AcquiredGoogle Part I: Origins of Search. How the Best Business in Human History Happened (Audio)
EVERY SPOKEN WORD
150 min read · 30,022 words- 0:00 – 0:46
Intro
- BGBen Gilbert
All right, David, last episode we are doing in our studios before Radio City.
- DRDavid Rosenthal
Ooh, that's right.
- BGBen Gilbert
How do you feel?
- DRDavid Rosenthal
Uh, we're about to go from, like, the stage of one, [laughing]
- BGBen Gilbert
[laughing]
- DRDavid Rosenthal
Very, very small audience of one to the very, very big stage.
- BGBen Gilbert
Where if we make a mistake, no one will notice-
- DRDavid Rosenthal
Yeah
- BGBen Gilbert
... and we just re-record it, and it's like it never happened. [chuckles]
- DRDavid Rosenthal
We should try that at Radio City. Just be like, "Ah, strike that. All right, let's take that again."
- BGBen Gilbert
Yeah. Hey, this is authentically Acquired, you guys. This is how we do it. You're getting a look at the inside. Probably not, though. All right, let's do it.
- DRDavid Rosenthal
Let's do it.
- SPSpeaker
Who got the truth? Is it you? Is it you? Is it you? Who got the truth now? Hmm. Is it you? Is it you? Is it you? Sit me down. Say it straight. Another story on the way. Who got the truth?
- 0:46 – 5:18
Why Google matters now: AI’s foundation and the most profitable business in the U.S.
- BGBen Gilbert
Welcome to the Summer 2025 season of Acquired, the podcast about great companies and the stories and playbooks behind them. I'm Ben Gilbert.
- DRDavid Rosenthal
I'm David Rosenthal.
- BGBen Gilbert
And we are your hosts. Artificial intelligence is the story of our time. It is definitively the next trillion-dollar technology wave after PCs, the internet, and mobile. And to understand AI, you have to understand the company most responsible for its technical foundation and the wave that came before it, Google. This episode begins our multi-part Google saga. Finally-
- DRDavid Rosenthal
Woo!
- BGBen Gilbert
... as I'm sure many of you out there are saying right now, Google has been the front door to the entire internet for twenty-five years now, a quarter century, but it wasn't always this way.
- DRDavid Rosenthal
No, it was not.
- BGBen Gilbert
Back in 1998, when Google was founded, there were a dozen other search engines that already existed, and there were a variety of different business models, most of which were not very interesting.
- DRDavid Rosenthal
Yeah, none of which were very interesting. [chuckles]
- BGBen Gilbert
Yes. So today, we will try to answer the question: Why did Google work? And once it did, how did it go from clever technology and nice product to the single greatest business of all time? I'm not being facetious, listeners. Google, and I should say Alphabet today, generates more net income, or profit, than any other US company. More than Apple, Microsoft, ExxonMobil, J.P. Morgan Chase, Berkshire Hathaway. This is a cash gusher. It is, A, super high gross margin, B, in a giant market, and C, according to the US government, as of today, they are a monopoly in that market, with ninety percent market share. That is three enormous numbers multiplied together to create that most profitable company in the US stat that I threw out earlier.
- DRDavid Rosenthal
Well, I'm glad we don't need to get to, uh, the government and all that until much, much later in our series, but yeah, this is the creation of the most beautiful business of all time.
- BGBen Gilbert
And Google's market position has been seemingly unassailable, at least until really this year, until the AI war has really heated up. So of course, it was that clean user experience that everyone talks about, with just a search box on the homepage, and the focus on the users, and the high-quality, fast search that spread virally through word of mouth. But good product is far from the only reason that Google became dominant. So today, we'll tell the story of why, while Google was nowhere near the first search engine, it was the last.
- DRDavid Rosenthal
Well, you know, uh, Microsoft may take a little issue with that with Bing, but- [chuckles]
- BGBen Gilbert
[chuckles]
- DRDavid Rosenthal
But only a little issue. [laughing]
- BGBen Gilbert
Yeah, a little. Few percentage points issue.
- DRDavid Rosenthal
Few percentage points of issue, yeah. [chuckles]
- BGBen Gilbert
Well, listeners, if you wanna know every time an episode drops, check out our email list. It is also the only place where we will share a hint at what our next episode will be, share corrections, updates, little tidbits we learned from previous episodes. That's acquired.fm/email. After this episode, join the Slack to talk about this with us and the whole Acquired community: acquired.fm/slack. And if you want more Acquired between each episode, check out ACQ2, our interview show, where we talk with founders and CEOs building businesses in areas we've covered on the show. The most recent was with Jesse Cole from the Savannah Bananas. David, that was the most fun I've ever had recording [chuckles] basically any podcast episode.
- DRDavid Rosenthal
It was bananas. It was awesome.
- BGBen Gilbert
Yes. Well, before we dive in, we wanna briefly thank our presenting partner, J.P. Morgan Payments.
- DRDavid Rosenthal
Yes, and as you all know, J.P. Morgan is our partner for our big Radio City show coming up on July 15th. We've been hard at work preparing. It's gonna be an amazing night. The show is basically sold out. I think there are, like, less than 100 tickets remaining right now out of the 6,000 total. So if you haven't grabbed yours yet, go do it, like, right now, or they will all be gone. J.P. Morgan will be showing off all their latest and greatest payments tech there. We'll have exclusive merch, a fan meetup before the show, an after-party, and an encore event the next day at the New York Stock Exchange. So details on all of that are in the Acquired Slack. We're so pumped.
- BGBen Gilbert
Yes, we cannot wait to see you there. So with that, this show is not investment advice. David and I may have investments in the companies we discuss, and this show is for informational and entertainment purposes only. David Rosenthal, when is the first time any human being searched for anything ever? [laughing]
- DRDavid Rosenthal
Uh, I have no idea. That's a great question. [chuckles]
- BGBen Gilbert
Not that far back? Where do we start?
- DRDavid Rosenthal
Yeah. Well, you know what? We should ask Google.
- BGBen Gilbert
[chuckles]
- 5:18 – 9:55
Founders’ origin stories: ambitious builders, not accidental academics
- DRDavid Rosenthal
But to do that, we need to tell the story of Google, and that story starts in March of 1973 in Lansing, Michigan, where Larry Page is born as the second child and second son to Carl and Gloria Page. And Larry, of course, grows up in Lansing because his dad, Carl Page Sr., is a professor of computer science in nearby East Lansing at Michigan State University. Now, before my dad, who went to MSU and is an MSU alum, gets too excited here, I regret to inform him, my dad, and you, Ben, that Carl got his PhD from Michigan. I'm sorry about that.
- BGBen Gilbert
And, uh, would send his son there as well.
- DRDavid Rosenthal
Yeah, yeah, both of his sons, and unfortunately, Larry's mom also went to Michigan.... also got a CS degree there, and also teaches programming as a programming instructor at MSU.
- BGBen Gilbert
Yeah. Pretty Michigan heavy.
- DRDavid Rosenthal
Pretty Michigan heavy, but, uh, pretty amazing childhood in, you know, the early mid-'70s here for Larry and his older brother. I mean, maybe not unique. I'm sure there were a few other households in America, in the world, that grew up with both of their parents steeped in computers as computer science professors, but really pretty unique.
- BGBen Gilbert
Incredibly unique. Are you kidding me? Larry Page grew up with two computer science academics as parents in the '70s, which would've meant that his parents would've needed to start in the '50s. Very, very few households.
- DRDavid Rosenthal
Like, right at the same time as the PC era is coming online, and Microsoft, to just have that be your air, your daily existence growing up as a kid, like, how incredible is that?
- BGBen Gilbert
Amazing.
- DRDavid Rosenthal
So even more so for future Google to come, for the 1979 to 1980 academic year, when Larry is six and seven years old, his dad does a sabbatical year at Stanford. So the whole family goes out and lives in Palo Alto, and Stanford and early Silicon Valley there makes a big impression on young Larry. And then he continues to kind of be influenced by this because, you know, I mentioned his older brother, Carl Jr., who's nine years older than him. Carl goes to Michigan, majors in CS, just like Larry would, and then when he graduates, he goes out to the West Coast, actually to the Pacific Northwest, and he works fairly early at Microsoft, and then, uh, Mentor Graphics down in Oregon. Carl Jr. would ultimately also come down to Silicon Valley and, uh-
- BGBen Gilbert
Mm, mm
- DRDavid Rosenthal
... play a little role in this story, as we will see in a little bit. But back to Larry here. Part of the reason I say all this, and I wanna include Sergey, too, in what I'm about to say, even though we haven't introduced him yet in the story, I think there's this perception today that Larry and Sergey were these, like, bumbling academic guys who weren't really business-minded, and Google was a research project, and this all sort of happened by accident, that they built the best business of all time. Like, absolutely freaking not. [laughing]
- BGBen Gilbert
[laughing]
- DRDavid Rosenthal
We want to dispel that notion right now. [chuckles] You know, one of the things we heard over and over again, talking to people in research, is how hugely ambitious the two of them were, not just for the products they were building, but for Google, for the business. Larry's a different generation and a very different personality than Mark Zuckerberg, but you should think about his ambition and his desire to build a huge, world-changing company at the same level as him.
- BGBen Gilbert
Yes. To your point, Google did not happen by accident. Or another reasonable comparison, the generation before, Bill Gates. I think they publicly, Larry and Sergey, don't get the same sort of ethos that those two get, but the same fire was there.
- DRDavid Rosenthal
Larry would say later, this is a quote from him: "Probably when I was 12, I knew I was gonna start a company eventually. I wanted to make the world better, and in order to do that, you need to do more than just invent things." And he would say another time later, "You need to use business and entrepreneurship to make these things real. It's not enough just to invent them."
- BGBen Gilbert
Yeah, and he's alluding to two things there. One is companies are the vehicles by which you bring ideas to the masses, and two is, in a capitalist society, a company is the vehicle that can accumulate profits, which then you can reinvest to build something of your great scale and ambition.
- DRDavid Rosenthal
Yes, and Larry got this all along, and Sergey did, too. Okay, so as we all know, Larry goes to Michigan undergrad. He graduates in 1995, and then he goes off to Stanford to get his PhD in computer science, where he has a fateful meeting with his business partner, friend, soulmate, Sergey Brin.
- 9:55 – 15:50
The Stanford spark: meeting, partnership chemistry, and early research direction
- BGBen Gilbert
And isn't the way this all went down that Larry was visiting, and Sergey was already in the program? I think Sergey was leading some kind of tour to try to sell Larry on joining the program, and Larry is... Even though he's, like, the new guy there, he's, like, challenging Sergey at every little corner. He's bringing up, "Wouldn't a better system be this?" And they're talking about cities and transportation and civic design, and they're almost sort of, like, bickering back and forth in this verbal sparring of who's smarter, even though they just met. That's sort of, like, the story that I read, and I don't know, what did you and I read? Probably six or seven books between us on the history of Google.
- DRDavid Rosenthal
Yeah. Many, many versions of this story out there. As I was doing the research, I talked to one of our good friends, Anna Patterson, who was- been in the Google orbit for a very long time. She was an early employee, left, started a company, Google reacquired, was a VP of engineering there for a long time. She told me another little bit of this story that has never, I think, before been told publicly.
- BGBen Gilbert
Ooh!
- DRDavid Rosenthal
Well, it turns out Anna was a postdoc at Stanford at this time, and she's the one who organized this new students weekend. [chuckles] So she organized Larry and Sergey meeting. And she told me that the first night of the weekend, so, like, the first event, the first time that they actually met, was at drinks at the British Bankers' Club in Menlo Park. And this sort of magical friendship, bickering back and forth, but, you know, a real partnership was started there, and it was already going that night. So Larry and Sergey, they end up shutting the bar down that night, and another famous local Stanford alum picks up the tab for the group.
- BGBen Gilbert
Ooh.
- DRDavid Rosenthal
Can you guess who that person was?
- BGBen Gilbert
[laughing] Uh, I don't know. Lay it on me.
- DRDavid Rosenthal
Charles Schwab.
- BGBen Gilbert
No way!
- DRDavid Rosenthal
Yep, apparently lived locally in the area, went to the British Bankers' Club all the time, and he'd do this. He'd just see Stanford students there and be like: "All right, I, I got you guys."
- BGBen Gilbert
That's awesome. So Charles Schwab funded the first date of Larry and Sergey. [laughing]
- DRDavid Rosenthal
Yeah. [laughing] Amazing. And Charles Schwab accounts would go on to hold billions and billions-
- BGBen Gilbert
[laughing] Yes
- DRDavid Rosenthal
... and billions of dollars' worth of Google stock because of that. [laughing]
- BGBen Gilbert
Funny.
- DRDavid Rosenthal
Amazing. But yes, I think the spirit of all these stories is true. It was a instant, electric-... friendship, partnership between the two of them, and that would carry on forever. I mean, they shared an office at Google. I don't think we've really covered founders before that were true partners in the way that Larry and Sergey are.
- BGBen Gilbert
Hmm.
- DRDavid Rosenthal
Like, you know, reminds me a little bit of you and me. [chuckles]
- BGBen Gilbert
On a very different scale, yes.
- DRDavid Rosenthal
On a very different scale.
- BGBen Gilbert
But that's interesting, equal co-founders, I'm racking my brain. Maybe Bill Gates and Paul Allen, but even then, it became very clear very quickly Bill Gates is the guy-
- DRDavid Rosenthal
Yeah
- BGBen Gilbert
... that was reflected in their equity ownership.
- DRDavid Rosenthal
Exactly. I'm sure we've covered other companies where there were equal equity ownership amongst founders, but where it was a real true partnership, one plus one equaled, like, 100.
- BGBen Gilbert
It's fascinating. Yeah, maybe Jensen, Curtis, and Chris at Nvidia, but over time, you know, it kind of became Jensen. Yeah, you're right, this is sort of unique for us to be covering true founder partners that made it decades together.
- DRDavid Rosenthal
I mean, even Warren and Charlie, Charlie was never full-time at Berkshire Hathaway.
- BGBen Gilbert
Right, and certainly owned way less.
- DRDavid Rosenthal
The closest I can think of is maybe Capital Cities with Tom Murphy and Dan Burke.
- BGBen Gilbert
Hmm. It's really interesting.
- DRDavid Rosenthal
Okay, so Sergey, what's his story? Sergey was also born in 1973, a few months later in August, in some place even colder than Michigan, Moscow [chuckles]
- 15:50 – 23:29
From web annotations to PageRank: the leap that created modern search relevance
- DRDavid Rosenthal
Yeah. Okay, so fall of 1995, Larry arrives at Stanford. Sergey's already there. Terry Winograd is his PhD advisor, and Larry and Sergey are already building this great friendship. Larry, that academic year, presents a dissertation topic to Terry, to his advisor, in collaboration with Sergey, and the idea they have is this World Wide Web thing seems to be becoming a thing. You know, here we're 1995. We're, what, a year after Netscape was started-
- BGBen Gilbert
Ooh
- DRDavid Rosenthal
... a couple years after Mosaic.
- BGBen Gilbert
I have a stat for you on this era on the internet.
- DRDavid Rosenthal
Ooh, yeah, lay it on me.
- BGBen Gilbert
This is from John Battelle's book, The Search, which is excellent. From 1993 to 1996, the web grew from 130 sites to more than 600,000, and if you [chuckles] compute that rate of growth over that four-year period, it is 723% growth year over year for four years. That is exponential. [chuckles]
- DRDavid Rosenthal
Yeah, this is the version of the Jeff Bezos realization, where he's like, "I gotta leave DE Shaw, and I gotta build Amazon. Like, nothing like this has ever happened before." [chuckles]
- BGBen Gilbert
Right. The internet is a phenomenon like no other, and if it keeps going... I mean, it's amazing for something to grow 700% year over year at all, but it happens, but for that to keep happening year over year over year for half a decade, that is worth quitting your job, dropping everything, changing your whole life.
- DRDavid Rosenthal
Yep, and just a couple years before, two other PhD students at Stanford had started this thing called Yahoo! And so I think perhaps inspired by what Yahoo! was doing, Larry proposes that they're gonna work on this idea of a system that will allow people to make annotations and notes directly on websites, instead of in a centralized directory like Yahoo!, 'cause Yahoo! was human hand-curated commentary-
- BGBen Gilbert
Huh
- DRDavid Rosenthal
... you know, directory of websites, and so the idea is like, "Oh, this is gonna be a decentralized annotation system where anybody can say what's interesting about a website."
- BGBen Gilbert
Oh, that's funny. I thought I knew the whole history of Google, but I somehow missed this.
- DRDavid Rosenthal
So Terry, Larry's advisor, is like, "Okay, you know, I like the, uh, problem space, shall we say, of the web for, you know, your dissertation here, Larry, but-... why don't you go refine this idea [chuckles] a little more and come back to me? So Larry goes off, and of course, he's collaborating with Sergey on this, and as they think about it, they realize that, ah, actually, there's sort of a fundamental flaw in what they were planning for this annotation system, which is that for a big site, like, say, The New York Times or something, it's just gonna get overrun with hundreds, thousands, millions of users commenting, and you need a way to separate the wheat from the chaff, so to speak, of the comments. You need to be able to have the good ones rise to the top. You need a, a way to rank them, you might say. [chuckles] And so Larry has a quote here: "It wasn't that we intended to build a search engine. We built a ranking system to deal with annotations. We wanted to annotate the web, build a system so that after you'd viewed a page, you could click and see what smart comments other people had about it. But how do you decide who gets to annotate a big site like Yahoo? We needed to figure out how to choose which annotations people should look at, which meant we needed to figure out which other sites contained comments that we should classify as authoritative," hence, PageRank.
- BGBen Gilbert
Ah, yes, we should say Page... It is ironic that the things that were being ranked were web pages 'cause the actual page in PageRank is named for Larry Page, not for the pages they would rank. [chuckles]
- DRDavid Rosenthal
Right. Exactly. So, uh, Larry goes back to Terry, and he's like, "Okay, this ranking idea, this seems like a really interesting computer science problem. The annotation thing seems messy. Why don't you just focus on rankings?" So Larry goes back and ultimately has the breakthrough leap. "Oh, we should apply rankings to web pages themselves." Larry says, "Wow, the big problem here is not annotation. We should use it not for ranking annotations, but for ranking searches!"
- BGBen Gilbert
Ding, ding, ding, ding, ding.
- DRDavid Rosenthal
And thus, at least the germ of the idea for PageRank as we all know it today, is born.
- BGBen Gilbert
So essentially, just the mechanics of what the idea is, is try to rank websites based on how authoritative they are, based on how credible they are, and this is something that has been done somewhere before the web, very close to home for all these Stanford folks, academia.
- DRDavid Rosenthal
Of course, yes!
- BGBen Gilbert
How important is a research paper? Well, that depends how many other people cited the research paper.
- DRDavid Rosenthal
And in particular, not just how many raw number of other papers cite a research paper-
- BGBen Gilbert
How many important papers cite your research paper.
- DRDavid Rosenthal
If you're in an important journal, what do those papers cite? And this becomes the inspiration for how they're gonna do the ranking of web pages.
- BGBen Gilbert
And this was actually a research field before the web. The study of academic citations, there's already sort of a body of work around how to do this well.
- DRDavid Rosenthal
Oh, interesting. I didn't know that, actually. I mean, it makes sense.
- BGBen Gilbert
It's kinda like how Hollywood loves making movies about Hollywood. Academia loves doing papers about papers. [chuckles]
- DRDavid Rosenthal
Yeah.
- BGBen Gilbert
So there are some examples to look at of how might one use references or citations to weight importance.
- DRDavid Rosenthal
Right. So we're almost all the way there to the huge leap that would become PageRank and then BackRub and ultimately Google, but there's still one missing piece. They've got the theory of how to do this, but what's a citation on the web? Well, they realize it's a link. A hyperlink is the exact same model as an academic citation, and not only is it the same as a citation, it's even better because there's this metadata-
- BGBen Gilbert
Oh, yes
- 23:29 – 25:26
Crawling the whole web: why Google could only be built in that narrow window
- DRDavid Rosenthal
So there's one more thing to making this brilliant PageRank idea work, which is a little problem, which is that the way the web is architected, any given web page only shows outgoing links. There's no way to query a page and say, "Oh, who links to me?" You can only query a page and say, "Who do you link to?"
- BGBen Gilbert
Right. It's kinda like it's easy for me to answer the question, "Who's in my phone book in my phone today?" It's hard for me to answer the question, "Whose phone books am I in?"
- DRDavid Rosenthal
Exactly, and so the only way you could figure that out is if you somehow went and got a copy of everybody's phone book. [chuckles]
- BGBen Gilbert
[chuckles] Right.
- DRDavid Rosenthal
And then could backtrace all the links.... Well, that's what they do. Google could not have been built at any other time in history-
- BGBen Gilbert
Yes
- DRDavid Rosenthal
- because-
- BGBen Gilbert
The web was actually small enough that you could go suck it all up then.
- DRDavid Rosenthal
Exactly! It was small enough that as a research project, it was not totally insane-
- BGBen Gilbert
Pretty insane. [laughing]
- DRDavid Rosenthal
It was just a little bit insane.
- BGBen Gilbert
Yeah. [laughing]
- DRDavid Rosenthal
It was still pretty insane to say, "Oh, I'm gonna go [laughing] crawl the entire internet, make a copy of every web page out there, store it in something, which we'll get to, [laughing] and then trace back all the links."
- BGBen Gilbert
And then reverse compute all the links to answer that one seemingly simple question of: what web pages link to me?
- DRDavid Rosenthal
If you had tried to undertake this as a brand-new project, even just a year or a couple years later, it would've been impossible, because the web would've already gotten so big that to just start de novo and create a index copy like this, like a full copy-
- BGBen Gilbert
Even one year later would've been tens of millions of dollars, and within a couple of years would've been hundreds of millions of dollars.
- DRDavid Rosenthal
Yep, prohibitively expensive.
- BGBen Gilbert
So we're in, what, '96, '97 here?
- DRDavid Rosenthal
Yep, we're in '96, kind of the back half of that first academic year of Larry at Stanford.
- BGBen Gilbert
Great.
- 25:26 – 29:54
BackRub becomes Google: early prototype, viral adoption, and Stanford buckling
- DRDavid Rosenthal
So with Terry's encouraging, Larry and Sergey go forth to undertake this ambitious project. They set up a page on the Stanford internet. They decide that they're going to call the project BackRub, [chuckles] since it uses backlinks for ranking web pages. So they spin up backrub.stanford.edu, and Larry writes the first implementation of PageRank and the crawler to go do this. He writes it in Java, and it's, like, super buggy and basically doesn't work. So they ask one of their friends there at Stanford, a guy named Scott Hassan, to help them. He- Scott's a better coder than Larry and Sergey is.
- BGBen Gilbert
Mm.
- DRDavid Rosenthal
So he codes it up in Python, and it actually sort of works. Now, Scott, not an employee of Google, never would become an employee of Google, 'cause it's not a company yet. It's a research project.
- BGBen Gilbert
Right, and they hadn't even come up with the name Google. I mean, nothing about this... It's not a search engine.
- DRDavid Rosenthal
Exactly. So if you go to that project homepage, and you can find cached versions of this on the internet or images, uh... I think there's even a recreation of it out there.
- BGBen Gilbert
Yes, with the really weird black-and-white picture of a back rub with the red text over it.
- DRDavid Rosenthal
Yeah, I think that picture actually was on [laughing] backrub.stanford.edu.
- BGBen Gilbert
[laughing]
- DRDavid Rosenthal
It looks like somebody's back. [laughing]
- BGBen Gilbert
I don't know. They certainly didn't search Google Images for it, I know that.
- DRDavid Rosenthal
Yeah, exactly. Exactly. So the text on the page says, "BackRub is a quote, unquote, 'web crawler,' which is designed to traverse the web. Currently, we are developing techniques to improve web search engines." So yeah, Ben, they're not thinking of BackRub-
- BGBen Gilbert
Mm
- DRDavid Rosenthal
... as a search engine yet. They're thinking of BackRub as just a implementation of a crawler and the PageRank algorithm.
- BGBen Gilbert
Oh, that's interesting, but they have the insight that this method of ranking, if it turns out to be better, could contribute to better search engines.
- DRDavid Rosenthal
Yep, 'cause again, even though Larry really wants to start a company, he's thinking he's gonna get his PhD, and then go forth here.
- BGBen Gilbert
Kinda like Mark Zuckerberg got years into Facebook before realizing, "Oh, this is my company."
- DRDavid Rosenthal
So Larry and Sergey are building BackRub here, and I mentioned Scott Hassan, their friend, who helps code it up in Python, doesn't end up joining Google. Well, what happened to Scott? Scott leaves while all this is going on and starts a company. Because it's 1996, 1997, you're here in Silicon Valley-
- BGBen Gilbert
Right
- DRDavid Rosenthal
... the bubble is inflating. [chuckles] Like, what do you do? You go start a company.
- BGBen Gilbert
It's your obligation to go take and smash this piñata. [chuckles]
- DRDavid Rosenthal
So Scott leaves, starts a company called eGroups. That company, a couple years later, ends up getting acquired by Yahoo, becomes Yahoo Groups for about $400 million.
- BGBen Gilbert
Oh.
- DRDavid Rosenthal
Do you know who co-founded eGroups with Scott?
- BGBen Gilbert
Ugh, man, you're stumping me today. No.
- DRDavid Rosenthal
Larry's older brother, Carl Page.
- BGBen Gilbert
Oh! That's this company.
- DRDavid Rosenthal
Yes.
- BGBen Gilbert
Wow.
- DRDavid Rosenthal
So here we are, we've got Larry and Sergey doing this research project to improve search engines. Meanwhile, their buddy who helped code that and Larry's older brother, they just went and they started a company, and then they raised money. Sequoia and Mike Moritz would end up funding eGroups.
- BGBen Gilbert
And then they sell it for $400 million to the leading web company at the time? That seems like a good idea. [chuckles]
- 29:54 – 40:49
Failed to sell the tech: portals’ business model conflicts (Excite, Yahoo, others)
- DRDavid Rosenthal
So they're shopping it around that spring, that summer. They get a bunch of meetings. They meet with Infoseek, Lycos, all the existing search engines.
- BGBen Gilbert
And we should say, there was a large list of other search engines, portals, internet properties-
- DRDavid Rosenthal
Search engine-like things
- BGBen Gilbert
... yes, that existed and had traffic. I mean, Archie-... Gopher, AltaVista, HotBot, Inktomi, Lycos, Yahoo, Excite, Infoseek-
- DRDavid Rosenthal
The list goes on, and on, and on. Yes. So the closest they get that spring and summer is with Excite. This story is amazing. So supposedly, this is according to In the Plex, Steven Levy's book, great book that we used as a source for the episode, they end up getting a meeting with Vinod Khosla, a legendary founder of Sun Microsystems. By this point in time, he's one of the top VCs in the Valley. He's at Kleiner Perkins, alongside John Doerr. The two of them are running the firm, and Vinod is on the board of Excite. And so somehow, [chuckles] Larry and Sergey, and I think they bring Scott along, get a meeting with Vinod, and they hammer out a deal that Excite is gonna license this BackRub search technology from the two of them for about a million dollars. Part of that's in cash, part of that's in Excite stock, and Larry and Sergey are gonna come work at Excite that summer, implement BackRub for their [chuckles] search, you know, basically make Excite into Google, and then they're gonna leave, and they're gonna go back to Stanford in the fall. And they get so far that they run a test, a side-by-side test of Excite's search results, the original, you know, algorithm, and then the BackRub algorithm. And the legend goes that they're demoing this test [chuckles] to Excite's CEO as, like, a final step to finalizing this deal, and the results are so relevant with BackRub. You know, you get exactly what you search for, exactly what you want. It's right there. You click, you go to it, and the usual Excite search is bad. You have to, like, click around, you go forward, you come back, you spend a lot of time on the site. [chuckles] And the CEO is like, "Why on earth would we move to your algorithm? I want people to stay on my site."
- BGBen Gilbert
[chuckles] Yes.
- DRDavid Rosenthal
"I make money when people stay on my site. I don't want them to leave my site. You guys are crazy. Get out of here. I'm killing the whole deal."
- BGBen Gilbert
It is amazing that as early as 1996, '97, this time period, this very important conflict of interest is teased out. This is basically why Google beat Yahoo! I mean, there's a lot more to it, but the portals all had this mentality of, "We want to build more and more and keep people on our site, in our ecosystem, continue to look at our banner ads," and Google, from this point, basically forever, was, "How quickly can we deliver someone something relevant, so they can leave Google and have had a good experience finding what they really wanted?"
- DRDavid Rosenthal
Now, all this is laughable in hindsight but made total sense at the time because what was the business paradigm for all these sites? What was the model? It was banner ads. It was CPM, cost per thousand views. You wanted page views and impressions on your site, and here what BackRub is doing is they're gonna kneecap your page views.
- BGBen Gilbert
Right. They're gonna dramatically reduce the number of page views and allocate them to other properties on the web, so they can leave your property.
- DRDavid Rosenthal
This deal was never gonna happen with Excite or anybody else because it broke the business model.
- BGBen Gilbert
Right. It was not strategic for them. It was a conflict of interest to implement this type of better ranking, better search, faster technology. So back to the lab, right? No deal.
- DRDavid Rosenthal
Yeah, exactly. That fall, 1997, Larry and Sergey go back to school. All these get-rich-quick deals have fallen apart. Nobody wants BackRub, and Larry's just like, "Well, F it. All right, this is how I believe search should work. We're gonna build this thing ourselves here at Stanford." Quote from him: "We couldn't get anyone interested in buying BackRub. We did get offers, but they weren't for much money, so we said whatever. We went back to Stanford to work on it some more. These companies weren't gonna focus on search. They were becoming portals, i.e., they wanted eyeballs, page views. They didn't understand search, and they weren't technology people."
- BGBen Gilbert
Yeah, and, I mean, when he says, "We talked to others," they tried to sell PageRank to Yahoo! for one million dollars and were rejected, and there's gonna be chapters of this story that you can mark by the different times that Yahoo! discussed buying Google and didn't. But this is the very first. They showed the tech to Infoseek, also didn't happen. Infoseek was bought by Disney and later shut down. They showed the tech to Lycos. They were shopping it all around town.
- DRDavid Rosenthal
So they get back to campus, and they're like, "All right. We're gonna build a real search engine ourselves." First order of business, the name. [laughing]
- BGBen Gilbert
[laughing]
- DRDavid Rosenthal
BackRub, uh, probably not gonna fly.
- BGBen Gilbert
Yeah, describes the technical underpinnings but doesn't really describe the searching.
- DRDavid Rosenthal
Yeah, so they're casting about, trying to find the right name to encapsulate what they're doing, this sort of new, good form of search, and the story is that Larry's dorm mate suggests the term Google.
- BGBen Gilbert
Oh, wait. Do you know the name before this?
- DRDavid Rosenthal
Oh, no.
- BGBen Gilbert
Do I know something you don't? Oh, this is great.
- DRDavid Rosenthal
Ooh, go for it!
- BGBen Gilbert
The name is What Box.
- DRDavid Rosenthal
What Box?
- BGBen Gilbert
What Box. It rolls right off the tongue. You know, it's a box that you type stuff into.
- DRDavid Rosenthal
Mm-hmm.
- BGBen Gilbert
It's sort of a question.
- DRDavid Rosenthal
Okay, I get it.
- BGBen Gilbert
But they decided that it sounded too close to a porn site-
- 40:49 – 48:53
Legendary seed round: Bechtolsheim’s check forces Google Inc. into existence
- DRDavid Rosenthal
So Larry and Sergey go to a professor in the CS department at Stanford named Dave Cheriton, and Dave had started an Ethernet company called Granite Systems with Andy Bechtolsheim from Sun, while also staying as a professor at Stanford at the same time. He was a founder of Granite Systems and had stayed as a professor. Cisco had just acquired Granite for two hundred and twenty million, and so Larry and Sergey are like: "Oh, okay, Dave, he's one of our professors. He knows how to do this stuff." And he's like, "Well, why don't you talk to Andy about how we could spin this out and make it into a company?" So Dave emails Andy that evening, and Andy replies right away. He's like: "Sure. I'm kind of busy tomorrow, but how about we meet at your house at eight AM in the morning? I'll come by on my way to the office." And thus begins the story of Google's legendary seed financing round and the crazy cast of characters involved in it. But before we tell that story...
- BGBen Gilbert
Now is a great time to talk about our presenting partner, J.P. Morgan Payments. So, listeners, you've heard us talk about specific aspects over the last few episodes, like biometric payments, their developer platform, and their supply chain financing. But today, we wanted to pop up a level and tell you about the Acquired and J.P. Morgan partnership itself.
- DRDavid Rosenthal
... Well, first is the team. The folks there at J.P. Morgan are, A, absolutely world-class, and B, really get acquired in what makes this community special. Just look at the Chase Center show we did. They took our vision and said, "What if we did all this times ten?" And now we're about to go do it all over again at Radio City.
- BGBen Gilbert
And deeper than that, they're just an insanely trusted brand. J.P. Morgan Payments is the world's largest payment franchise. They power eighteen of the top twenty corporations in the world, and most companies we've covered on the show. In fact, over ninety percent of the Fortune five hundred companies do business with them.
- DRDavid Rosenthal
A couple years ago, we were worried that, oh, J.P. Morgan Payments might only be for big companies, but it's not. We've seen startups that heard about them on Acquired become customers, and that's our goal in picking partners, is to find the very best companies that create value for listeners and will scale with your success and be around forever. That is J.P. Morgan Payments. They literally [chuckles] do ten trillion dollars in payment volume a day. Think about how insane that is. And with J.P. Morgan processing over fifty percent of all US e-commerce transactions, their software and payment rails basically underpin our entire global financial system. [chuckles]
- BGBen Gilbert
Yes, and lastly, every single one of your companies needs payments. J.P. Morgan thinks about payments as a lever for growth, not just vanilla operational stuff. They've been investing heavily with products now for fraud prevention, FX, working capital, and more, all of course, built enterprise-grade, and with developer tools and APIs. You can learn more at jpmorgan.com/acquired, which itself is a cool custom site they've built that has details on the products we've been talking about all season, plus a little behind-the-scenes video of Acquired live at Chase Center from last year. When you get in touch, just tell them that Ben and David sent you, or shoot us a message in Slack, and we'll get you connected with their team. All right, David, the Google seed round.
- DRDavid Rosenthal
Yes, here we go. So eight AM the next morning, Larry and Sergey rouse themselves out of bed over on the Stanford campus, head on over to downtown Palo Alto at Dave's house, and Andy drives up. He's like: "All right, I'm in a hurry. Show me what you got." They demo Google for him. Andy loves it. He's like: "Great, I'm in. Hundred thousand dollars?" And Larry and Sergey are like: "But, but w- we weren't talking about raising money-
- BGBen Gilbert
Like today. [chuckles]
- DRDavid Rosenthal
... We, we just wanted some advice to start a company."
- BGBen Gilbert
[laughing]
- DRDavid Rosenthal
Andy's like: "Great, I'll go get the check from my car." [laughing]
- BGBen Gilbert
[laughing]
- DRDavid Rosenthal
He writes a check to Larry and Sergey, made out to Google Inc., for a hundred thousand dollars, basically just throws it at them, hops in his car, and takes off. [laughing] Google Inc. does not exist yet. [laughing]
- BGBen Gilbert
[laughing]
- DRDavid Rosenthal
This is actually true. This actually happened. Andy's like: "You guys figure this out. That's your problem, not mine. I'm good for the money."
- BGBen Gilbert
No investment documents, no valuation, just, "Here's a hundred thousand dollars. I assume I will get something for my investment."
- DRDavid Rosenthal
Yep, exactly, and this was the forcing function for Google Inc. to get founded.
- BGBen Gilbert
So Larry and Sergey need to be able to, like, spin up an entity, have that own the intellectual property from Stanford, and set up a bank account for that entity, such that they can deposit this check before it expires.
- DRDavid Rosenthal
It takes a, a couple months to get all this done.
- BGBen Gilbert
[chuckles] Yes.
- DRDavid Rosenthal
Which, depending on who you ask, is either very good or very bad because in the intervening months, Dave himself decides to throw in another hundred thousand dollars to the funding here, and Larry and Sergey meet a former Netscape guy named Ram Shriram, who started advising them on starting this company, spinning things out.
- BGBen Gilbert
And longtime Acquired listeners will recognize this name from our Amazon episode.
- DRDavid Rosenthal
Oh, yes. Ram had left Netscape and joined a startup called Junglee that amazon.com then acquired, and so Ram had a little bit of liquidity. He throws in for two hundred and fifty thousand dollars into the round, and he's like: "Hey, do you guys wanna meet Jeff?" [chuckles] Jeff Bezos. [laughing]
- BGBen Gilbert
[chuckles] Who at this point, it's kind of interesting, you think about Amazon and Google as kind of equally old companies. Jeff is sort of the elder statesman of the internet. His company was started in 'ninety-four. This is 'ninety-eight. Amazon just went public the year before. I mean, it's kinda crazy that, at this point in time, it was little Larry and Sergey's grad students meeting public CEO Jeff Bezos.
- DRDavid Rosenthal
Yeah, yeah.
- BGBen Gilbert
It's almost like when your six-month-old baby is hanging out with a fourteen-month-old. You're like, "Oh, my God, they're so different-"
- DRDavid Rosenthal
Right. Right, right
- BGBen Gilbert
... "but, like, they're gonna be classmates in a couple years. They're basically the same age."
- DRDavid Rosenthal
Exactly. So Ram arranges a meeting, and the next time that Jeff is in Silicon Valley, they all meet at Ram's house, and similar to Andy Bechtolsheim, Jeff's like: "Great. Ram, what are you in for, two fifty? I'm in for two fifty, too." [laughing]
- BGBen Gilbert
[laughing]
- 48:53 – 59:14
Search in 1998: AltaVista’s index, Yahoo’s directory dominance, and cost realities
- BGBen Gilbert
But besides office space, it's time to put your product out into the world, and I think it's worth drilling in here. What was the state of search in nineteen ninety-eight when Google becomes a company?
- DRDavid Rosenthal
Yep, I think it's worth saying a little bit more about two other players to set the context. The first is AltaVista. Folks who are old enough might remember, AltaVista, pre-Google, was, like, pretty good.
- BGBen Gilbert
It was pretty good.
- DRDavid Rosenthal
AltaVista has a fascinating history. This is wild. I didn't know this until doing research for this episode. Do you know where AltaVista came from?
- BGBen Gilbert
I do, but most people don't. DEC, Digital Equipment Corporation.
- DRDavid Rosenthal
DEC, Digital Equipment Corporation's Western Research Laboratory, which was their Palo Alto research lab, their equivalent of Bell Labs. But DEC, I mean, the company we talked all about in our Microsoft series, where Dave Cutler came from, who wrote Windows NT, you know, legendary, legendary company.
- BGBen Gilbert
Right. Hardcore enterprise, big hardware-
- DRDavid Rosenthal
Yep
- BGBen Gilbert
... computing company.
- DRDavid Rosenthal
The mini computer company. Judy Faulkner wrote Epic on a DEC mini computer, right?
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
This is where AltaVista came from, and the big insight that they had was you can go crawl the web to build the index in parallel. So before AltaVista-
- BGBen Gilbert
Hmm
- DRDavid Rosenthal
... all the other web crawlers out there that were building search engines, they were just like single-threaded processes. You go crawl one page, and then you go crawl another page, [chuckles] and then you go crawl-
- BGBen Gilbert
Huh
- DRDavid Rosenthal
... another page. And the internet was small enough back then that people didn't really think to do it any other way, 'cause remember, it's all growing so fast.
- BGBen Gilbert
Oh, fascinating, and it's a super parallelizable process. Why not? Oh, and this-
- DRDavid Rosenthal
Of course
- BGBen Gilbert
... makes sense 'cause DEC hardware would be pretty well-suited for this. They've got a big enterprise appliance that they need applications for.
- DRDavid Rosenthal
Exactly. This is why it was a research project at DEC. It was a way to show off the power of their latest enterprise-class servers that they were hawking. So if you think about what are the competitive vectors of search, what makes one search engine better than others? It's not just the ranking. Today, people think about PageRank and Google and the innovation and the ranking and the relevancy. That was the most important thing. There are actually two other vectors that are critical.
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
One is speed. How fast are you gonna return the results?
- BGBen Gilbert
Which we take for granted today, but not too long before Google's founding, search was a thing where you'd kick off a query and then go do something else, and wait for it to come back.
- DRDavid Rosenthal
Right. It was like AI today. You're doing deep research. You're just like, "Okay, great, send the query."
- BGBen Gilbert
Yes.
- DRDavid Rosenthal
"You know, go get some lunch, come back."
- BGBen Gilbert
So funny.
- DRDavid Rosenthal
Exactly. We'll get more into speed in a minute. But the other attribute that's super important is the index. How big is the index of pages that you're searching across? And before AltaVista and parallelization of crawling, all the indexes of all the other search engines were super small. Maybe a million pages was, like, the biggest. So you could have the best search engine in the world, but if you're only getting a small percentage of the actual sites out there that it's searching, it's not gonna be that useful.
- BGBen Gilbert
And the funny thing about this period of time, too, is very rarely were people actually updating their index. So when something would say, like, a million pages crawled, that was cumulative, and they just kept adding new sites to it and assuming you weren't doing many updates.
- DRDavid Rosenthal
Right. Right, right. Oh, man, how times have changed. So when AltaVista spins out of DEC and launches as a commercial company and entity in and of itself, its big claim to fame is its index. It has sixteen million pages in its index versus the competitors. AltaVista still kind of sucked at relevancy and speed, so the information retrieval algorithms that AltaVista and others were using was highly based on how many times a given query word appeared on the page. So [chuckles] if you wanted to rank highly for dog food, you just spammed "dog food" in invisible text- [laughing]
- 59:14 – 1:15:00
Infrastructure as destiny: distributed systems, cheap hardware, and global speed
- DRDavid Rosenthal
Yep, which brings us to really what is the second big reason why Google worked so well and became the Google we all know today. One is accurate, relevant, fast search results, and PageRank, and everything we've been covering. Two, though, is the infrastructure to actually make this whole thing work and scale efficiently.
- BGBen Gilbert
Yes.
- DRDavid Rosenthal
So right after they raised the angel round, Larry and Sergey go out, and they recruit just, like, unbelievable, top-tier engineers and computer scientists to come rewrite the code and work on this infrastructure problem. So pretty quickly, they get Urs Holzle and then Jeff Dean, who are just these absolute legends. They are both still at Google today. Urs is now a fellow, but he ran all of Google's infrastructure from 1999 until 2023. Before joining, he'd done his PhD at Stanford, and he was a professor at UCSB. He'd also written the primary Java virtual machine that Sun used as, like, the official Java virtual machine. [chuckles]
- BGBen Gilbert
Oh, wow!
- DRDavid Rosenthal
[chuckles] And Larry and Sergey recruit him out of academia to come join as employee number eight, and his initial job title was search engine mechanic because, quote, "Everything was broken." [laughing]
- BGBen Gilbert
[laughing]
- DRDavid Rosenthal
So that's Urs, and then he builds all this incredible infrastructure.... Jeff Dean, who they also recruit around the same time, from Dec, right?
- BGBen Gilbert
He was a senior engineer at DEC. Yes, yes! And Jeff is basically like Google's Dave Cutler. So today, Jeff runs AI at Google. He also implemented the first version of AdWords, built AdSense, rewrote the core search pipeline five times- [chuckles] ... co-invented and implemented Bigtable, MapReduce, TensorFlow, and Gemini. [laughing] He actually keeps his resume up to date online. We'll link to it-
- DRDavid Rosenthal
He does ... in the show notes. It's incredible. We're burying a little bit of a lead here. We, we spoke with Jeff to prep for this episode, and I watched a handful of talks he's given. Uh, delightful human, and God, what a great engineer. Just generational talent. But this is, like, the early nucleus of engineers that Google recruited. It's amazing that they attracted them because prospects were not good that all of this would work in scale, and it was only because of these guys that it did.
- BGBen Gilbert
Well, and here's the crazy thing. Later, there's an easy point to make, which is Google got to hoover up all the best talent because they were a solid business after the dot-com crash. But this, in '９８, '９９, we're in the go-go times. The dot-com bubble hadn't burst yet, and Larry and Sergey managed to recruit this talent. I think this is like a, a history turns on a knife point or like a make or break the company thing. The fact that they were able to get these guys in a hot talent market really speaks to Larry and Sergey's vision, the excitement around the idea, how novel their approach was, everything.
- DRDavid Rosenthal
Yep. And part of the reason why this talent was attracted to Google, sure, some of it was like, "Oh, the product's really good, and people are using it, and so that makes the company interesting." The other part of it, though, is that the technical challenges and the architecture coming out of Stanford was super unique and novel. This was a really, really interesting thing to work on, and why was that? So the Google index that they needed to build and operate on for the search engine for PageRank to work, was so much bigger than any other index out there. Google needed, like, the entire page to compute all the rankings and find the links, find the backlinks.
- BGBen Gilbert
Hmm.
- DRDavid Rosenthal
They needed to architect Google with this huge distributed computing system. So the index was so big that it wouldn't fit on a single machine or a single server, no matter how big or how expensive. So what they do to store the index and to operate on it with this distributed file system, is they break the giant index into tons and tons and tons of little chunks, they're called, of individual sixty-four megabyte files, small files, tractable files, and they get stored on lots and lots of different disks, and lots of different machines, and lots of different servers, and ultimately, different data centers all over the world. And then there's a separate server that keeps a master mapping of all the chunks, like, where the chunks physically are. And so when a query comes in and needs to operate on the index data, the master server just returns only the chunks that it needs, not the whole index, and that makes the whole thing possible.
- BGBen Gilbert
So basically, that one server you're talking about can kind of just say, "Oh, all the chunks are here on all these different machines that are distributed throughout my data center. Just look at those chunks," and that way, it can kind of just pull, and in a parallel way, pull from all those different chunks concurrently.
- DRDavid Rosenthal
Yep, and I think that's even abstracted. Like, from a compute perspective, they see the master map. They feel like they have access to the whole file, but then what's actually getting returned to them to operate on is only just the chunk data that they need.
- BGBen Gilbert
Hmm. So Google was sort of forced to do distributed computing because their index file was too large to store on any one machine, no matter how big or fancy it could be.
- DRDavid Rosenthal
Yep, I think that's right, which sort of enables the whole thing in the first place and is technically extremely interesting. But now the physical infrastructure side, right? Because you have all these chunks, and they can live anywhere, and Larry and Sergey already had to grab commodity hardware, you know, hard drives and motherboards directly back at Stanford. Well, Urs comes in, and he's like: "Well, we can just keep going with this. Let's keep using cheap commodity components and hardware, and yeah, they'll suck, and they'll fail a lot, and things will burn out, but that's okay. Because we've got this distributed file system, we'll just replicate everything, like, three or five times."
- BGBen Gilbert
Right, and we can cleverly design software to account for the fact that we have commodity hardware, commodity RAM. These systems that were not assembled with the notion of being enterprise-grade, we can sort of design Google with the idea to take into account the fact that the hardware is not enterprise-grade, and that means we can get cheaper hardware and run in a distributed computing way. And frankly, I think this makes it interesting to a lot of engineers who kind of want to work on hard problems. How do I design a system when I can't count on a whole bunch of stuff from the underlying hardware that I would get to count on if it was a fancy deck server?
- DRDavid Rosenthal
So I read the industry average server hardware failure rate at the time was around, like, three to four percent per year. Google's hardware failure was over ten percent [laughing] per year.
- BGBen Gilbert
[laughing]
- DRDavid Rosenthal
But the whole system was designed that it didn't matter. It was all just replicated.
- BGBen Gilbert
Super interesting.
- DRDavid Rosenthal
So this keeps scaling up and up and up over the years with Google. Pretty quickly, maybe even while Google is still a private company, they technically become the world's largest computer manufacturer.
- BGBen Gilbert
Oh, wow!
- DRDavid Rosenthal
Because they're not buying fully baked servers. They're just buying components and assembling them into this sea of components-
- BGBen Gilbert
Proto data center
- DRDavid Rosenthal
... in their data center, and then data centers.
- BGBen Gilbert
And their early data centers, they're never really putting them in PC housing, right?
- DRDavid Rosenthal
Yes. So these early, you know, quote, unquote, "machines" they're building, they're not even putting-... PC cases on them. They just mount the motherboards directly on corkboard, and then they put, like, the RAM in there, and they put hard drives in there, and then they just stuff them in their data center racks.
- BGBen Gilbert
The photos of these early Google, quote-unquote, "server racks" are crazy because the way that their agreements worked in the co-located data center facility is they would lease by square footage, not by energy consumed, not by number of machi- by square footage. And so when you give a computer scientist a constraint, they will optimize for it, and the goal is: how much of Google can I power in this square footage? [chuckles] And the way that you optimize around that is, well, incredible density of hardware, so we're not putting cases on these computers, we're putting corkboards in. And imagine just a sheet of cork, which is an insulator, so you know that these electrical components that you don't want to conduct between each other are not gonna conduct between each other. And you just stuff a server rack full of corkboards with all this commodity hardware sort of strewn about it, and it looks unbelievably messy. It's extremely economical, and then you just kind of handle it all in software.
- 1:15:00 – 1:39:09
Early monetization confusion: enterprise search pitch, first ads, and portal OEM revenue
- BGBen Gilbert
All right, David, so going from having no business to the greatest business model humankind has ever discovered, not exactly a straight line, huh?
- DRDavid Rosenthal
Uh, no, [laughing] not at all. So how does it all start? So early nineteen ninety-nine, even despite the incredible infrastructure work and being able to scale cheaply, Google's still running out of money from the angel round [chuckles] and they hire a recent Stanford undergrad named Salar Kamangar, who joins Google as employee number nine. And like many Stanford students at the time, he started using the search product while he was an undergrad, and was blown away, and he's like, "I gotta go work for this company." He basically bangs down Google's door, tries to get hired. Finally, they're like, "Okay. Okay, come on in." And so the first thing that Larry and Sergey give to him to do is kind of, you might argue, the most important thing at the company. They're like: "Well, we're running out of money, so we need to go raise venture capital. We don't want to write the business plan and the pitch deck. You write the business plan and the pitch deck." [laughing] So Salar goes off, and he writes the pitch deck for the Google Series A, uh, in collaboration with Larry and Sergey, and they come up with a three-pronged business model that they're gonna present to VCs, three ways that they're gonna make revenue.
- BGBen Gilbert
And it's hand-wavy as hell. [chuckles]
- DRDavid Rosenthal
Yes. [chuckles] All right. So number one, the biggest revenue driver projected going forward, you know, the main Google business, innovative new business model that they're gonna pursue here. They are gonna sell Google search technology to enterprises, [laughing] so that companies can use the same amazing consumer Google Search technology to search their own documents and intranets. [laughing] This is the business plan for Google for the Series A.
- BGBen Gilbert
You know what this kind of feels like to me? It feels like they're saying, "Google.com is so precious, and amazing, and special, we don't wanna risk it by having to make money on it, so can we make money doing something else with our technology-
- DRDavid Rosenthal
Yes
- BGBen Gilbert
... that will fund what we really wanna do, which is google.com?"
- DRDavid Rosenthal
Now, it's pretty funny to talk about this now in retrospect. They did have a couple reasons why they thought this might work. Number one, was all the way back at Stanford, BackRub and then Google, had actually been used for this use case. You could use Google to search internal Stanford intranet stuff, and people did. Uh, it was, like, a great experience for Stanford students. Also, before the Series A, somehow Larry and Sergey had managed to actually sell one of these deals to the company Red Hat.
- BGBen Gilbert
That's right. That was their first revenue, right, was Red Hat?
- DRDavid Rosenthal
Yeah, the open source Linux company. They sold this enterprise search deal to Red Hat for twenty thousand dollars. They're like, "Oh, great, there's a market here." So that was gonna be the main business driver. [chuckles] And then there were gonna be two other business lines, too, in the company. One was gonna be, "Well, sure, okay, VCs, you know, if you make us, we'll sell ads, CPM banner ads, the same way everybody else does. We're not gonna like it, but we'll put it in the business plan."
- BGBen Gilbert
And it seems like they didn't think through it any more than that, 'cause I couldn't find anything about, is that gonna appear on the search results page? Is that gonna appear on google.com next to the search box? It seems like it was never real enough to actually have a plan for it.
- DRDavid Rosenthal
And indeed, the Series A pitch deck and business plan, like, was intentionally vague. I think part of the reason Larry and Sergey were like, "Okay, Salar, new guy, you go do this," is, like, they didn't actually wanna tell VCs that much.
- BGBen Gilbert
Yeah.
- DRDavid Rosenthal
So that was number two, and then number three was that they were gonna license-... Google organic search results to portals and directories as essentially OEM search to backfill results, like we were talking about with Yahoo! Other search engines were doing this. Inktomi had gotten started at this point in time. Inktomi was the next-door neighbor at the data center, Exodus in Santa Clara.
- BGBen Gilbert
And they built a sizable business selling white-labeled organic search results to other portals.
- DRDavid Rosenthal
Exactly. This was Inktomi's whole business, is they just sold organic search results white label to other portals.
- BGBen Gilbert
But there's five big customers and 50 total customers out there for this business.
- DRDavid Rosenthal
Yep. So this is the business plan. This is the pitch deck. They go out... Remember, we're in spring 1999 here, so even though this is a little hair-brained, it's still the dot-com bubble. Money is still flowing. There's a great Michael Moritz quote in Steven Levy's book, talking about this particular moment in time. He says, "Nobody's feet were on the ground." [laughing]
- BGBen Gilbert
[laughing]
- DRDavid Rosenthal
It's a very Sir Michael way of putting things.
- BGBen Gilbert
That's a deliciously Michael quote, yes.
- DRDavid Rosenthal
And Google's got all this usage, and engagement, and growth numbers that, "Hey, internet companies trade on eyeballs," so of course, this is gonna be a hot deal. Famously, Kleiner and Sequoia end up splitting the deal, and Michael Moritz and John Doerr, the two most legendary VCs in the world, they team up, they join forces. They split the deal, and they both join the board of Google at the Series A.
- BGBen Gilbert
Which is unheard of! The fact that Larry and Sergey were able to say, "You both only get 12.5% of this company, and you have to do it together," they both must have really, really, really wanted to do the deal.
- DRDavid Rosenthal
That is true, and I love that even today, even you have that opinion. We heard from folks in the research that this really was, like, a Google PR masterstroke to seed this narrative.
- BGBen Gilbert
Oh. Well, they held a press conference in person with both Sir Michael and John Doerr there. It's the first Google press conference. Larry and Sergey are there in Google-branded shirts.
- DRDavid Rosenthal
Yes, they made a big deal about this. The reality is, Sequoia and Kleiner split tons of deals. [laughing]
- BGBen Gilbert
[laughing]
- DRDavid Rosenthal
This was not the first one. It may have been the first one that Michael and John split together, but, like, they had been on boards together before. Maybe they'd done one round or the other, and Sequoia and Kleiner split deals all the time, but hey, it was the dot-com era, and everybody needed a PR strategy, [chuckles] and that one worked well.
- BGBen Gilbert
Fascinating.
- DRDavid Rosenthal
But the point is, this was a hot deal. There's all sorts of stories out there about other investors, you know, coming into the round, or trying to get in, or trying to get in later.
- 1:39:09 – 1:51:00
Surviving the dot-com crash: Yahoo deal, CEO search, and ‘Googliness’ culture
- BGBen Gilbert
All right, David, so how did Google get big?
- DRDavid Rosenthal
In June of two thousand, they sign a deal with Yahoo! right as the whole world is falling apart. The dot-com bubble is bursting. The peak of the Nasdaq was March two thousand. In June of two thousand, Google signs the deal with Yahoo!, that they are gonna take over all organic search result backfills on yahoo.com with the Powered by Google branding, and Yahoo! is gonna invest ten million dollars in Google as part of this deal.
- BGBen Gilbert
Whew! What a deal.
- DRDavid Rosenthal
This totally saves Google. Between the revenue that they got from Yahoo! for this and the ten million dollar investment, it keeps the company going through the next couple of years of the dot-com winter until they figure out the AdWords business model.
- BGBen Gilbert
Yep. So traffic doubled to fourteen million searchers per day on day one of this deal, June of two thousand. We're now a, a year later than the Netscape deal. So started to get a material portion of web traffic here with fourteen million searchers per day.
- DRDavid Rosenthal
Yep. And the next year, in two thousand and one, the first full year of this Yahoo! portal search deal, Yahoo! pays Google seven point two million dollars for organic search results, so it's material. And again, to underscore, between the ten million dollar investment, this revenue, the other portal deals, Netscape, others, and then others that they're able to get on the back of Yahoo!, this revenue really bridges the company through the dot-com winter. [chuckles]
- BGBen Gilbert
That's such a good point, and something that's often pretty overlooked, that there was no potential for Google to raise more money here. The venture capital gravy train was over, and so we're sitting here saying, "Oh, they really need to make money, and when are they gonna turn the revenue switch on?" And we're sort of, like, hand-wringing over here. We're only two years into the company's life. Think about startups today. You don't have-
- DRDavid Rosenthal
Expectations of profitability, yeah. [chuckles]
- BGBen Gilbert
Exactly, within a couple of years of founding. But Google's got a very expensive business to run between the people and the infrastructure, and there's no more ability to finance it, so revenue really was the only option.
- DRDavid Rosenthal
So in the midst of all of this, as Yahoo's coming online, the board is also pushing Larry and Sergey to hire a CEO.
- BGBen Gilbert
Yes.
- DRDavid Rosenthal
So as part of the Series A process, John Doerr had very begrudgingly extracted a promise from Larry and Sergey to hire a, quote, unquote, "professional CEO." Larry was CEO for the Series A and then CEO for the next couple years after the Series A. They really didn't wanna do it. They were dragging their feet.
- BGBen Gilbert
It took sixteen months to find a CEO. I don't think that was entirely because it was hard to find someone. I think some of that was, "Uh, let's see how long we can get away without one."
- DRDavid Rosenthal
Yes. My favorite story from the whole Google CEO hiring process was sort of the standard playbook here that John and Mike and Sequoia and Kleiner would run with founders when convincing them to hire a CEO is: take them around the valley, take them on the tour, have them meet the CEOs of the great companies in the valley, the public companies, and say, "Look, see what a great CEO can do for your business." [laughing]
- BGBen Gilbert
[chuckles]
- DRDavid Rosenthal
So they do this with Larry and Sergey. They go around, they meet everybody in the valley. They're unimpressed. They don't like any of them.
- BGBen Gilbert
[chuckles]
- DRDavid Rosenthal
And finally, after months of this, they come back, and they tell Kleiner and Sequoia, "All right, there's one person that we met in this whole process who we think meets our bar, who we would be willing-
- BGBen Gilbert
[laughing]
- DRDavid Rosenthal
... to come in and hire as our CEO here at Google."
- BGBen Gilbert
Oh, God, who is it?
- DRDavid Rosenthal
Steve Jobs. [chuckles]
- BGBen Gilbert
Really?
- DRDavid Rosenthal
Yes, yes, yes.
- BGBen Gilbert
'Cause wasn't he, like, an idol of theirs?
- DRDavid Rosenthal
... Yeah, well, and he had just come back to Apple from NeXT. [laughing] Whether they really meant it or not, I'm sure if Steve had been willing to come be CEO, they probably would've said yes.
- BGBen Gilbert
Of course.
- DRDavid Rosenthal
But I think it was more like a, hey, a little thumbing their nose at the VCs.
- BGBen Gilbert
Right.
- DRDavid Rosenthal
Like, "Nah!"
- 1:51:00 – 2:21:09
Cracking the money machine: AdWords evolves using Overture’s model + Google’s quality layer
- BGBen Gilbert
Yes. So all four of those issues are things that Google's gonna address in this next evolution of AdWords, but there's a whole part of the world that heavily inspired [chuckles]
- DRDavid Rosenthal
[chuckles]
- BGBen Gilbert
... AdWords V2.
- DRDavid Rosenthal
Yeah, AdWords V2, uh, you might say, is Google's Instagram Stories moment.
- BGBen Gilbert
Yes. There was an innovator in the space called Overture, or its original name, go2.com. We should tell you that story now. So GoTo, Bill Gross started the company out of his startup incubator, Idealab, and he did it with quite a bit of flair, coming to the world from the TED Conference in February of nineteen ninety-eight.
- DRDavid Rosenthal
So same time as Google's about to launch.
- BGBen Gilbert
Right, and at the time, existing search engines, as you'll remember, had a problem. This is the same exact problem that Larry and Sergey recognized: quality was going down. In the old world, keyword-matching algorithms were fine. There was no one gaming the algorithms. There wasn't a lot of real commercial activity yet, and search engines weren't well understood yet, and so the old, "Hey, go search for dogs," and the most relevant website is probably the one that says "dogs" the most, that still kind of worked.
- DRDavid Rosenthal
Yep.
- BGBen Gilbert
So now you're starting to get, in nineteen ninety-eight, all this stuff like keyword stuffing, white text on a white background, people getting porn sites to appear in search results no matter what you're searching for, hijacking traffic, all that sort of stuff. So Bill had this very radical idea: the best search results should be determined by the free market with dollars. Whoever is willing to pay the most is probably the very best search result for your given query, and spammers who aren't relevant to your search can't afford to pay, 'cause there's not gonna be super high conversion. But super legitimate businesses that would actually solve the pain point that you're searching for could, just like how Yellow Pages in the phone book had paid inclusion as a philosophy that would lead to only the most relevant listings for any given category.
- DRDavid Rosenthal
Right, and at the time, this was, like, a completely crazy idea, but when you think about it, it actually does make sense. If I have a product or service that can solve the need you're expressing for through your, your intent in the search, I should be willing to pay more than anybody else to meet your needs.
- BGBen Gilbert
Absolutely. It's just a different way of solving ranking and relevance than Larry did. Larry and Sergey sort of figured it out on the or- organic side, and Bill sort of figured it out on the paid side. So Bill went so far as to, uh, [chuckles] GoTo didn't actually develop any organic search technology on their own.
- DRDavid Rosenthal
[chuckles]
- BGBen Gilbert
They relied-
- DRDavid Rosenthal
It was all paid.
- BGBen Gilbert
Yes, only on paid listings, and if you kept scrolling, they actually did show organic results, but they would license them from Inktomi and others, David, like you were saying, as a backfill. All right, so the net of all this on the TED stage, Bill gets wildly criticized for this. Some people even booed the idea when he was on stage at TED, but crazily, Bill's idea was basically right, and it had a ton of ideas that would become a part of Google that we'll talk about here in a minute. So here's how it worked. When you searched, GoTo would show you a list of the paid results, exactly in order of who paid the most, with no fanciness at all beyond that, and they would show you the price that someone was willing to pay for your click. So right there on the page, you could see twenty-one cents, twenty-three cents, twenty-four cents.
- DRDavid Rosenthal
Yeah, it was fully transparent.
- BGBen Gilbert
Yes. So insight number one, paid ads on keywords auctioned off to the highest bidder showing up first. Insight number two, and again, this is way back in 'ninety-eight, was that this whole cost per thousand impressions thing was wrong, and that eventually, he thought the whole world was gonna move beyond this to a cost-per-click or pay-per-click pricing, and so he thought, "Why not just do it today?" And so GoTo advertisers only had to pay when a user actually clicked, and the origin of this is, since Bill had a bunch of companies at Idealab, he could uniquely feel this pain point. He sort of hated the fact that he was getting billed for all these impressions at his companies when he just wanted to pay for the actual clicks.
- DRDavid Rosenthal
I mean, this is how advertising worked throughout all of human history to this point. You know, there's that famous John Wanamaker quote of, "Half the money I spend on advertising is wasted. I-- the problem is, I just don't know which half." This new model of performance-based advertising wasn't-... possible until the internet, when you could track clicks and conversions. But now, all of a sudden, as an advertiser, you don't have to worry anymore about what's wasted.
- BGBen Gilbert
Right.
- DRDavid Rosenthal
You know it's all performing.
- BGBen Gilbert
And the nuance is CPM actually works fine in brand-building situations, but on conversion, you actually care about the click. So basically, with cost per click, you're getting free exposure every time your ad shows up, but nobody clicks on it. But in a high-intent environment, you're not trying to get exposure, you're trying to actually capture the clicks. So it's kind of reasonable the way that it shook out, that a lot of brand-based advertising is still CPM-based, but on search engines, it totally should be CPC. So how did it go? Well, it worked insanely well out of the gate. GoTo did a hundred million in revenue in one year.
- DRDavid Rosenthal
[laughing] Way more than Google.
- BGBen Gilbert
Yes. This is a good business model, they have found. By the way, this is also self-serve. There is a website where you, as an advertiser, can log in and place a bid. There is an auction that happens, you know, a, a real-time auction, where the person with the highest bid, again, placed through the website, is on the very top. Does this sound familiar to anyone who's [chuckles] used Google's advertising tools? So the hundred million happened in year one. By mid-1999, they had eight thousand advertisers. Compare that against what AdWords had when they launched in October of 2000, which was three hundred and fifty advertisers in the beta program. To your comment about scale, David, this can just scale to so many more advertisers. GoTo goes public within a year.
- DRDavid Rosenthal
Yeah.
- BGBen Gilbert
Isn't this crazy? Uh, you're probably sitting there thinking, like, "How are they not the dominant player?" So, [chuckles] one thing that did not happen was patents. They did not patent the idea of the auction or of pay per click. And I got the chance to talk to Bill when we were prepping for this episode. He's very direct about all this, very reflective, also a brilliant guy. He just thought they were obvious. He just thought, "This is the way it should be done. Of course, it should be billed per click. Of course, there should be an auction, and the highest bidder, [chuckles] uh, is the one that, that wins." So the nuts and the bolts of it are that right before going public, the lawyers flagged, "Hey, you really should patent some of this." But they were just outside the window of what was patentable because he shared them more than a year ago on stage at TED, so the ideas were no longer eligible. [chuckles]
- DRDavid Rosenthal
[chuckles] The TED Conference. That's amazing. There's some really interesting background to all this, too. You would think, of course, Bill was right, this stuff is obvious. Why had nobody tried this until 1998? Somebody actually had tried this earlier. There was a search engine called OpenText that did try paid search results in 1996, but the internet was still enough of sort of a utopian, uh, community, like small enough and sort of an outgrowth of academia, that... I mean, people booed Bill Gross and GoTo on stage at TED in 1998. In 1996, when OpenText tried to do this, it was like they got kneecapped right away.
- BGBen Gilbert
Heresy, yeah.
- DRDavid Rosenthal
Yeah, it was heresy, and because that happened, everybody else had a hangover from it of like, "Oh, that's like a third rail. You can't touch that. Internet users will never tolerate paid search."
- BGBen Gilbert
Right. So it's funny, maybe they wouldn't have gotten the patents anyway, since OpenText was doing it before. But that was the ethos of that early web, is, "How dare you litter our organic results with your paid inclusion, putting these ads front and center?"
- DRDavid Rosenthal
Look, originally, Larry and Sergey were thinking this, too, right?
- 2:21:09 – 2:48:42
Bet-the-company distribution: AOL deal, traffic acquisition logic, and Google Toolbar
- BGBen Gilbert
So if you wanna learn more about what Vercel can do for AI and web development at your company, join customers like Runway, Supreme, PayPal, Ramp, NerdWallet, Leonardo AI, Zapier, and Scale AI, and head on over to vercel.com/acquired. That's V-E-R-C-E-L dot com slash acquired, and just tell them that Ben and David sent you. Okay, so the AOL deal, and one context-setting thing, just to see how fast Google's world changed in 2002 with the new AdWords system, it going phenomenally well. As recently as late 2001, just months before, there's a dinner with Terry Semel, who's the CEO of, of Yahoo, kind of big media executive guy, comes in, takes over, is the big media CEO, and he sits down with the founders, and he says, "So guys, I think we're your biggest customer, right? Like, us paying you for those organic results in the portal deal." And they say, "Yep." And he says, "That's, like, less than ten million dollars that we're paying you, so you don't have a business, do you? The business can't be that big if we're your biggest [chuckles] customer at less than ten million dollars, and everyone's all excited about you." And they're like, "Uh, we're excited about some of the things they have in the works," and they're clearly thinking about this new AdWords system that they're gonna launch. On the spot, he offers to buy Google for a billion dollars.
- DRDavid Rosenthal
Wow!
- BGBen Gilbert
Even knowing you aren't doing much revenue, and this is at a time Google was so secretive pre-IPO. I mean, no one knew. Other people in the business... Terry Semel sits down, he didn't have a real sense of their revenue. He just knew that he was the biggest customer. So I think this kinda illustrates just what a insane twelve months it was to go from being in that position to the numbers that you just shared on, what is it? Five X revenue in a year.
- DRDavid Rosenthal
Yep, they more than five X revenue from 2001 to 2002, from the eighty-six million to four hundred and forty million in revenue. [chuckles]
- BGBen Gilbert
All right, so they're feeling real good about this, and so they decide to go to AOL, the big source of traffic. I mean, AOL has thirty-four million users at this point. It's funny imagining this recently, AOL was still a big and important company, but if they could figure out how to be the search results provider, and more importantly, the ad provider for AOL, that is a potentially company-making event.
- DRDavid Rosenthal
Yes. I mean, hell, 2002, I was probably just transitioning from using AOL as my way to access the internet-
- BGBen Gilbert
Hmm
- DRDavid Rosenthal
... as a senior in high school. [chuckles]
- BGBen Gilbert
Hmm.
- DRDavid Rosenthal
I think we had maybe just gotten broadband, like, that year, maybe the year before.
- BGBen Gilbert
Funny how sometimes things feel like a lifetime ago, and sometimes they feel like just yesterday.
- DRDavid Rosenthal
Right? Right. So yeah, okay, summer 2002, the transition to the new AdWords model is blowing the doors off. Google goes to AOL.
- BGBen Gilbert
Which, by the way, Yahoo sees this, and they come back and say, "How about three billion?"
- DRDavid Rosenthal
[laughing] I had heard about that three billion number.
- BGBen Gilbert
Google comes back and says, "How about five billion?" [chuckles] And, of course, no deal gets done, and this would be the last time that they seriously try to acquire the company.
- DRDavid Rosenthal
Yeah, but then Yahoo would buy Overture. [laughing] But as I pointed out a minute ago, when Yahoo bought Overture for one point six billion dollars, that was a huge portion of Yahoo's market cap. If they'd actually done the five billion dollar price that the Google founders floated at them, it would've been a reverse takeover. It would've been Google taking over Yahoo.
- BGBen Gilbert
Oh, that's a good point. In fact, Google throwing out five million is almost a farce. It's like, "How about we buy you?"
- DRDavid Rosenthal
Yeah, it's like a, it's a counteroffer. Yeah, "We'll, we'll buy you." [chuckles]
- BGBen Gilbert
That's so funny. So this AOL deal, the current state of things is that the thirty-four million AOL users, their search experience is powered by Inktomi on the organic side since 1999, so the last three years, and Overture for the last two years. It's sort of a bake-off of, do we want those two, or do we want just one to take over all of it, since Google seems to have kind of the whole package now? Google wins the deal. Here's the shape of the deal, and then we can kinda talk about the philosophy behind it, but it's worth knowing the bullet points. Advertisers will all sign up with Google.
- DRDavid Rosenthal
Hmm.
- BGBen Gilbert
Clean. They use Google's UI. So Google can sign them up, or AOL can say, "Hey, advertiser, I know we have a long-standing relationship. You can buy ads on our properties other than search, but for search, here's the URL you go to, to place your order with Google."
- DRDavid Rosenthal
Hmm. Okay, go through the rest of the deal points, but this is huge.
- BGBen Gilbert
That is huge.... Google will then share back eighty-five cents on the dollar to AOL for all of that revenue. AOL wants two things in exchange for turning over their entire business in the search advertising world to Google. One is, we want warrant coverage. So what they end up getting granted is the option to buy seven point four million shares of Google at three dollars per share, so a total of a twenty-two million dollar investment. They get that as part of the deal. Two is, a one hundred million dollar revenue guarantee.
- DRDavid Rosenthal
Yeah. We wanna make sure that, hey, even if this whole thing falls apart, you're gonna pay us at least a hundred million dollars, and hopefully more, if these ads perform well, and we're getting eighty-five percent.
- BGBen Gilbert
So here's the crazy thing, Google doesn't have a hundred million dollars. When they're negotiating this deal in May of two thousand and two, it's, like, just starting to work.
- DRDavid Rosenthal
Yeah.
- BGBen Gilbert
So Sergey Brin has a quote. He says, "We could have gone bankrupt." This is quite literally Google betting the company, and the way to kinda think about it is financial leverage. They took on a fixed dollar-denominated obligation with that revenue guarantee to AOL. So if there was upside to Google, it would've been a huge, huge win. But if there's downside in their business of serving-
- DRDavid Rosenthal
Yeah, if they couldn't make it work on AOL.
- BGBen Gilbert
Right. They obviously had very high confidence that it would, but if something happens, and they're like, "Oh, shoot, we actually can't sell these things at the rates that we thought," it would've gone from like, "Oh, shucks, bummer," to, "Now that we've signed this deal, we're bankrupt."
- DRDavid Rosenthal
Yeah, this was a really, really contentious decision, and I think it ultimately came down to Larry and Sergey pushing for this. [chuckles]
Episode duration: 3:39:29
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