of frivolity it had, especially in Silicon Valley," he
says. He had not been a big advocate of the beer-pong tournament.
Sleekness and efficiency were the image they sought, rather than
frivolity. Though Thefacebook's white and barren functional look stood
in stark contrast to the florid excess of MySpace, its design was still
awkward and inefficient, reflecting the additive way it had evolved since
its dorm-room days. Aaron Sittig, the graphic designer and programmer
who was Parker's close friend, had now joined Thefacebook full-time.
"On my first day I came in and asked Mark, What do you want me to
do?'" Sittig remembers. "And he's like 'You're a designer. So redesign
the site.'" It came to be called the Facelift project. Sittig spent the summer
working closely with Zuckerberg to disentangle software code and
simplify how everything worked. The simplicity that later came to characterize
the site was deliberate. "We wanted to get the site out of the way
and not have a particular attitude," says Sittig. "We didn't want people
to have a relationship with Facebook so much as to find and interact
with each other."
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 a company called
AboutFace, which used the Facebook.com address to market software
that companies used to create employee directories. AboutFace was
willing to sell, but didn't want Thefacebook stock as payment. Parker
ended up paying $200,000 in cash. He also oversaw a redesign of the
logo, removing the brackets that had surrounded "thefacebook" and
streamlining the typeface for the new company name: Facebook. The
partly pixelated head of Al Pacino in the upper left corner of the screen
remained, cleaned up a little and shrunk. The company officially became
Facebook on September 20, 2005.
But despite Parker's successes, every day it became clearer to Zuckerberg
and others that he was not the right guy to be helping manage
the company. Zuckerberg started to think he should run the company.
Parker himself doesn't deny he was unreliable. "I'm always gearing up
for a really big push and achieving a lot and then kind of disappearing,"
he admits, "which is not a good trait if you want to be operationally involved
in a company day to day." Parker was disappearing periodically.
And employees noticed his erratic moods.
Rebranding Facebook would turn out to be Parker's last important
act as company president. In the last week of August he was on a kiteboarding
vacation in North Carolina, where he had rented a house
right by the beach with several friends, including a young woman who
was his assistant at the company. That she wasn't yet twenty-one would
figure in Parker's later difficulties. One night midway through their vacation
week, they threw a party and invited the kiteboarding 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 drugsniffing
dogs and a search warrant naming "Scott Palmer." They said
they had a report that the house contained a large amount of cocaine,
ecstasy, and marijuana. They searched everywhere.
Parker and his friends repeatedly insisted that the police were mistaken
and that there were no drugs. But finally, after about an hour,
a policeman triumphantly returned brandishing a plastic bag containing
white powder. Parker, who had signed the rental agreement for the
house, was taken to the police station. When he got there he learned
there had been reports of drug use following the party two nights earlier.
After a lengthy back-and-forth over whether there was even enough evidence
to book him, Parker was arrested for felony possession of cocaine.
He was not formally charged with a crime. That would require an indictment.
He was released immediately.
Parker flew home to California, shaken but adamantly insisting he
had done nothing wrong. He told Zuckerberg, company counsel Steve
Venuto, as well as executives Dustin Moskovitz and Matt Cohler. They
decided it didn't call for any action by the company. Then Zuckerberg
told Jim Breyer about the incident. That did not portend well for Sean
Parker.
Breyer, Accel's board member at Facebook, took the arrest very seriously.
He was worried not only that the company's president and board
member was being accused of drug possession, but also that he had
been with an underage company employee at the time. Breyer knew
about the allegations about drug use and misbehavior at Plaxo, because
he had talked to Mike Moritz and other investors in that company about
Parker before investing in Facebook.
The fact that Parker had never developed a good relationship with
Accel and Breyer made it hard for him to resolve the matter quietly. A
complicated and tense negotiation ensued.
Zuckerberg was not convinced Parker had done anything wrong.
No official charges had been brought, after all. (They never would be.)
And Zuckerberg felt real loyalty to his friend. The CEO was deeply
grateful to Parker for having done such a good job negotiating with
Accel, and for ensuring he had control of the company.
But Breyer thought Parker was a liability for the company well beyond
his actions in North Carolina, whatever they might have been.
Though he had tremendous respect for Parker's intelligence, he saw
him as bringing a volatile edge to the company's culture. Breyer was
also fully aware of Parker's aversion to venture capitalists like himself.
Others in the company's leadership felt uncomfortably stuck in the
middle of an intractable dispute. Even some of Parker's friends felt that,
regardless of the merits of this particular accusation, he should not remain
Facebook's long-term president. For them, this incident was merely
the straw that broke the camel's back. So while some of these younger
employees supported Parker in his specific contention that he had done
nothing wrong, they weren't eager to retain the status quo. Among other
things, his compatriots worried about Parker's desire to remain the public
face of Facebook. It felt risky for the company to have that same
person leading what was beginning to seem like a reckless personal life.
A whirlwind of accusations and arguments swept the company up
into a genuine crisis. Breyer insisted Parker had to leave the company.
The pressure on Zuckerberg was intense. Meanwhile, Jeff Rothschild,
who had been brought in as a seasoned technologist by Accel but had
by now bonded with the team of young entrepreneurs, worked hard to
serve as a mediator. He spent hours talking with Parker and Zuckerberg
as they sought a resolution, as did company counsel Venuto (a longtime
associate whom Parker had hired).
All this took place over only a couple of days. Breyer demanded
Parker step down and was talking about filing a lawsuit because as a
board member he hadn't been informed earlier. Parker's friend and
board member Peter Thiel was also encouraging him to quit. Parker
and Zuckerberg sat in the dorm room and had an emotional conversation,
which ended with Parker agreeing to step down.
But this third time he was being ejected from a company he had
helped create, Parker had finally succeeded in building in some insurance
for himself. Under the terms he had carefully crafted to protect
himself and Zuckerberg, he had no obligation either to relinquish his
board seat or to give up his stock options, even if he was no longer an
executive. But Breyer insisted that he not only leave the board but also
stop vesting, or acquiring final ownership, of his stock, since he had
only been at the company about a year. (Vesting is generally tied to tenure—
the longer you remain with the company the more stock becomes
yours.) The company advanced Parker's vesting by a year, and he agreed
to relinquish about half his options. (Had he retained the options he
gave up, they would be worth around $500 million today.)
But Parker had the right to assign his board seat, which he was also
voluntarily relinquishing, to someone else. He had reservations about
giving it to Zuckerberg, because with the control of a third seat Zuckerberg
would have unchallengeable authority over the company's destiny.
However, Parker worried that any other choice would risk allowing
the company to fall under the control of outside investors. His assumption
that, if investors had the power, they would eventually seek to oust
Zuckerberg gave him, he felt, no choice.
Parker and Zuckerberg agreed the seat should revert to the CEO,
giving Zuckerberg control of two seats on the five-person board in addition
to the one he occupied himself. For the time being these two
seats remained unoccupied. But in the event of any serious disagreement
with Breyer and Thiel, Zuckerberg had the ability immediately to
appoint two new directors on the condition they vote as he instructed.
"That solidified Mark's position as the sort of hereditary king of Facebook,"
says Parker. "I refer to Facebook as a family business. Mark and
his heirs will control Facebook in perpetuity." Zuckerberg continues to
this day periodically to consult his former colleague.

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