Meta (Audio)

Ben Gilbert 0:00 All right, so I was up late last night. Late for me, as a dad, is, like, 11:00 PM. But I'm sitting here at my computer in my dark basement, you know, pulling notes together. David, what music did I have on? You have one guess.

David Rosenthal 0:14 Uh, oh, oh, I know exactly what you had on.

Ben Gilbert 0:16 [laughing]

David Rosenthal 0:16 You had Trent Reznor, Social Network soundtrack. [laughing]

Ben Gilbert 0:20 [laughing] It makes anything you're doing feel, uh, you know, twice as important and twice as revolutionary, and, uh, it just felt very apt for this episode.

David Rosenthal 0:29 Oh, man. So I have been listening, in the last twenty-four hours, to 50 Cent, In Da Club, because that came out my freshman year of college, same year as the facebook.com, and, like... Man, 50 Cent, facebook.com, can't get any better than that.

Ben Gilbert 0:45 Perfect, match made in heaven. Well, I'll check out our Wall the Wall from the old days, and see if there are any posts about that. [laughing]

David Rosenthal 0:53 [laughing]

Ben Gilbert 0:53 All right, let's do it.

David Rosenthal 0:54 Let's do it.

Speaker 0:55 Who got the truth? [upbeat music] Is it you? Is it you? Is it you? Who got the truth now? Is it you? Is it you? Is it you? Sit me down, say it straight. Another story on the way. Who got the truth?

Ben Gilbert 1:12 Welcome to the Fall 2024 season of Acquired, the podcast about great companies and the stories and playbooks behind them. I'm Ben Gilbert.

David Rosenthal 1:21 I'm David Rosenthal.

Ben Gilbert 1:22 And we are your hosts. Today, we are studying a company whose products are used by more humans than any other company in history, Meta, of course, formerly known as Facebook. So I figured I would contextualize [chuckles] these numbers a little bit. Meta has four billion monthly active users.

David Rosenthal 1:42 And daily active users are over three billion.

Ben Gilbert 1:46 Yeah, nuts. There are only eight billion humans on Earth. So as I started to brainstorm what the closest competitors could be to serving half of the humans, I thought, "Surely I can find it in empires or governments from the past, where there is some larger percentage."

David Rosenthal 2:03 Yeah, makes sense.

Ben Gilbert 2:05 Nope. The Roman Empire, at its peak, was only forty percent of humans, tops. You know, the data's a little bit hard to actually find from that period of time. But the British Empire, which we have a little bit better handle on, at its peak, was only twenty-three percent of the global human population. So no government, tech company, utility, et cetera, has ever addressed so much of the world.

David Rosenthal 2:28 It's just wild. There's no other way to put it.

Ben Gilbert 2:30 In the over twenty years since its founding, Meta truly has connected humanity through its apps: Facebook, Instagram, WhatsApp, Messenger, and now Threads. So today, we're gonna study how they did it. There's been a lot of ink spilled writing about Facebook over the years, and for its first ten years, most of that writing focused on the many benefits to society, with breathless exuberance over milestone after milestone. And for the past ten years, it's kinda seemed like Meta could do nothing right. Reporting focused on its many stumbles, the massive mistakes, the incredible controversies surrounding the company, and while we will, of course, discuss these events as part of our story and analysis, our goal today, on this podcast episode, is really to understand how it is that Meta became the dominant fabric that connects the human race, and why they've been so successful at continuing to win over and over again. No matter what you think of the company, it is undeniably one of the most important institutions in the world, and their global scale is no accident. It is the result of careful actions from some of the most motivated and brilliant people in the world, who believe in one mission: connecting as many people as possible.

David Rosenthal 3:46 I hadn't thought about this till now, but almost sort of tautologically, this is, like, the most important episode we'll ever do, to try and understand this. [chuckles]

Ben Gilbert 3:55 [chuckles]

David Rosenthal 3:55 Like, it's the biggest company that has ever existed. It's the biggest thing that's ever existed.

Ben Gilbert 4:00 Yeah, by these measures that we're talking about right now.

David Rosenthal 4:03 Right.

Ben Gilbert 4:03 Now, of course, the story of how we got here is nuts. It is the perfect Acquired stew, like you're saying, David. They speed-ran their startup phase, they swerved through multiple disruptive technology waves, they battled fierce competitors, they invented, or maybe discovered, one of the greatest business models ever, and they're now trying to pull forward the next technology generation through sheer force of will with AR, VR, and AI. So finally, listeners, we tackle one of the greatest corporate stories ever, Facebook, the Mark Zuckerberg production. So listeners, we have one big announcement for you today. It is time for our annual Acquired survey. If you have three to five minutes, please click the link in the show notes, or go to acquired.fm/survey to take it. We'll be raffling off a pair of shiny new Meta Ray-Bans-

David Rosenthal 4:47 Yeah

Ben Gilbert 4:47 ... and giving away a bunch of ACQ dad hats as well. This is really our one big ask of you all year, and it helps us immensely with making the show better, to hear your suggestions, and also to help our sponsors understand just how impactful the Acquired audience is. So go to acquired.fm/survey, and David and I are both eternally grateful. After this episode, discuss it in the Slack, and check out ACQ2, our second show, where we just had Clem Delangue, the CEO of Hugging Face, on to talk about his view on how the open-source AI ecosystem will play out. And before we dive in, we wanna briefly thank our presenting partner, J.P. Morgan Payments.

David Rosenthal 5:26 Yes, just like how we say every company has a story, every company's story is powered by payments, and J.P. Morgan Payments is part of so many companies' journeys, from seed to IPO and beyond.

Ben Gilbert 5:36 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, Roman Empire? Like-

David Rosenthal 5:48 [chuckles]

Ben Gilbert 5:48 ... what's our starting place here?

David Rosenthal 5:49 No, man, we gotta start in 1984, or we're never gonna finish this episode. [laughing]

Ben Gilbert 5:54 [laughing]

David Rosenthal 5:54 And really, I mean, where else can you start? I can make up pseudo-Roman Empire, classics, Aeschylus, whatever T-shirt saying Mark has this day of the week, but-... Facebook has always started and ended with Mark Zuckerberg. So we start in May of 1984, when Mark Elliot Zuckerberg is born as the second of four children to Karen and Ed Zuckerberg in Dobbs Ferry, New York. Small, little suburban town, suburb of New York City.

Ben Gilbert 6:25 Yep, and his mom is a psychologist, and his dad is a dentist. Is that right?

David Rosenthal 6:29 That's right. Ed studied dentistry at NYU. He was always, like, really into math and computers, though, but growing up the son of Jewish immigrants in New York City, you know, the expectation was you're gonna be a doctor or a lawyer. So he goes to dentistry school, becomes a dentist. He meets Karen. They get married. After Ed finishes dental school, they move up to Dobbs Ferry in Westchester County, and Mark and his three sisters grow up as prototypical middle-class suburban American kids in the '90s. Life is good. Your grandparents worked really hard to make a bunch of sacrifices for your parents. Your parents are now professionals. They're also working hard to give opportunity to you, and the family is kind of leveling up in America. It's the classic story here.

Ben Gilbert 7:14 And you can play sports, and you can hang out with your friends and play video games.

David Rosenthal 7:18 Indeed, and for Mark and for me growing up, and maybe you, too, like, it's kind of amazing. Like, there's no reason not to just explore your passions, and for Mark, those passions become threefold: one, turn-based strategy video games, most particularly Sid Meier's Civilization; two, programming computers; and three, as you mentioned and everybody who watched our Chase Center show knows, ancient Greek and Latin history. [chuckles]

Ben Gilbert 7:49 Classics.

David Rosenthal 7:50 The classics, and pretty much in that order of importance, both to him personally and the future course of Facebook and Meta. [chuckles] So let's start with Civilization. September of 1991-

Ben Gilbert 8:01 David, I toyed with the intro to this show being, "And we are your hosts. Civilization is a video game upon which..." [chuckles] But I decided not to.

David Rosenthal 8:10 Right? I mean, it's kind of laughable, but like, no, this is really important here. So September 1991, when Mark is seven years old, Civilization, or Civ, as its fans call it, comes out for PCs, and young Mark gets hooked. And for those of you who haven't played Civ, it is a very particular type of turn-based strategy game and is probably the foremost example of what is known as the 4X genre. That's the number 4, letter X, and 4X stands for Explore, Expand, Exploit, Exterminate. And despite that sort of nefarious-sounding nature to the last one there especially, Civ and 4X games were kind of this radical branch of video games at the time, where the action of playing and the way to win wasn't just about, like, killing all the enemies on screen. It's a lot more like a board game or like Risk, if you're familiar with that. It's about strategy. It's about growing and marshaling your resources effectively, and most importantly, there are multiple ways to win the game. Most other games out there, you can win by defeating all the other players, but you can also win by completing a technology development tree and reaching, like, the peak of technology, which is, in the game, launching a spaceship to go colonize a new planet. So that's another way to win, and in modern versions of the game, you can also win by diplomacy, by getting elected the leader of the UN. You can also win by dominating all the other players on either culture or religious dimensions, too. So it's kind of like this amazing simulation of what it's like to run one of the top ten market cap mega capitalization-

Ben Gilbert 10:01 [laughing]

David Rosenthal 10:01 ... companies in the world today.

Ben Gilbert 10:03 But to your point, this idea that it's turn-based, you try to amass resources, figure out how to deploy your resources, have multiple concurrent strategies so that you, as the roll of the dice of the universe happens and things unfold before you and you're-

David Rosenthal 10:20 And other players make their moves, yep.

Ben Gilbert 10:23 Right, to be able to effectively react to it all and use your resources to win in whatever way winning means to you.

David Rosenthal 10:29 It's kind of funny. This is way too simplistic of an analogy and, you know, not fair to Mark on any dimension, but the whole construct here sort of reminds me of the book Ender's Game. You know, where like, it's these kids growing up playing this game, and they didn't realize all along it was actually-

Ben Gilbert 10:44 Literally

David Rosenthal 10:45 ... the real game. [laughing] Uh, so playing Civ and other video games when he's young, PC games, leads young Mark to want to learn how to program himself. So when he's 10, he has his parents take him to the local Barnes & Noble one day and begs them to buy him C++ for Dummies, and he dives into the book, learns everything in there, and he's like, "I, I need more, I need more." So after that, his parents hire a local tutor to come and tutor him for an hour a week in programming and learning how to write software. And Mark has this quote that he says later: "I'd go to school, and I'd go to class and come home, and the way I'd think about it was, 'Awesome, I have five whole hours to just sit and play on my computer and write software.' And then Friday afternoon would come along, and it would be like, 'Okay, wow, now I have two whole days to sit and write software. This is amazing!' "

Ben Gilbert 11:38 It really is astonishing as a 10-year-old to be learning C++. This is not Basic. This is a language where you are thinking very close to the metal. You have to be very aware of the constraints of your system, of manually managing memory. It's impressive for 14 or 16-year-olds to be learning simplistic languages. This is a whole different ballgame.

David Rosenthal 12:02 As it always is with Mark. So-... while he's a kid here, you know, in Dobbs Ferry, he codes up all sorts of little projects, including a family chat tool for all the networked computers in the house, and also his dad's dentistry office is attached to the house. So he builds this network called Zucknet, [chuckles] which is family chat between all the computers. Very prescient here. And then, speaking of family and friends chat, in 1997, when Mark is 13 years old, AOL launches AIM, AOL Instant Messenger.

Ben Gilbert 12:38 Ooh, I remember it well. Many, many, many hours lost to AIM, and, uh, warning my friends and other dynamics of the AIM system to gang up on people and to have other people gang up on me, and-

David Rosenthal 12:52 Oh, man, punting people off AIM, and-

Ben Gilbert 12:55 Yes, having to create a new screen name, and log off, and log on, and message someone, and pretend you're someone else. I mean, the whole... This was middle school.

David Rosenthal 13:03 This was middle school for all of us, and this was middle school for Mark, too. The crazy thing about AIM, to go on just a quick little digression here, I had no idea till doing the research, it was actually, like, a rogue skunkworks project within AOL. Did you know this?

Ben Gilbert 13:18 Hmm, no.

David Rosenthal 13:20 Yeah, so it was a couple engineers that just went off and built this, almost against the wishes of management. It was not originally intended to really be for social use or for kids at all. It was more like the idea they had was it was gonna be kinda like Slack, like chat for workplaces.

Ben Gilbert 13:37 Oh, wow!

David Rosenthal 13:37 They ended up using it internally at AOL to communicate, and that's actually where away messages come from.

Ben Gilbert 13:44 Oh.

David Rosenthal 13:44 So they came up with away messages 'cause people would be in meetings or, you know, this is the days of desktops. There's no cell phones, barely even laptops. People would go out to lunch, and they'd have to put up a message so that when their colleagues were trying to communicate with them, be like, "No, no, I'm in a meeting. No, I'm away."

Ben Gilbert 14:00 Huh.

David Rosenthal 14:00 That's the origin of away messages.

Ben Gilbert 14:02 That's fascinating, and it is interesting how you ended up kind of using away messages after a while, even while you were there, just to indicate status.

David Rosenthal 14:10 It was the ultimate emo teenager thing. It was like, "I am expressing my whole self through this one line away message."

Ben Gilbert 14:16 100%.

David Rosenthal 14:17 So, I mean, for people all of our age, Mark's age at the time, I mean, that completely changed our social experience when that came out. So the other important thing about AIM when it came out, that I had no real conception of at all as a kid, was that it was free. So my family was an AOL family. Like, we were AOL subscribers. We had the You Got Mail, et cetera.

Ben Gilbert 14:42 Oh, yeah.

David Rosenthal 14:42 But you didn't have to be-

Ben Gilbert 14:43 Nope

David Rosenthal 14:43 ... a paying AOL subscriber to download and use AIM and join the network. AIM goes on to become this total viral thing in North America. I mean, kinda concurrent with Napster, a little bit before Napster.

Ben Gilbert 14:59 Yep.

David Rosenthal 15:00 It's the first piece of consumer viral software, and so by 2001, a couple years after launch, it has 36 million users, including, as we've been talking about, basically every middle and high schooler with access to a computer. And, you know, 36 million users doesn't sound like a lot today, but you gotta remember, the internet was way smaller back then, way, way, way smaller. Not just in terms of number of people had access, but also just number of people who were literate in how to use it.

Ben Gilbert 15:32 Totally. It's the early broadband era, is that era we're talking about, and you're right, tens of millions of people, at least in the US, had internet access at this point in time.

David Rosenthal 15:42 Yep, and basically all of them, and certainly all the young people, were on AIM. So the other important thing about AIM and AOL here is it was pretty easy to hack, but, like, oh, man, there was just a field day that kids and teenagers had with, like, AIM bots, punting software, wares, hacking programs. If you were someone like me, you were just downloading this stuff off of FTP servers on the internet and installing it on your machine, and it let you kind of be a punk and, like, kick people off of AIM by bombarding them with messages. You know, you could do some, like, teenage punk stuff, but it also let you extend the functionality of what AOL and AIM was. You could add graphics. You could add emojis. You could draw pictures.

Ben Gilbert 16:34 Add links in your profile.

David Rosenthal 16:36 Yeah.

Ben Gilbert 16:36 Oh, the ASCII art in your profile and your away message!

David Rosenthal 16:39 Totally, and, like, this becomes such an important part of teenage culture on the internet as we're growing up. It's like all this personalization of like, "Hey, I don't want just what AOL gives me. I wanna control this." So for me, I was downloading and using this stuff. You might have been writing it, although you might have been a little young.

Ben Gilbert 17:00 No, I didn't learn PHP until I was 15 or 16, so call it 2005.

David Rosenthal 17:10 Okay, so yeah, a little later.

Ben Gilbert 17:11 Yep.

David Rosenthal 17:12 Mark is one of the kids that's writing this stuff, and, you know, I think that's where he got his start. He was doing Zucknet. He was doing all these little projects, but, like, you know, here's AOL, this sort of unintentionally, infinitely hackable and extensible canvas that he can play around on. So that's number two for Mark, you know, passion number two, computers and programming, and then passion number three is classics. So Mark, when he enters high school, he'd gone to public school all through elementary and middle school in there in Dobbs Ferry in Westchester

David Rosenthal 17:43 County. He does two years at the local public high school, at Ardsley High School, and after two years at Ardsley, Mark is like, "Well, you know, a couple things. I'm not sure that this is the right high school for me for the rest of my high school career. One, I think I would enjoy just being in a sort of, like, better school, like, a higher level of competition, higher level of learning." You know, he's definitely at the top of the class at Ardsley.... two is, you know, I'm really into Latin and classics, and, like, I'm gonna tap out on that real fast here at Ardsley. There's gotta be a place I can go where I can really study this, and that takes us to Phillips Exeter Academy.

Ben Gilbert 18:28 In New Hampshire, right?

David Rosenthal 18:29 Yes, in New Hampshire. And so Exeter is one of these private boarding high schools that have existed basically as long as Ivy League colleges have, and they're there just kind of as feeder schools into Ivy League colleges. So Mark applies to Exeter, gets in, and the summer before he's about to go, the school hosts an event in New York City, in the city, for incoming two-years to meet each other, get to know the school, get ready, et cetera. And there, Mark meets another kid who's a lot like himself, who also is really into computers, really into AIM and everything going on there, and Mark's like, "Yeah, man, I've really made the right choice. Like, everybody here is gonna be just like the two of us," and that person is Adam D'Angelo, future CTO of Facebook.

Ben Gilbert 19:22 Amazing they met in high school.

David Rosenthal 19:24 Now, the great irony of this story is that Mark and Adam ended up being, like, the only two kids who were really into computers in the class. [laughing]

Ben Gilbert 19:30 [laughing]

David Rosenthal 19:30 It was just the two of them. [chuckles] They just happened to meet in New York City at the pre-school event.

Ben Gilbert 19:36 Which is probably one of the last few years that that would be the case. I'm sure if you went to this school today, it'd be eighty percent of the class is re- or a hundred percent of the class is really into computers.

David Rosenthal 19:44 Yes, I think in large part because of Mark and Adam, [chuckles] it's quite different these days.

Ben Gilbert 19:49 Yep.

David Rosenthal 19:50 So the two of them, when they get to Exeter, become fast friends. They work on all sorts of computer projects together, software projects, and by the end of their senior year, to graduate from Exeter, you have to do a senior project. And, you know, most people do this, like, a mini college thesis, or they do something in the community, et cetera, et cetera. Mark and Adam are like, "No, we're gonna build some software. This is what we do." So Mark one day is listening to music on his computer, I think probably on Winamp, which is how everybody listened to MP3s that you got from Napster back in the day.

Ben Gilbert 20:25 I think I listened on SoundJam, but it's just because I had a Mac.

David Rosenthal 20:30 Oh, yeah! Future seeds of iTunes.

Ben Gilbert 20:33 Yep, that's right. It got acquired by Apple, and then eventually they, I think, built off the same code base and turned it into iTunes. But everyone used Winamp. That was the AIM of music players.

David Rosenthal 20:43 And in fact, AOL, I think, would acquire Winamp a couple years later.

Ben Gilbert 20:46 Ah.

David Rosenthal 20:47 Bring it all into the fold. So legend has it, Mark is listening to a playlist in Winamp one day during his senior year, and he gets to the end of the playlist, and he's like, "Why did the music stop? I listen to so much music all the time on Winamp. It should just know what I like and automatically pick the next song. It should just be a DJ." And then inspiration hits, and he s- calls up Adam, and he's like: "I've got our senior project. We are going to build an AI DJ plug-in for Winamp," and they call this Synapse, and, like, they did it, these two high school kids. They build an AI, you know, ver... AI, it wasn't called AI at the time, but like a, you know, a recommender system that looks at the data of what songs you've consumed on Winamp and predicts what song you're gonna like to consume next. I mean, it's basically Spotify today.

Ben Gilbert 21:40 What year is this?

David Rosenthal 21:42 This would've been spring of 2002.

Ben Gilbert 21:44 Yeah, real early days.

David Rosenthal 21:46 So they build this thing, and then they release it to the internet, and people start using it. It starts getting some adoption, and, um, a couple companies, including Winamp itself, reach out to Mark and Adam and are like, "Hey, do you wanna come work here? Like, can we buy this?"

Ben Gilbert 22:03 Yeah, and I think Microsoft was one of them, too. It was for, like, a, a million-dollar acquisition offer or something like... It wasn't, you know, crazy, but these are high school kids.

David Rosenthal 22:11 Right, in 2002.

Ben Gilbert 22:13 Yes.

David Rosenthal 22:14 But, yeah, this is really important, 'cause they're about to graduate. Adam is gonna go off to college at Caltech. Mark is gonna go off to college at Harvard in the fall, but Mark is not just like any student coming into Harvard. He's like, "I can build these things, and they have value, and big companies are gonna be willing to pay me for them. I don't need to be that worried about getting a job."

Ben Gilbert 22:35 Right. He sort of always knew he had a great fallback plan, so it kinda let him be risk-on.

David Rosenthal 22:40 So Mark graduates. He goes off to Harvard. It's the natural choice on many fronts. I mean, one, Mark, of course, aces his SATs. I think he gets a 1600 on the SATs. There's this great legend about, um, you had to take SAT twos to get into college back then. I don't know if you still do, but I think you had to have a minimum of three. Mark doesn't study or prepare for them at all. He walks in the day of the test, says, "I'm gonna take all three that I'm gonna take on the same day." He gets eight hundreds on all of them. College admissions was not gonna be a big deal, and his older sister Randi was already there at Harvard.

Ben Gilbert 23:15 So clearly, gonna go to Harvard if he wants.

David Rosenthal 23:18 Yes, and I think he wants enough. Like, I, I don't know that it's that important to him, but he's like, "Yeah, sure. Harvard, it's the best. I'm gonna go there."

Ben Gilbert 23:26 Yep. In fact, there's a video of that.

David Rosenthal 23:28 [chuckles] That's right.

Ben Gilbert 23:29 Have you seen this? His dad sort of filming his reaction, and he's pretty measured about it. It's very, "Yep, got into Harvard," and then kind of goes back to doing something else on his computer.

David Rosenthal 23:39 Yep, and I think for most kids, for most people in the world, you would look at that and be like, "What arrogance?" And, look, it's not like 18-year-old Mark is not arrogant, but I think it's also... This is why all this stuff we've been talking about is important. It's just not that important to him. You know, he likes building stuff. He likes making stuff. He knows it has value. He knows people will use it. Whether he goes to Harvard, doesn't go to Harvard, goes to college, doesn't go to college, it's just not that big a deal to him, I don't think.

Ben Gilbert 24:11 Yeah, reading in between the lines, it seems like the thing that he was most excited about is, "Oh, good, a challenging environment where I will encounter other really smart people like myself, who are ambitious."

David Rosenthal 24:19 Yes, I think that is totally right.... So Mark gets to Harvard in fall of 2002, and, you know, like you said, he goes to class, he does well, but he wants to meet other people and be around other smart folks. He ends up joining the AEPi fraternity there, like my co-host here, my esteemed colleague, Ben.

Ben Gilbert 24:38 Indeed.

David Rosenthal 24:39 Also, my father, while he was in college.

Ben Gilbert 24:41 Ah, I didn't know that.

David Rosenthal 24:42 Yeah, that's right, that's right, AEPi. Adam, meanwhile, of course, goes off to Caltech, you know, 3,000 miles away in the opposite corner of the country.

Ben Gilbert 24:50 Also, can I just say, how crazy is it that Adam D'Angelo would become Facebook's first CTO? They don't go to college together.

David Rosenthal 24:59 Right! Well, I was gonna get into this in a sec. Adam has a very different experience at Caltech. He ends up graduating from Caltech. I think, um, they probably do not have the same, uh, generous leave policy there that Harvard does.

Ben Gilbert 25:10 'Cause Harvard's is weird, right? It's like you can leave, and if you ever wanna come back, you just- it's like you never left.

David Rosenthal 25:15 Oh, we're gonna come back to that in one sec. Put a pin in that. But for Adam at Caltech, he still finds time while he's there to keep working on these projects. So during his freshman year, he builds something called BuddyZoo, you know, kind of building on Synapse and the success that they had in their senior project. BuddyZoo takes your buddy list from AIM, from AOL, and effectively turns it into a social network. So you upload your entire buddy list to BuddyZoo, and then you get your friends to do so, too. BuddyZoo then analyzes and gives you a list of who are the friends of your friends, how many degrees of separation do you have to them-

Ben Gilbert 25:59 Oh.

David Rosenthal 26:00 It automatically identifies cliques of, like, oh, who of your friends are part of these cliques, and who are their friends? It measures popularity among users. This is starting to sound pretty familiar here.

Ben Gilbert 26:11 And this is pretty advanced stuff for 2002, 2003.

David Rosenthal 26:15 Very advanced stuff, especially for a side project for a very busy Caltech student.

Ben Gilbert 26:20 Yep.

David Rosenthal 26:20 So BuddyZoo, pretty quickly in the months after Adam launches it, gets a couple hundred thousand users. There's gravity to this thing. It's becoming fairly big, especially given how small the internet was at the time.

Ben Gilbert 26:34 Yeah.

David Rosenthal 26:35 And Adam is like: "Whoa! Okay, this is interesting. So this is kinda what scale looks like. Synapse was cool, and we had a bunch of people downloading it, but this feels like something more on the order of AIM itself. Like, this is really interesting."

Ben Gilbert 26:50 And the important thing with Synapse was it was a single-user application, so it could analyze my songs and tell me what to listen to. This is the first time Adam, Mark, you know, particularly Adam, in this case, is discovering a very different type of application that gets better as more people join it.

David Rosenthal 27:08 Yes. Now, we say Adam, and, and Adam definitely built and launched it, but it's not like Mark wasn't involved. They're staying in touch the whole time and collaborating and working through coding challenges together on, what else? On AIM. It's kind of serving its original use case, like they're collaborating through it across the country. So that summer, 2003, after their freshman year, Adam comes to Boston and gets an internship at the MIT Media Lab. He discovers this thing called Friendster, another social network out there, and Adam is like: "Whoa, this is a dedicated, standalone kind of version of what I just built with BuddyZoo. This is, like, really interesting."

Ben Gilbert 27:49 And it's all on the web.

David Rosenthal 27:51 Now, Friendster was based out here in Silicon Valley, had raised money from Kleiner Perkins-

Ben Gilbert 27:57 And Benchmark, right?

David Rosenthal 27:59 Oh, Benchmark, too? I didn't know that.

Ben Gilbert 28:01 Yep.

David Rosenthal 28:01 Ah-

Ben Gilbert 28:01 Yep

David Rosenthal 28:01 ... interesting.

Ben Gilbert 28:02 Which is what tied their hands and why they could not pursue an investment in Facebook.

David Rosenthal 28:08 [laughing] Oh, that's funny.

Ben Gilbert 28:10 Not that I think that was a real possibility anyway, 'cause things were kind of moving so fast, but you never hear them in any of the discussion about who was pursuing Facebook and who was iced out. They just- they had a competitive investment.

David Rosenthal 28:21 That's right. It's funny, I never even think about that, because obviously, Matt Cohler would go on to become-

Ben Gilbert 28:26 A partner

David Rosenthal 28:27 ... an important partner at Benchmark.

Ben Gilbert 28:28 And, of course, Matt was an early executive at Facebook.

David Rosenthal 28:31 Yes, exactly. Interesting. So here's Friendster, this example of, like, a real standalone company, social network, growing virally, funded by venture capitalists, based in the San Francisco Bay Area. Adam's like: "Oh, maybe that's sort of what we should be focusing on." And by the end of the summer in 2003, Friendster had over 3 million users, so, like, really interesting, growing really quickly.

Ben Gilbert 29:00 Friendster had real scale and grew really fast. That is something that has kind of been lost to history. Friendster is, like, the butt of a lot of jokes, but it exploded out of the gates.

David Rosenthal 29:10 True. So Adam's playing around with Friendster, and Friendster had this feature called Testimonials, which was kinda like a Facebook wall, but in the long run, one of the core problems with Friendster was it positioned itself as a social network and about friends, but really, it was kind of intended to be a dating site underneath it all.

Ben Gilbert 29:33 Absolutely. That was wink, wink, not a dating site. It was this idea that, like, well, there's all these other things that are dedicated to dating, so there's this weird stink about it, but if you just naturally meet a friend of a friend online through a thing that's totally not a dating site, then great! There's no stigma around it.

David Rosenthal 29:52 Yep. So, uh, specifically when it comes to testimonials, the purpose of testimonials was supposed to be, like, why you should date somebody [laughing] -

Ben Gilbert 30:00 [laughing]

David Rosenthal 30:00 ... or why they would be a great partner, which is funny. So Adam, while he's playing around with this, and he's telling Mark about it, he actually posts on Mark's Friendster profile a testimonial, and [chuckles] he says that, quote, "Mark gets way too lucky," and he posted this in the summer of 2003. And Adam was telling me this story, and he was like: "You know, I have thought about that post-... for 20 years since then. [laughing] Because on the one hand, it was like a stupid throwaway, you know, double entendre that I put on there 'cause it was a, you know, a dating site. On the other hand, it is both absolutely true about Mark, that he always gets way too lucky, and Facebook and Meta always gets way too lucky, but it's not luck.

Ben Gilbert 30:46 Yeah.

David Rosenthal 30:47 It's actually Mark. There's something very different about the way he operates, and all the reasons that Meta and Facebook get lucky over the years, Mark was always that way, and it's always because of Mark.

Ben Gilbert 31:00 Mark is unbelievably good at positioning himself for luck to do its thing.

David Rosenthal 31:04 And specifically, at this point in time, you know, what Adam talked about is, like, he was always looking around. He was looking at Friendster, he was looking at what we did with Synapse, he was looking at what I did with BuddyZoo, he was looking about the projects at Harvard he did that we're about to talk about, and he was always thinking, like, "How do I incorporate all of this and make whatever I'm doing better?" This was the stew that Facebook is about to come out of. So this brings us to fall semester, 2003, 2004, Mark's sophomore year, and the famous Kirkland House, Suite H 33, with Mark Zuckerberg, Chris Hughes, Dustin Moskovitz, and Billy Olson as the four roommates there.

Ben Gilbert 31:47 Three of the four of those names are names you may know as the founders of Facebook. [chuckles]

David Rosenthal 31:52 Yes. So Mark is focused heading into his sophomore year at Harvard, and he's not focused on classes, he's focused on projects.

Ben Gilbert 32:00 And he's done, like, ten. I mean, this is something that, again, is kind of lost to history. People talk about, "Oh, there's the one Facemash thing that he did that led to Facebook." He did, like, ten side projects. I mean, I remember being in this era of my life where you feel like you have superpowers as a programmer, and you're looking around and you're like, "Oh, I can make a website for that. I can make a website for that." I had the same thing, where the world wasn't saturated with apps yet, and so you could just, like, make things that made your life better or other people's lives better, or cool ways to connect people. And I distinctly remember feeling like, "How come nobody else realizes you can just do this?" I know what that sort of feels like, and I know that mentality he was in. There were ten things that he had worked on, even before Facemash.

David Rosenthal 32:41 Yep, so the first of which, right as they're getting back to campus that fall, is Mark builds a tool called CourseMatch.

Ben Gilbert 32:49 Oh, yeah, that's right.

David Rosenthal 32:50 And this is as students are shopping for classes for fall semester, you can upload which classes you're thinking of taking or which classes you've signed up for, and you can see who of your friends have also signed up for that class or are planning to sign up for that class. This is just text. All this is, is a list of classes and a list of people who sign up, and it takes Harvard by storm. I mean, think about it, right? Like, it's obvious in hindsight. A bunch of college undergraduates, yeah, you wanna take classes you're interested, but, like, really, you wanna make sure you take the classes with the people that you want to be around.

Ben Gilbert 33:27 I was literally texting my friend yesterday, who was at Harvard at this time, and she said, "Oh, yeah, people totally chose their classes based on who was in them."

David Rosenthal 33:35 Of course, of course. So Mark sees this, and he's kind of like... You know, again, it's one of these learnings, an observation about the world. He's like: Wow, people are spending a lot of time on this tool.

Ben Gilbert 33:46 It's literally just lists of people. You click on a class name, and people would spend a lot of time just combing over that list of people.

David Rosenthal 33:53 Totally. There's nothing visually compelling here. So he's like, "Well, okay, now it's time for my next project. You know, people have registered for classes. What if there was something visually compelling [chuckles] for people to spend time on?"

Ben Gilbert 34:05 What if I overstepped a little bit and, uh- [chuckles]

David Rosenthal 34:09 Yeah, and this is Facemash, well-chronicled in all the many books, stories-

Ben Gilbert 34:15 The Steven Levy book, the David Kirkpatrick book.

David Rosenthal 34:17 Movies, you know, whatever. [laughing]

Ben Gilbert 34:19 Movies. Movie.

David Rosenthal 34:21 Movie. Mark codes this up in one evening in his dorm in Kirkland House, and it's basically the website Hot or Not for Harvard, with a couple of, like, actually interesting mechanical twists on it. Now, the two big problems with it are, one, this is probably just not a good idea or not, like, kind. Generally, it is a head-to-head voting mechanic on which picture is, quote-unquote, "hotter than the other picture." The other thing that is really not great is, rather than having users upload their own pictures, Mark hacks into the Kirkland House servers and downloads the face book photos of all the students to populate the website.

Ben Gilbert 35:04 Lower case face, space, lower case book.

David Rosenthal 35:08 Yes. So we should probably spend a minute and talk about what a face book was before Facebook. So my big question for you is, did Ohio State have a face book?

Ben Gilbert 35:19 It did not.

David Rosenthal 35:19 It probably would've been like a telephone book-sized thing if they did.

Ben Gilbert 35:23 I mean, I went to college in the fall of 2007, and so you could look up people's email addresses if you had their first and last name. You might be able to get some other, maybe major, but it was a text blob, it wasn't a photo.

David Rosenthal 35:37 Well, I think most, if not all, Ivy League schools back in the day had these. Princeton, where I went, certainly had these when I showed up on campus.

Ben Gilbert 35:44 In fact, Phillips Exeter had one. The private high schools did, too.

David Rosenthal 35:48 That's right, that's right. So you had to give the university, or in Exeter's case, the high school, a school photo of you when you were coming in, before you matriculated, and then they would literally make a book, like, a printed book with the names and class years and photos of all the incoming students from the freshman class. And I think if I remember right, at Princeton at least, they would republish the book every year-

Ben Gilbert 36:14 Hmm

David Rosenthal 36:14 ... you know, for your class, 'cause, you know, some people would leave, some people would join, et cetera, et cetera.

Ben Gilbert 36:18 All right, so these are photos stored digitally that Mark then, while plugged into the campus network from his dorm room, is-... accessing, downloading, and then putting up on his own website that he is hosting.

David Rosenthal 36:32 Yes, called Facemash. Now, a couple interesting things about Facemash. One, gosh, if Mark was blown away by the engagement of the Harvard population with CourseMatch, Facemash takes that to such a whole another level that it actually melts down [chuckles] the servers in Kirkland House, and the IT department at Harvard has to shut off internet within hours of it going live to all of Kirkland House, lest this, like, continue to spread virally within Harvard and take down, like, all of the servers.

Ben Gilbert 37:04 Oh, so maybe he didn't actually rehost the images. Maybe he was just pointing at the URLs that were hosted by Kirkland House.

David Rosenthal 37:09 Oh, I didn't think about that. Yeah, that might have been how it worked.

Ben Gilbert 37:12 But either way, dude knows how to make something that gets engagement.

David Rosenthal 37:16 Yes. Yes, he does. So the other interesting thing from Mark's perspective about Facemash is that it was the first time he was building a rich web app as one of these projects. You know, fully built on the LAMP stack, and he had probably used the LAMP stack, Linux, Apache, MySQL, PHP, for CourseMatch.

Ben Gilbert 37:40 And so to be clear, that's an operating system, a web server with Apache, MySQL, the free open-source database, PHP, the free open-source programming language.

David Rosenthal 37:51 Yes, but this is the first time that he's building, like, a real rich, consumer-grade web app on top of the LAMP stack. [chuckles]

Ben Gilbert 37:58 Rich, consumer-grade. [chuckles] It's the technical requirements of CourseMatch, but with photos.

David Rosenthal 38:05 Well, uh, photos and voting.

Ben Gilbert 38:07 Sure. Yeah, you have, like, an probably an additional table of information in the database or something, but the big takeaway here is, A, of course, the use case shouldn't have done it, B, wow, it gets engagement, C, this is training wheels of how to use these new open-source web technologies. If you go back two, three, four years, you're gonna have to go to Oracle, you're gonna have to go to Microsoft, you're gonna have to buy, like, enterprise-grade, super proprietary systems to do this, and this is all just, like, free and something you could cobble together and upload onto some Linux web hosting, and boom! There had to be 100 times more or 1,000 times more web applications created by the Mark Zuckerbergs everywhere in this period of time, doing whatever random little project that they thought would be fun or funny or useful.

David Rosenthal 38:54 Yep. It's such a perfect example, despite its problematic nature, of this is, like, the first time in history where you need neither money nor permission to launch an application like this on the internet.

Ben Gilbert 39:09 Totally. $10 domain, $100-a-year web hosting, that includes the database, no licenses required, PHP is all free. Maybe the bandwidth would've been an issue, but this is on the order of $100 to do this.

David Rosenthal 39:21 Yeah. Well, clearly, the bandwidth was an issue [laughing] because they shut down internet to Kirkland House.

Ben Gilbert 39:26 So David, this feels like a thing you should get kicked out of school for doing. [chuckles]

David Rosenthal 39:30 Yeah. Harvard, as you imagine, is not pleased about this. They haul Mark in front of the administrative board, which is a disciplinary committee for students when things like this happen. He and his fraternity brothers are pretty sure that he's actually gonna get thrown out of school for this. So the night before the ad board meets to make their final decision, AEPhi, the fraternity, throws a goodbye Mark party [chuckles] that night, and legend has it that this is where Mark and Priscilla Chan meet for the first time, and Priscilla, of course, is now Mark's wife.

Ben Gilbert 40:03 Yep.

David Rosenthal 40:04 So the ad board meets the next day and decides not to throw Mark out of school, but to put him on disciplinary probation for the rest of the year. Basically, "Don't do this again." [chuckles]

Ben Gilbert 40:14 Slap on the wrist.

David Rosenthal 40:15 Slap on the wrist. So Mark doesn't end up getting kicked out of Harvard, but he does kind of end up becoming, like, the Harvard computer celebrity [chuckles] even before Facebook.

Ben Gilbert 40:27 Right. I mean, this is a big deal. Everyone on campus knew about Facemash. A lot of people already knew about CourseMatch anyway, so he's now the guy who can make websites and web applications here at Harvard that people use.

David Rosenthal 40:40 Yep, and it just so happens that there's a group of upperclassmen at Harvard, led by two twins, the Winklevoss twins, who have an idea to digitize Harvard's Facebook and build an online version of it, that they're thinking of calling the Harvard Connection. Then they think maybe we could actually take that to other schools, too, and call it ConnectU, as sort of the broader version. This was not at all a unique idea. [chuckles]

Ben Gilbert 41:07 Not at all.

David Rosenthal 41:08 Lots of people at lots of schools had this exact same idea. In fact, Harvard itself had this idea. The IT department at Harvard had been promising for years and talking about how they were gonna build a digital version of the Harvard Facebook.

Ben Gilbert 41:24 And Friendster is out there, and I looked it up, Stanford had Club Nexus, Columbia had CU Community, Yale had Yale Station. I'm sorry, there was a whole movie made about the drama of how novel this idea is. It's not!

David Rosenthal 41:38 Totally not. I'm pretty sure Princeton had one, too, when I was there, pre-Facebook. Yeah, totally not a novel idea. Lots of people have it.

Ben Gilbert 41:45 Nope.

David Rosenthal 41:46 The Winklevoss twins, though, you know, Mark is now this celebrity on campus. They need somebody to be a programmer to write the site, so they talk to Mark, and Mark agrees that he's gonna help them out and help code this site that they're thinking about.

Ben Gilbert 41:59 Also, again, the chutzpah to say, "We have this idea. You are a programmer. You will program our idea." Clearly, Mark can come up with his own ideas that get people excited enough to use the stuff he builds. Now, so far, it's been a little unsavory, but he doesn't have a problem coming up with ideas with product market fit and executing them end to end. The only thing he hasn't done so far is made money, made anything as a business, but what other pieces of the puzzle does he really need from some people with an idea?

David Rosenthal 42:31 None. Uh, it's funny, I was gonna save this for a little later, but let's talk about it now.... in addition to technically, because of open source and the LAMP stack, and also socially because of AIM and everything going on, the world sort of, for the first time, something like Facebook being able to be built for no money and no permission. Also, this was the first time that a technical person, because of this, could just do everything. Like, Mark didn't need anybody. Mark didn't need a non-technical co-founder. Mark didn't need a CEO. He was the CEO.

Ben Gilbert 43:06 I remember thinking the same thing when I shipped my first app to the App Store. Co-founder Ian and I, in 2009, I think, made something called Seize The Day, got over a million downloads. Two programmers uploaded something to the App Store. That's a slightly different era, 'cause that's mobile, not web, but I remember looking around being like, "Whoa, we, like, didn't need a business guy."

David Rosenthal 43:25 Right. [chuckles]

Ben Gilbert 43:26 That's the craziest thing. You can make stuff, and you can put it in the world.

David Rosenthal 43:31 Totally. So this takes us to Harvard's Christmas break. Now, at the time, Harvard did final exams for the fall semester after Christmas break in January. So the idea is, all the students go home for Christmas break, you come back in January, and then there's a week of reading period, where you re-familiarize yourself with all the material from your classes, then you take final exams, then there's a little break, there's a course shopping period for spring semester, and spring semester starts in February.

Ben Gilbert 43:58 So Mark has a few weeks to program a new idea. [chuckles]

David Rosenthal 44:01 Exactly, to not study and program a new idea. And during Christmas break, he had actually come out to Silicon Valley, to the Bay Area, to hang out with some friends out here. And seeing, you know, the physical embodiment of all these great tech companies, Yahoo, early Google, et cetera, drove by them all. And so he comes back, and he's, like, extra, extra motivated. He's like, "You know, this digital Facebook idea, I think this is something that a lot of people want. I bet I can code this up in a week and just launch it."

Ben Gilbert 44:35 And again, not a business, just, like, a project. He has this gut feeling that people will use this if he makes it.

David Rosenthal 44:42 Totally. Now, importantly, though, all the stuff he'd been doing throughout the year, he's like, "Well, I can incorporate that into this project, too. It'd be pretty boring if it's just a digital Facebook. Like, I don't think people want that. But I've made all this other stuff that people really, really like and engage with."

Ben Gilbert 45:02 And when you say just a digital Facebook, you mean, like, essentially, the profile page would just be a photo and a name.

David Rosenthal 45:07 Right, just like the physical version of, like, here is a list of all the students in the class, and here is their, you know, stock profile picture.

Ben Gilbert 45:14 Yep.

David Rosenthal 45:15 So later, after thefacebook.com blew up, Mark told The Harvard Crimson in an interview, "I don't really know what the next big thing is, because I don't spend my time making big things. I spend time making small things, and then when the time comes, I put them together. That's the kind of stuff I do, small little projects, and eventually, they all fit together." And that's what thefacebook.com ends up being. So Mark gets back from reading period. Instead of studying, he dives in. He IMs his friend, Andrew McCollum, who he knows from CS classes, and asks Andrew to do the page design. Andrew says, "Yeah, sure thing, I'll help you out." Andrew goes and fires up Photoshop. He finds an image on the Internet of some guy who looks kinda cool and, uh, puts it in the header of the design for the site.

Ben Gilbert 46:02 Behind a cloud of ones and zeros, because it's cool.

David Rosenthal 46:06 It's like the Matrix.

Ben Gilbert 46:07 Yes. [chuckles]

David Rosenthal 46:07 [chuckles]

Ben Gilbert 46:08 And it's gradiented. You know, it's sort of white on the left, blue on the right.

David Rosenthal 46:12 And for, like, you know, a year or two, however long the Facebook guy was at the header, everybody's like, "Who is the Facebook guy?" People think it's Al Pacino. People are like, "Is it a student?" Do you know who the Facebook guy was?

Ben Gilbert 46:24 I totally do. I looked this up. I spent, like, two hours-

David Rosenthal 46:27 I did, too

Ben Gilbert 46:27 ... trying to figure this out. Really? [chuckles]

David Rosenthal 46:29 Yeah, it's amazing. [chuckles]

Ben Gilbert 46:31 'Cause everyone always said it's Al Pacino, and I'm like, it doesn't really...

David Rosenthal 46:33 No.

Ben Gilbert 46:33 Al Pacino must've looked really different when he was younger [chuckles] and it's not.

David Rosenthal 46:37 All right, tell me your answer. I'll tell you if it matches mine.

Ben Gilbert 46:40 All right, so there was an '80s song that got really big called "Centerfold."

David Rosenthal 46:45 Oh, yes, this is it.

Ben Gilbert 46:47 And the image is of Peter Wolf.

David Rosenthal 46:49 Yep, who is the lead singer of the J. Geils Band.

Ben Gilbert 46:52 We'll link to that image. There's this great Quora post, which we should say, Adam D'Angelo, founder and CEO of Quora, after Facebook. There's a great Quora post about this, where there's unmistakably the photo of Peter Wolf that Facebook guy is based on. They just sort of pixelated it and, you know, made it duotone instead of the original photograph.

David Rosenthal 47:13 So great.

Ben Gilbert 47:13 Yeah.

David Rosenthal 47:13 So great. So on the evening of February 4th, 2004, after final exams, right when students are coming back, getting into the mode for the new semester, starting to shop for spring semester courses, Mark Zuckerberg launches thefacebook.com. And right off the bat, from the moment somebody logs in, the functionality is, like, awesome. So the registration page reads, "You can use The Facebook to: search for people at your school, find out who are in your classes," course match.

Ben Gilbert 47:52 Yep.

David Rosenthal 47:52 "Look up your friends' friends," BuddyZoo, "See a visualization of your entire social network," BuddyZoo plus graphics. And then, at the bottom of every page is the famous, "Copyright 2004, The Facebook, a Mark Zuckerberg production." [chuckles]

Ben Gilbert 48:11 Awesome. I feel like it's, like, one of the most infamous screenshots is the screenshot of that original homepage.

David Rosenthal 48:16 So, so great.

Ben Gilbert 48:18 So importantly, things that did not exist here yet: messages, wall posts, even, I don't think pokes were in the original, very first version.

David Rosenthal 48:28 That's a good question. If they weren't in the very first version, they launched-

Ben Gilbert 48:32 It was soon after

David Rosenthal 48:32 ... pretty quickly thereafter.

Ben Gilbert 48:33 Yeah.

David Rosenthal 48:34 Yep.

Ben Gilbert 48:34 But no Facebook Events, no photos, other than your profile photo. I mean, no... I don't even think status updates were in the very first one.

David Rosenthal 48:43 ... I don't think status updates were there yet, no. But all the lessons from all the other projects, all the elements of them, are coming together here. So once again, registration is limited to email addresses on the harvard.edu domain. That was part of the magic of what had made all the other projects so successful, is like, it's not randos in here, it's other people at Harvard. It's your classmates, it's the people you care most about.

Ben Gilbert 49:10 Yep.

David Rosenthal 49:11 And by the nature of that, it's their real identities.

Ben Gilbert 49:14 And that's what makes it different than all these other social networks. Myspace existed, Friendster existed, but anyone could sign up for these, and in part, that meant that they had more explosive growth, 'cause there was no governor on the growth. And we'll talk about all the problems that sort of come from anyone, anywhere can sign up at any time. But the very core thing here is authenticated people. The people who are signing up for Facebook at the start are people you know go to the same college as you, and have to use their real name matched against a university-issued email address. Identity, an authentic identity, is a part of the company from its first moment.

David Rosenthal 49:53 Yep. Coupled with, super important learning number two from Facemash, it's all user-submitted content. So no pre-population-

Ben Gilbert 50:04 [chuckles]

David Rosenthal 50:04 ... with anything from Harvard, you know, no scraping from Harvard servers, et cetera. And like, yeah, on the one hand, that prevents Mark from getting into trouble. On the other hand, though, it sets the expectation and the requirement, and trains the behaviors of the users, of you gotta enter all the content into this site yourself. You put in your AIM screen name, you put in your cell phone, you put in your interests, you put in your classes.

Ben Gilbert 50:28 Also, y- isn't it crazy that they displayed cell phone numbers for the longest time?

David Rosenthal 50:33 Right! Well, again, think about the functionality and the utility to the users. On the one hand, you would never disclose your cell phone number to the general public. On the other hand, other students and your friends at Harvard knowing your cell phone number, well, that's actually pretty useful-

Ben Gilbert 50:50 Right

David Rosenthal 50:50 ... for getting in touch, for going out, for going to parties, for planning things, et cetera, et cetera.

Ben Gilbert 50:55 These are all people you would give your email and phone number, and maybe even birthday to, if they just asked.

David Rosenthal 51:00 Totally. You would probably also give them your relationship status, [chuckles] which is in there. [laughs] Formalizing your relationship status for the first time, here on the facebook.com. You can add a photo of your own choosing as your profile picture. So, big difference from old-school Facebooks, where it's whatever the university chooses, or it's a stock school photo or whatever. Like, no, you get to express your personality. You get to Photoshop it as much as you want.

Ben Gilbert 51:27 And you can update it whenever you want.

David Rosenthal 51:29 And you can update it whenever you want.

Ben Gilbert 51:30 So it is amazing how much of the next billion-plus people's source of value comes from this founding moment. The Facebook grows tremendously in functionality over time, but everything is like a natural outcropping out of authentic identity, user-submitted content, trust that the people who are seeing this content are people in your sort of private network. The whole thing is here in this first few weeks of coding that got done, and then threw up the landing page.

David Rosenthal 52:03 I would even go one step further than that. The actual nature of the seeding of the network here is maybe the most important thing, and here's what I mean by that. Once Mark launches this, it takes off like wildfire within Harvard. Of course, he's already a celebrity, already known for launching these projects. People are tuned in, waiting for the next Mark Zuckerberg production. Within the first 24 hours, 650 people join. There's only 2,000 people in a class at Harvard [chuckles] , so I think there's about 7,000 or 8,000 undergraduates total. Within two weeks, over half of the entire undergraduate population-

Ben Gilbert 52:44 [laughing]

David Rosenthal 52:44 ... is active on Facebook. So now, here's what I mean, and why the seeding is so important. This initial network is super dense, super engaged, and super active. That not only sets the norms for how you're gonna behave on Facebook going forward, it also means that as the network grows virally, it radiates out from this, like, nuclear reactor of a base. [chuckles] Contrast that with an approach of something like Friendster, that's default open to everybody, backed by Silicon Valley venture dollars, trying to grow. They're doing marketing. Okay, let's say somebody in Ohio hears about Friendster somehow, maybe they see an ad for it. They sign up. When they join the service, there's no friends there.

Ben Gilbert 53:33 Right.

David Rosenthal 53:33 There's nothing to do.

Ben Gilbert 53:35 Right.

David Rosenthal 53:35 There's no functionality. It's not alive. When you join the Facebook, even though it's limited to just Harvard students, y- you sign up, and you're, like, blown away by how alive this site is.

Ben Gilbert 53:49 Right. Almost nobody can use the Facebook, but for the people who can, it's an unbelievably great experience. As they expanded, that stayed true. It was either you're not allowed to use it, or if you are, it's blow-away great, instantly.

David Rosenthal 54:03 That's basically always true, and the moments when Facebook stops growing is when that's not true. [chuckles] And then they sort of refocus on it, and then that gets the growth back.

Ben Gilbert 54:14 Yep.

David Rosenthal 54:15 Here's another thing that I think was really important about this seeding of Facebook, was actually that it happened at Harvard. Harvard is the top global brand among universities. Whatever you personally think about Harvard, it's undeniable, especially back then, that it was, like, the top. If you were a kid or a family pretty much anywhere in the world, you knew what Harvard was. This was really important as Facebook expanded, because it had this patina to it. It was, like, elite.... especially as they grew, there were clones, there were lots of other Facebook copies out there.

Ben Gilbert 54:53 And even if they were as good as what Mark had built, they didn't start at Harvard.

David Rosenthal 54:58 It's kind of like civilization. Nobody else could ever invade Facebook's turf, but they could invade other people's turf. So somebody put it to me in the research, like, there was a fairly big competitor in Germany, I think maybe called StudyVibe or something like that. Facebook could really easily go into Germany, and people in Germany would be like, "Oh, Facebook, I've heard of that. This is interesting." StudyVibe could never go into Boston, [chuckles] like, ever.

Ben Gilbert 55:25 Hmm, it's interesting. Yeah, that's a great point. Okay, so like, weeks go by, and they've saturated Harvard, and not only that, you start seeing this thing happen, which just to level set with listeners, this stayed true for several years. This is a crazy stat: seventy percent of people who ever signed up were active that day. There are not user engagement retention metrics better than that in the world. The fact that as they grew, it didn't matter how many more people they added, it was still the case that seventy percent of users ever were daily active. And so you have this crazy situation at Harvard where it's just like, to your point, nuclear reactor levels engaging. In fact, this term wouldn't get coined till later in the summer, but this is from The Facebook Effect, David Kirkpatrick's book, "They had coined a term for how students seemed to use a site. Zuckerberg, Moskovitz, and Parker," Sean Parker, who we'll talk about, who comes in, "called it the trance. Once you start combing through the Facebook, it was very easy to keep going. It was hypnotic. You just kept clicking and clicking and clicking from profile to profile, viewing the data." [chuckles]

David Rosenthal 56:39 [chuckles] And every single one of those clicks is a page view. So yeah, this hits Harvard like an earthquake. It's Facemash all over again, except a good problem, not a bad problem. It's all legit. The servers are melting down. Even Mark is blown away by how big this thing gets so quickly.

Ben Gilbert 57:01 Yep. Right away, they add the wall, so there's a way to publicly post, uh, things like testimonials on your friends' walls. Uh, you could view a wall to wall, so you could see the public posts that you were making back and forth to each other. So you've got your profile information, wall posts, and that's it.

David Rosenthal 57:19 Yep. But to your point, very quickly, Mark is adding features, adding functionality, adding things to do to the site. The other thing that he does right off the bat is say, "Okay, we're taking this to other colleges, too." So he recruits his roommates. Dustin Moskovitz comes on to help maintain the site. Dustin was actually an econ major. He had no idea how to code. [laughing]

Ben Gilbert 57:42 [laughing]

David Rosenthal 57:42 He goes out and buys Perl for Dummies, and Mark's like, "Uh, that's great that you read that. The site is written in PHP." [laughing]

Ben Gilbert 57:50 [laughing]

David Rosenthal 57:51 So Dustin goes and learns PHP, too, and helps with coding the site and keeping up with everything.

Ben Gilbert 57:57 Eh, you know Perl, you can learn PHP. It's much easier.

David Rosenthal 57:59 Chris Hughes joins, too. Andrew McCollum joins, and then they need to keep buying servers to keep up with the traffic, or else everything is gonna melt down. So one of Mark's fraternity brothers in AEPi is a guy named Eduardo Saverin, and Eduardo was, I think, part of the business and investing club at Harvard. So they recruit Eduardo in, and Eduardo invests a thousand dollars in infrastructure for the site. Mark invests another thousand dollars, so together, there's two thousand dollars of investment in the facebook.com, and the deal they strike is that Mark gets two-thirds of the company, and Eduardo gets one-third of the company, and Eduardo sets up a business entity to formalize all of this as a Florida LLC. Eduardo was from Florida. Right away, as we were saying, Mark's like, "Great, this is not just a Harvard thing. We need to bring it to other colleges." And he specifically chooses Columbia because, Ben, as you said, there was an existing competitor there, and he's like, "I wanna see how Facebook competes, and, like, I wanna know right away, can we displace it?"

Ben Gilbert 59:03 It's so interesting. He doesn't go to the schools where there's nothing. He goes to the schools where there is something and wants to be better than it.

David Rosenthal 59:09 Which is so counterintuitive to how most people would think. They'd say, like, "Oh, no, this is a race. I'm gonna go to the white space. I'm gonna gobble everything up and then wait to take on competitors when I'm bigger and stronger." Like, Mark's like, "Nope, right away."

Ben Gilbert 59:21 This is a early mindset of we are [chuckles] gonna be globally dominant. If you're okay splitting the market, you go for the white space, and then you say, "Let's see how much of the low-hanging fruit we can easily get." But if you're Facebook, you're gonna say, "Let's go to the hardest possible competitor, extinguish them [chuckles] ..."

David Rosenthal 59:39 Yes. [chuckles]

Ben Gilbert 59:39 ... and then, [chuckles] and then we, uh, we'll have a better shot at owning the whole market, and we can get to the low-hanging fruit later." By the way, their strategy, once they did win at a school like Columbia, was to go figure out all the schools that were, like, closest to Columbia in terms of network connections and then win there, too, to kinda, like, build a moat around their victory.

David Rosenthal 1:00:00 Yep. So there we have the initial crew: Mark, Dustin, Chris, Andrew, and Eduardo, the five co-founders of Facebook. The other interesting thing about going to Columbia, which they do three weeks after the launch at Harvard, twenty-two days, it was the same month, all within February 2004. They set up Columbia as a completely different network than Harvard. So if you join the Columbia Facebook, you can't then go access all the profiles of Harvard students.

Ben Gilbert 1:00:38 Right, at first, there was zero connectivity between the two.

David Rosenthal 1:00:41 Which is another sort of counterintuitive thing. You'd think, like, "Oh, great, I wanna build this as big as possible. Mark clearly wants to conquer all these other schools. The best way to do that is to have all this alive content come right to them from Harvard."... I think he realized that had he done that, it would've socially inhibited sharing within Harvard.

Ben Gilbert 1:01:01 Yeah. The scarce commodity is trust. That is the important lesson here. It's also a very convenient infrastructure decision, where if these two systems truly don't need to talk to each other, that's great! Put different servers in different data centers. Don't worry about overloading the database. Don't worry about number of writes per second and reads per se- it's great. If every school gets its own server rack, you'd end up not having some of these issues that the other social networks have. Friendster is out there trying to compute second-degree friends of friends, which is this crazy, hard computer science problem, especially as the global number of people growing. It's an N-squared problem. And Facebook is over here, or the Facebook at the time, in the land where they're keeping N small. So even anything that's N squared is contained within that school, and their servers aren't falling over and taking 20-plus seconds to load pages the way that the Friendsters of the world are.

David Rosenthal 1:02:01 This is such an interesting point, because technology infrastructure advantage has always been a core part of Facebook, even back to this very beginning. What's interesting is that it flips at some point. As Facebook grows and eventually becomes open to everybody, their competitive advantage becomes their tech is so good and their infra is so good that they can do everything you were just talking about that Friendster couldn't do and that MySpace couldn't do. But in these early days, their competitive advantage is actually like, "No, we're scale out, not scale up." And then Mark was totally willing to just flip the bit later. [chuckles]

Ben Gilbert 1:02:41 Right, it's effectively counter-positioning. They're building the Facebook in such a way that the use cases don't require incredibly sophisticated technology to accomplish those feature sets. There's this funny chicken or the egg thing here, and I think the answer, like many chicken or the egg, is both. Mark, at the moment he conceives of an idea, thinks through the technical requirements and the user experience, and they're sort of co-mingled in the product development process. And so I really do think even at age 19, he was sort of aware of the scaling benefits, in addition to the user experience benefits, of launching in this way.

David Rosenthal 1:03:19 Totally agree. Okay, fun bit of trivia about Harvard's leave policy that we referenced earlier. Do you know what else Mark does on the same evening that they launch Columbia?

Ben Gilbert 1:03:33 No idea.

David Rosenthal 1:03:34 He goes to hear Bill Gates speak on campus.

Ben Gilbert 1:03:38 That was the same night?

David Rosenthal 1:03:40 The same night, during which speech, Bill mentions that he actually felt comfortable dropping out of Harvard because he discovered that Harvard had this really-

Ben Gilbert 1:03:52 [laughing]

David Rosenthal 1:03:52 ... generous leave policy, that you could take an infinite leave of absence and pursue something else and come back any time you want. And Mark would actually say later that Bill saying that at the event was part of what got him comfortable doing the same thing.

Ben Gilbert 1:04:07 Unbelievable. It is crazy. Tying this back to our Microsoft episode, this would've been, what, early 2004, and so this would've been right after Bill stopped being CEO, handed the CEO reins to Steve. He was still the chief architect and still chairman of the board, but it's sort of this like post-DOJ time for Microsoft, where Bill is just technically focused and can do things like go speak at Harvard.

David Rosenthal 1:04:32 Yeah. It is amazing how much influence Microsoft had on Facebook and on Mark. We have a lot more to talk about on that front. So, next couple days after Columbia launches, Facebook launches at Stanford, at Yale. By the end of the semester, they're in over 100 schools, in like, you know what, three, four months. Like, the speed they're moving with is crazy.

Ben Gilbert 1:04:55 And they start building these wait lists. I mean, this is the other... Th- there's so many common startup things that Facebook kind of invented. They built tremendous demand before they would light up the network. They knew that as soon as you're in Facebook, you wanna quickly get to seven friends or 10 friends or whatever the metric is to create that sort of magic moment where you're like, "Oh, yeah, Facebook now works for me." So they wanted to wait until they had sufficient demand to, boom, open that school, and then once it's open, everybody should have the best possible experience. And so you're seeing Facebook basically say, "Okay, wherever there's really strong demand, that's where we'll open next, and we're not gonna open anywhere where we see like, you know, middling demand for our product."

David Rosenthal 1:05:39 Yep, totally. Meanwhile, here we are at the end of the school year. The Winklevoss twins take the whole ConnectU situation to Harvard's president, Larry Summers, to adjudicate this dispute between them and Mark. Larry says, "Hey, Harvard is not gonna get involved here. This is a business dispute between students." Eventually, the two twins sue Mark and Facebook. They settle for $65 million, 45 million of which is paid in pre-IPO Facebook stock. Obviously, that grows. A large portion of that, then, I think they sell and put into Bitcoin in like 2011 and 2012 timeframe. So t- they end up pretty- [chuckles] ... pretty fine out of all this.

Ben Gilbert 1:06:24 They did great.

David Rosenthal 1:06:25 They did great. But here we are at the end of the school year, summer comes around, and Andrew McCollum has some connections out in the Bay Area. He had interned at Electronic Arts. Adam D'Angelo is gonna be spending the summer from Caltech. So the crew all decides like, "Hey, great, let's not get internships. Let's go rent a house out in Palo Alto, move to Silicon Valley, and work on Facebook there for the summer and see what happens." And yes, the house did indeed have a pool. Yes, they did indeed install a zip line off the chimney. [chuckles]

Ben Gilbert 1:07:00 Yes. [chuckles]

David Rosenthal 1:07:00 That was not fiction in the movie. That did actually happen.

Ben Gilbert 1:07:04 ... And it is important to know, to this point, it is a project. Mark and Dustin and Chris, and everyone who moves out, they are there to work on a project that they think is cool and seems to be working, and get exposure to Silicon Valley and venture capitalists for when they start their startup, having a network. That is literally the mentality. Facebook is live at how many schools, David?

David Rosenthal 1:07:29 A hundred.

Ben Gilbert 1:07:30 A hundred schools, and they are going out, not with the intent to make this a company, but to contemplate what company they could start, and meet people that can help them with that.

David Rosenthal 1:07:41 Yep. Now, when we say, "crew who moves out," that crew did not include Eduardo. Eduardo had an internship in New York, and decided that he was not gonna move out for the summer.

Ben Gilbert 1:07:52 Yeah. [sighs] Tough decision.

David Rosenthal 1:07:54 Not a great decision. On the other hand, he ends up with 2% of Facebook, so he's also fine.

Ben Gilbert 1:07:59 Yeah, so to make a long story short, yes, everything you saw on The Social Network around this, the result is effectively correct, that Eduardo Saverin goes from owning a third of this Florida-based LLC to something like 2% of this C corp, that is a Delaware C corp based in California, that goes on to become, or is Facebook, Inc. And the justification that they effectively use in changing this structure is, "Hey, a bunch of us moved to California to start a company together. You stayed back, and, yes, you sold some ads in the meantime, but, like, you didn't come start the company with us." Listener, we leave it to you to sort of decide how that should have played out and what's fair. None of us were there. He was a co-founder of Facebook, and then ended up with 2% and lived on a different coast. Okay, so they're in California. They get really serious about the Facebook. They actually are still working on something else called Wirehog concurrently within [chuckles] the same team, but they're starting to realize, "Okay, this, the Facebook thing, really, really has legs." And as they're sort of contemplating their next move, they literally run into someone on the street who will change everything. David, who is this person?

David Rosenthal 1:09:10 That person is the co-founder of Napster, Sean Parker, who would have a brief but very, very large impact on the company.

Ben Gilbert 1:09:20 Yes, so before we tell the Sean Parker chapter of the Facebook, now is a great time to talk about our presenting partner, J.P. Morgan Payments. In these critical moments, like we are talking about now, where a new paradigm or technology shift happens, David and I typically focus on the founders and the innovators who figure out how to build something really great. But unfortunately, it's not just the good actors who take advantage of these opportunities.

David Rosenthal 1:09:46 Oh, yeah. There are always bad actors on the other side of the same new technology, and this is especially true whenever money or value is exchanged, whether it be phone scammers taking advantage of international networks in the '80s and '90s, viruses spreading through the early Internet, or today's cybercrime, like AI-powered identity theft. As technology gets smarter, so will the fraud tactics.

Ben Gilbert 1:10:09 Enter J.P. Morgan Payments. With the digital payments ecosystem expanding rapidly through innovations like real-time payments, blockchain, and peer-to-peer networks, the attack surface has grown exponentially. For a company like J.P. Morgan, who moves $10 trillion a day across 160 countries, staying ahead of bad actors is critical for the entire global financial system. That's why they've been investing in technology like AI and cyber fraud prevention for years. Their AI models have been trained on billions of transactions. That is unparalleled scale and expertise when it comes to fraud intelligence, and it's only getting smarter and more reliable, given they're processing over 5,000 transactions per second with 99.9% accuracy. Regardless of your size or industry, you can leverage their enterprise-grade solutions, like validation services, which validates bank accounts, individuals, and businesses.

David Rosenthal 1:10:57 One great example is a Fortune 500 global media company. They needed an automated solution for the thousands of influencers on their platform to do rapid onboarding, minimize errors, and ensure consistent validation of bank account information. They were able to compress validation times from days to minutes, so they could scale.

Ben Gilbert 1:11:14 They've got a great payments developer portal. It's a trusted, scalable platform built with payment security and risk management in mind.

David Rosenthal 1:11:22 Developers can even integrate their preventative fraud solutions to act before an incident takes place. Sardine, a leader in financial crime prevention, collaborates with J.P. Morgan Payments and embeds its account validation services API to analyze and protect over two billion devices for 300 companies, with AI to the highest standards of fraud and compliance safety.

Ben Gilbert 1:11:42 David, I actually met the founder of Sardine at the meetup that we did after the Chase Center event with J.P. Morgan Payments in San Francisco last month.

David Rosenthal 1:11:49 That's right!

Ben Gilbert 1:11:49 It was awesome. Ultimately, every business benefits from built-in fraud prevention, whether you're moving $100 or a billion dollars, and with the trust and innovation from J.P. Morgan Payments' whole ecosystem, you can drive growth while protecting your business. Check out more payment solutions and stories at jpmorgan.com/acquired. Okay, David, Sean Parker enters the picture. Here we go.

David Rosenthal 1:12:13 So Sean Parker had, of course, started Napster with Shawn Fanning back in the late 1990s, and after the whole Napster saga, Parker ended up starting the email contact list company called Plaxo, which was kind of its own proto-social network and pioneered [chuckles] email address book exploitation and, uh, exporting.

Ben Gilbert 1:12:38 Which is how every social company got its start. Facebook did a ton of this, LinkedIn did a ton of this, WhatsApp did this.

David Rosenthal 1:12:45 Exactly. It pioneered the first bootstrap viral social network mechanic.

Ben Gilbert 1:12:50 "Hey, let me see who all the people you know are, so that on this new thing, that you wanna be connected to all the people you know, you're connected to all the people you know. Oh, by the way, we might also invite all the people that, uh, you've ever contacted." [chuckles]

David Rosenthal 1:13:02 Yep. So Sean and his co-founders at Plaxo raise money for Plaxo from venture capitalists, and not just any venture capitalists...... the best venture capitalists from Sequoia Capital, and all is going well. Plaxo is going fine. Sir Michael Moritz is on the board of the company. Anyway, after a couple of years, [exhales] Sean Parker ends up getting kicked out of the company by the board. Now, Sean wasn't exactly the most, like, reliable employee and, uh, definitely was, um, quirky. But the result of this is Sean's everlasting enmity for Sequoia and paranoid distrust of all venture capitalists and company boards. This is gonna become very, very, very important here in a sec. So rewind slightly back to the spring of two thousand and four, when the team is still at Harvard. Sean is living in Palo Alto, and one of his housemate's girlfriends, who's, I believe, a student at Stanford, pulls up the facebook.com on her laptop, and it's kind of like the scene where this happens in The Social Network movie. Sean is like: "Holy crap, this is it. This is the winning social network." And Sean, I believe, had actually been an advisor to Friendster as well, so he was, like, between Plaxo and Napster, uh, Friendster, really believed social networking was gonna become a thing.

Ben Gilbert 1:14:36 Totally. And it is kind of crazy to think about. Unless you had a student show you on their computer, "This is what Facebook is," there's no real way for you to know other than the sign-up page.

David Rosenthal 1:14:47 Right, which you can't get past it and see how alive the thing is.

Ben Gilbert 1:14:51 Yep.

David Rosenthal 1:14:51 So Sean, being the enterprising person that he is, he cold emails the company's business email address and asks to set up a meeting, and Eduardo Saverin replies to Sean and is like: "Oh, cool, you're the co-founder of Napster. Yeah." They set up a dinner in New York City. This is while the spring semester is still going on at Harvard, and Mark and Eduardo and Sean all get dinner together, and Mark and Sean really bond. Mark is super pumped to meet him, but that's about it. Like, there's no, you know, discussion about, you know, "What's cool? A billion dollars," you know, et cetera, et cetera, as dramatized in the movie. That doesn't happen. They kind of think that they're just gonna go their separate ways.

Ben Gilbert 1:15:35 Right. "Nice to meet you." I don't think even Mark knows yet that he's moving to California this summer.

David Rosenthal 1:15:41 No, totally not. So here we are now in June. The Facebook crew has moved out to Palo Alto. They're walking down the street one evening. Sean is also walking down the same street in Palo Alto, sees them, and is like: "Hey, it's the Facebook guys!" [laughing]

Ben Gilbert 1:16:01 [laughing]

David Rosenthal 1:16:02 And at this point, Sean Parker was living in a different house, specifically the house of his girlfriend's parents, [laughs] not a good situation, and he makes a split-second decision right there on the street to insert himself into Facebook and is like: "Hey, I'm actually looking for a place to stay. Do you think I can crash with you guys in the crash pad for the summer?" [laughing] And he joins the crew, and this is how it all starts.

Ben Gilbert 1:16:32 That is wild.

David Rosenthal 1:16:33 Yeah, it's like a... [chuckles] You ever play old-school, like, Super Nintendo role-playing games, like Japanese RPGs, like Final Fantasy or whatnot?

Ben Gilbert 1:16:43 Uh, it's been a while.

David Rosenthal 1:16:44 [laughs] I mean, it's just like you meet somebody on the street, and they join the party, and like-

Ben Gilbert 1:16:49 [laughs]

David Rosenthal 1:16:49 ... you know, you always know the character on the street that's gonna join the party because their pixel sprite is more highly detailed than the regular-

Ben Gilbert 1:16:56 [laughs]

David Rosenthal 1:16:57 ... NPC pix- I mean, this is exactly what it is like here.

Ben Gilbert 1:17:00 Sean Parker had a very detailed pixel sprite.

David Rosenthal 1:17:02 Yes. So while he's there, you know, living in the house, uh, crashing with the college students, he basically takes Mark aside, and he's like: "Look, you've got something really special here. I have been in your shoes. Let me tell you exactly what is gonna happen this summer. You have created something magical. You're now out here in Silicon Valley. You are going to be the belle of the ball. All the venture capitalists out here, all the big companies, they're gonna wine and dine you, they're gonna court you, they're gonna tell you you're great, and they're gonna wanna invest in your company, and then they're gonna turn around, and they are going to screw you. [chuckles] They're gonna take control of your board. They're gonna force you to bring in, quote, unquote, 'professional management.' They're gonna kill all the magic. Growth is gonna slow. Then they're gonna blame you, and then they're gonna fire you, and then they're gonna put the company up for sale." [chuckles]

Ben Gilbert 1:17:56 And here's the thing: To this point in history, he really wasn't wrong.

David Rosenthal 1:18:01 He was absolutely right.

Ben Gilbert 1:18:02 There wasn't Founders Fund yet. There wasn't a16z yet. There wasn't, like, the notion of founder friendliness. What venture capitalists did is they invested in founders' companies and then brought in management to take them to the next level. It's what happened at eBay. It's what happened at Google. This is a pattern that happened over and over and over again, and usually, they would try to do it with the sort of help and support of the entrepreneur to build this, like, really great team together, but oftentimes, that backfired, and they just hot-swapped the CEO with a big grown-up manager in a nice suit.

David Rosenthal 1:18:35 Yep, and that was not the wrong playbook until this moment in time because, as we've been talking about, until now, if you wanted to scale something, you needed money, you needed permission, you needed business people, you needed deals, you needed contacts.

Ben Gilbert 1:18:55 Yeah, that's true. The open web kind of changed the hard requirement on that.

David Rosenthal 1:19:00 Yes, and I think Sean, as bitter as he was about his own experience, I think he probably also recognized that and recognized that the Facebook and Mark had the potential to start a new paradigm of how to do this differently.... So Sean says to Mark, "Look, if you just go out on your own, that's what's gonna happen. I am going to take you under my wing and make sure that that does not happen, and I'm gonna help you re-set up the company so that you permanently control the board, and no one can ever fire you [chuckles] because you are what is important here. And I'm gonna help you go about fundraising, but I'm gonna make sure we find the right people who are cool with that stipulation, number one, because if you go try and do it by yourself, like, you don't know enough, you don't know these people, you're not gonna find the right folks." And it's kind of wild. I mean, Sean was also in a position to take advantage of Mark and the company, and he didn't.

Ben Gilbert 1:20:04 There was some nice self-interest in all of this.

David Rosenthal 1:20:06 Uh, yes. [chuckles]

Ben Gilbert 1:20:06 It's not like this was, like, charitable.

David Rosenthal 1:20:07 He ends up being the president of Facebook. [chuckles]

Ben Gilbert 1:20:09 And he ends up with a pretty decent chunk for a non-founder, and he ends up with a board seat. Now, granted, it's technically Mark's board seat, but, you know, Sean's the one sitting in it.

David Rosenthal 1:20:19 Totally. But it would've been really easy for him to do one of two things. You know, one, obviously take advantage of Mark and the company and get a lot more for himself. Two, I think he also could have been so jaded by the Plaxo experience to say, "We shouldn't raise venture capital at all." But actually, what he counsels Mark to do is the right thing. "No, we should raise venture capital. We should professionalize, and the whole Silicon Valley machinery really can help us, but we're gonna do it in the right way on our terms."

Ben Gilbert 1:20:55 Yep.

David Rosenthal 1:20:56 I think he just really wanted to help Mark win the game.

Ben Gilbert 1:20:59 I think you're right.

David Rosenthal 1:21:00 The other thing that Sean does, by all accounts, is he makes sure that everyone in the house that summer gets equity in the company.

Ben Gilbert 1:21:09 Okay, so what's Wirehog? What's g- what's this second project that's going on here?

David Rosenthal 1:21:13 Yes. I really would love to know what Sean thought when Mark and the crew told them about Wirehog. Wirehog was basically going to be a captive Napster to Facebook. Everybody on Facebook in these private networks, walled gardens, what is something that college students really, really wanted to do and was happening internally on college servers all the time? Share files, share music, share movies. Wirehog was gonna be a product to make this happen. And actually, legend has it, I think in Stephen Levy's book, while they're talking about this, Sean Parker actually comes up with a name for the product, uh, and is like: "Oh, if you launch this, you should actually call it Dropbox." [chuckles]

Ben Gilbert 1:21:59 [laughs] Ah, no way!

David Rosenthal 1:22:00 [laughs] Yeah, like a year before Dropbox, the actual company, gets founded.

Ben Gilbert 1:22:05 That's so funny. But they really are sort of thinking of themselves as this almost, like, incubator lab. I don't really understand how this is true, but they really did convince themselves that their current front-runner for the product they were most excited about was Wirehog, and Facebook might be, like, a good distribution vehicle for it, or maybe at some point they don't even focus on Facebook anymore, and they go all in on Wirehog. And they're actively talking about this insanity while speaking with investors about [chuckles] raising capital.

David Rosenthal 1:22:34 Yes. So two of the investors that Sean goes out and helps them find... Sean, at this point, knows basically everybody in Silicon Valley, and he's like, "Okay, I need the pretty tight window of people who, A, have money, B, know what they're doing, and C, are okay with our terms that Mark is gonna control the board and control the company."

Ben Gilbert 1:22:55 So we need an individual, not an institution.

David Rosenthal 1:22:57 So he calls two angel investors who he knows pretty well and he thinks might be the right fit. One is Reid Hoffman, who, Reid had been running LinkedIn, and Sean had been in this early social networking thing.

Ben Gilbert 1:23:12 And he just started LinkedIn. They actually knew each other because Reid was an early investor in Friendster.

David Rosenthal 1:23:18 So Sean calls up Reid, and he also calls up Mark Pincus. Mark had been Sean's boss at an internship that he had in high school. [chuckles] And then Mark had gone on to invest in Napster when they started Napster as a company.

Ben Gilbert 1:23:32 And we should say who Mark Pincus is, for anyone who doesn't know. Mark would eventually start Zynga.

David Rosenthal 1:23:37 Yes, could become a very important person and company in the Facebook ecosystem.

Ben Gilbert 1:23:42 The maker of FarmVille.

David Rosenthal 1:23:43 Yes. So Pincus and Reid meet up with Sean and Mark, and they're just blown away by the Facebook. And Ben, as you say, Mark starts talking about Wirehog, and apparently Reid is like, "No, no, no, no. Stop talking about this-

Ben Gilbert 1:23:58 [laughs]

David Rosenthal 1:23:58 ... Wirehog thing. Like, [chuckles] I'm running LinkedIn. I can tell you this is special. Like, do the Facebook thing." [chuckles]

Ben Gilbert 1:24:05 Not only do the Facebook thing, but, like, music is kryptonite as a space right now because of what Napster did to the music labels. How is Sean not the one being like, "Stay a thousand yards away from music, my God?"

David Rosenthal 1:24:20 I mean, amazingly, a couple years later, you know, Sean being so open-minded, I mean, he was the, one of the ones who really helped Spotify get going.

Ben Gilbert 1:24:27 Yep, and really brokered the relationship with Mark, for Daniel and Mark to hit it off and obviously Spotify to have a huge amount of growth on Facebook.

David Rosenthal 1:24:35 Totally. So, okay, Reid, really excited, he's like: "No, no, the Facebook, focus on the Facebook."

Ben Gilbert 1:24:41 Your user numbers are what? Your engagement is what? Your retention is what? Your DAU/MAU ratio is what? Oh, my God!

David Rosenthal 1:24:48 So Reid's like: "Look, I'm running LinkedIn. Pincus and I don't have that much money together. We'll give you some, but we can't, like, fund a whole, you know, round for you."

Ben Gilbert 1:24:57 And they're kind of conflicted, both with Friendster and LinkedIn.

David Rosenthal 1:25:01 But he's like, "I think I know the perfect person who can put this together."

Ben Gilbert 1:25:06 I worked with this guy at PayPal.

David Rosenthal 1:25:08 My old colleague from PayPal, who actually, as luck would have it, is thinking about starting his own venture capital fund. This could be a really good fit. Why don't you meet-... Peter Thiel. [chuckles] And Peter, yes, indeed, was just in the process of starting what would become Founders Fund. Ben, you already alluded to this, but, like, Founders Fund was such a radical idea when Peter started it, the idea being baked into the name, that they will always side with founders and never push a founder out of a company.

Ben Gilbert 1:25:46 I was shocked. I mean, it, it just, it's so easy to forget this, but it was just 20 years ago. The idea that a venture capitalist makes an investment in a company, and they are not the controlling shareholder, was blasphemous just 20 years ago.

David Rosenthal 1:26:00 Totally blasphemous. And of course, PayPal has its own crazy history, where you can understand why Peter would arrive at this conclusion. But he really was, like, maybe the only person in Silicon Valley that hit that Venn diagram that I talked about a minute ago of, like, super legitimate, would actually help the company and help them navigate Silicon Valley, had money, because the PayPal exit had just happened, and was going to be cool with Mark controlling the company.

Ben Gilbert 1:26:32 Yeah. It's a one-of-one intro to make. I mean, it, it probably would've had to be someone else in the PayPal Mafia that kind of fits that.

David Rosenthal 1:26:39 Yep. But I don't think at that time, you know, Elon wasn't doing investing. I don't think there was anybody else who really could've done it.

Ben Gilbert 1:26:46 Yeah. That's a crazy counterfactual, thinking about if Elon had invested in Facebook instead of Peter Thiel [chuckles]

David Rosenthal 1:26:53 Right. What if Elon hadn't started SpaceX?

Ben Gilbert 1:26:56 He was in just as good a position.

David Rosenthal 1:26:58 Totally.

Ben Gilbert 1:26:58 Had Roelof gone to Sequoia yet?

David Rosenthal 1:27:01 If he had, he would've just started.

Ben Gilbert 1:27:02 This is effectively the pool of financiers who could have done this deal.

David Rosenthal 1:27:06 Right, but Sequoia wasn't gonna do this deal under those terms, so Roelof couldn't have done it. Yep, it was maybe one of two, with the other one [laughing]

Ben Gilbert 1:27:15 [laughing]

David Rosenthal 1:27:15 ... potentially being Elon. Wow, that would be a really different world that we would be living in today.

Ben Gilbert 1:27:20 Yep.

David Rosenthal 1:27:20 [laughs]

David Rosenthal 1:27:22 Okay, so they take the idea to Peter. In the meeting, Reid brings along a young guy who's working for him at LinkedIn, named Matt Cohler, [chuckles] uh, to come help, you know, talk to Peter, evaluate this from an investing standpoint. They strike a deal that Peter's gonna lead a round of $500,000. Reid and Mark Pincus are each gonna invest 37,500. Peter's gonna do the rest at a $5 million pre-money valuation, so 5.5 million post. [laughing]

Ben Gilbert 1:27:57 [laughing]

David Rosenthal 1:27:57 Which, you know, on the one hand, is, like, laughable now. On the other hand, at this point in time, for a bunch of kids who started this a couple of months ago, it's crazy that this would be worth $5 million.

Ben Gilbert 1:28:11 At a $5 million valuation, the multiple since then has been about 250,000X. [laughing]

David Rosenthal 1:28:19 [laughing] So that takes us to the end of the summer. So everybody now has to make a decision: Do they stay in Palo Alto and keep working full-time on Facebook, or do they go back to school? So Eduardo never came out in the first place, so he did his internship in New York. He goes back to Harvard and starts his junior year. Chris Hughes also goes back to Harvard, starts his junior year, graduates in 2006, and then rejoins Facebook after graduation. Andrew McCollum stays in Palo Alto for a couple years, and then goes back to Harvard later and completes his degree. He takes the, uh, you know, Bill Gates road not traveled option. Dustin never goes back, stays with the company until 2008, when he leaves to start Asana. And Mark, I think, probably never really even considered going back. [chuckles]

Ben Gilbert 1:29:18 Yeah, at this point, the 70% stat keeps being true. Despite the fact that they keep opening all these new schools, it keeps being true that 70% of people who have ever signed up are daily active users. So I think Mark realizes, "Oh, I have created one of the most engaging technology applications ever."

David Rosenthal 1:29:36 Yes, and certainly, at this point, the combination of Sean, Peter, Reid, Mark Pincus, all advising and being part of the company, they know, [chuckles] and they have certainly helped him realize that.

Ben Gilbert 1:29:54 Yep.

David Rosenthal 1:29:55 Adam D'Angelo does go back to Caltech, and then through AIM, I guess, remotely helps collaborate with the company until he graduates in, in 2006 and becomes CTO officially.

Ben Gilbert 1:30:06 Got it.

David Rosenthal 1:30:07 Sean, like we said, his impact on the company was huge. I really wanna underscore this again. Mark having full control over the company, as we are gonna see time and time and time again as we go through the story here, makes all the difference in the world, and that is 100% because of Sean Parker.

Ben Gilbert 1:30:26 Yep. So how long is Sean at the company?

David Rosenthal 1:30:29 Not very long, [chuckles] because at some point in time the next spring-

Ben Gilbert 1:30:34 So it's, like, nine total months at the company.

David Rosenthal 1:30:36 Yeah, I think about nine total months. Sean ends up leaving the company after charges get filed against him as a result of some drug incidents at a house party during a trip to North Carolina.

Ben Gilbert 1:30:49 Charges do eventually get dropped, but in the meantime, the decision is made, "Hey, this is not something the company's gonna get sucked into."

David Rosenthal 1:30:56 Yep. He immediately joins, where else?

Ben Gilbert 1:31:01 Founders Fund. [chuckles]

David Rosenthal 1:31:02 Founders Fund, [chuckles] which Peter, partially on the back of this Facebook investment, has now set up and raised officially. And like we said, Sean goes on to find and fund, and really help nurture Spotify through his role at Founders Fund.

Ben Gilbert 1:31:17 Yep. It's kind of amazing thinking about Founders Fund raising capital off the, on the back of this investment. One pitch is, "We invested in Facebook."... The flip side of it is, we just invested in a company. We're currently holding it flat, 'cause there's been no markup yet from any other investors, and they're not generating any revenue. [laughing]

David Rosenthal 1:31:36 [laughing] Well, let's talk about, uh, other investors. By this point, kinda towards the end of spring semester 2005, Facebook had now dropped the "The," become just Facebook. That was one of Sean Parker's final impacts on the company, is he actually negotiated the domain name purchase of facebook.com-

Ben Gilbert 1:31:58 Ah, I didn't know that.

David Rosenthal 1:31:59 For the company. Yeah, I believe they bought it for $200,000?

Ben Gilbert 1:32:03 Hmm.

David Rosenthal 1:32:04 Which actually was a good chunk of that venture money that-

Ben Gilbert 1:32:06 Yeah

David Rosenthal 1:32:06 ... they raised.

Ben Gilbert 1:32:07 Right, 'cause it was 500K that they raised before.

David Rosenthal 1:32:10 It was 500K, yep.

Ben Gilbert 1:32:11 And they're actively spending that. The company has never consumed that much capital, but they are having to spend it on servers. As they stand up new colleges, they are having to go into data centers and rack servers, or rent servers on a monthly basis, and the server bills are starting to add up, especially as they scaled to... How many schools were they at in the fall of 2004?

David Rosenthal 1:32:33 Several hundred.

Ben Gilbert 1:32:34 Well, Sean Parker introduced Mark to Western Technology Investment, WTI.

David Rosenthal 1:32:41 The debt fund, yeah.

Ben Gilbert 1:32:42 Yeah. And so they basically invented venture debt, and so they make a $300,000 loan, it's like, I think like a revolving credit line, in the fall of 2004, and that comes with warrants, that if the company ever goes public, that they could then exercise. They do a deal again the next spring for another $300,000, so they're in for $600,000. I, uh, spoke with someone years ago who told me this ended up being phenomenally, phenomenally successful, and the warrant exercise on this, I think, is the greatest venture debt deal of all time.

David Rosenthal 1:33:18 Has to be. Nice. Spring 2005, Accel comes in, leads a Series A, $12.7 million at a $98 million post-money valuation. That's sort of, like, crazy in and of itself for the time, and though, still being okay with Mark having board control.

Ben Gilbert 1:33:40 Yes.

David Rosenthal 1:33:41 Which, you know, one thing for like, okay, at the angel round, maybe, like, that's still pretty crazy, but whatever, this is an angel round. But, like, no, like a real venture capital firm, real Series A, 2005, A, $100 million valuation, B, being okay with that, that was wild. Oh, also, C, getting less than 20% of the company.

Ben Gilbert 1:34:03 Yes.

David Rosenthal 1:34:03 Like, rule of thumb, venture investing back in the day was, you need at least 20% of the company, ideally more like 25 or 30.

Ben Gilbert 1:34:10 Yes, so Kevin Efrusy, who ran down the deal and did the diligence at Accel, and Jim Breyer, who was the partner and took the board seat, this is one of the all-time great venture investments, and so it's worth talking about some of the deal mechanics. It was the very first post-dot-com institutional venture capital deal where the founder maintained control. Certainly, the norm was, as soon as a VC gets involved, it is a VC-controlled board and company. The other thing that's worth noting is this is a company getting a $98 million valuation. Now, the silly land that we live in now, we're like, "This happens all the time." This didn't happen, and we were only just coming out of the dot-com era, so eyeballs and clicks had just had four years of demonization from everyone, from the press, to the public, to limited partners. In fact, Accel had limited partners drop out of this fund, who were p- LPs previously, including your beloved Princeton, including Harvard. I mean, big... And I think Stanford was one of the only ones that really stuck with them for this $400 million fund. And they're kind of looking at this, realizing, "This might be one of the greatest companies of all time, and we are going to have to do the type of deal that everyone got raked over the coals for five years ago in the mania for doing, and no one is doing this type of deal in this environment. But it's Facebook, so we're gonna do it." I think the level of risk and reputation risk that they took on this cannot be underscored enough.

David Rosenthal 1:35:44 Totally. I, I was trying to think of, were there any other deals like this that you, you could even kind of point to as a comparable from the past? And the only one I can think of was the Google Series A, which was $25 million at a $100 million post-money valuation, split between Michael Moritz from Sequoia and John Doerr from Kleiner Perkins.

Ben Gilbert 1:36:08 But it was in the dot-com run-up.

David Rosenthal 1:36:10 Exactly, exactly. It was a totally, totally different paradigm, and the legend has it, I don't know if this is apocryphal or not, is that after making the investment, Moritz told Don Valentine at Sequoia, "Never have we paid so much for so little." [laughing]

Ben Gilbert 1:36:25 [laughing]

David Rosenthal 1:36:26 And I think he was actually referring to, like, the small amount of equity that they got by having to split the deal in Google. So yeah, in the dot-com bubble, that happened, but, like, that this would happen in 2005, Accel went way out on a limb for this.

Ben Gilbert 1:36:41 Yeah, so some other interesting deal points: $1.1 million of this $12.7 million round was done by Jim Breyer personally.

David Rosenthal 1:36:50 Wow!

Ben Gilbert 1:36:51 Yeah. The shares were acquired at 4.5 cents per share. Facebook just recently hit $600 a share. So [chuckles] Accel, and their limited partners, and Jim, for anyone who's still holding the shares after they distributed them, that is a 13,000X return.

David Rosenthal 1:37:12 [chuckles]

Ben Gilbert 1:37:13 Another interesting thing on this, do you know the whole Don Graham dynamic with this deal?

David Rosenthal 1:37:18 Yes.

Ben Gilbert 1:37:19 The original deal was that Don Graham from The Washington Post was gonna invest, and it wasn't gonna be a VC deal. That was at a $60 million valuation. Accel comes in over the top, and in part of the negotiation to get it up to this $98 million deal, there was actually a secondary.

David Rosenthal 1:37:38 Oh, wow!

Ben Gilbert 1:37:39 Three million went to Mark, Dustin, and Sean.... as a secondary in this deal.

David Rosenthal 1:37:48 Wow, I had no idea!

Ben Gilbert 1:37:51 Yep.

David Rosenthal 1:37:51 Wow, I mean, add to the litany of things that were not done back then.

Ben Gilbert 1:37:56 This is Facebook having all the leverage and full deal control in negotiating this Series A.

David Rosenthal 1:38:02 Wow.

Ben Gilbert 1:38:03 And still, it was one of the best venture capital investments of all time.

David Rosenthal 1:38:07 Absolutely. Man, that is freaking wild.

Ben Gilbert 1:38:10 Yeah. [chuckles]

David Rosenthal 1:38:12 Wow. Okay, well, that is a lot of hype to live up to. [laughing]

Ben Gilbert 1:38:16 [laughing]

David Rosenthal 1:38:17 Which brings us now to the summer of 2005, where Mark, motivated by this perhaps, I hadn't quite thought about that, announces to the company his product roadmap for the summer, and it is a six-point product plan. Number one, a redesign of the site. Bye-bye, Facebook guy. [laughing] Number two, a photo application.

Ben Gilbert 1:38:46 Which, by the way, Ph- Photos got written by, like, one guy in two weeks.

David Rosenthal 1:38:51 Yes. Move fast and break things.

Ben Gilbert 1:38:53 Yep.

David Rosenthal 1:38:54 Number three, a personalized newspaper based on all of your friends' activity. Number four, an events feature. Number five, a local business product. And number six, a sort of vague idea for a feature called I'm Bored, which would let users on the site who were bored consume media and play games.

Ben Gilbert 1:39:19 That's a pretty big [chuckles] feature mandate.

David Rosenthal 1:39:23 This is freaking wild. So now, okay, of that, I think only the redesign and photos would actually ship in 2005. Maybe events did, too, I'm not entirely sure, but this is incredible. Photos, newsfeed, platform, which is really what this I'm Bored feature is. Summer 2005, it's all right there in the vision, and Mark thinks they can accomplish all of this by the end of the summer. [laughing]

Ben Gilbert 1:39:51 [laughing]

David Rosenthal 1:39:52 And the wild thing is, they do accomplish all of this in the next two years, [chuckles] which two big points on this: for any other company, these are all, like, multi-year-long development processes.

Ben Gilbert 1:40:05 Well, and each one is its own company.

David Rosenthal 1:40:07 Exactly.

Ben Gilbert 1:40:08 Photos is Flickr. There are independent game platform companies out there.

David Rosenthal 1:40:13 Miniclip, et cetera. Yeah, flash games.

Ben Gilbert 1:40:16 What were some of the other ones?

David Rosenthal 1:40:17 Events, Eventbrite.

Ben Gilbert 1:40:19 Yep.

David Rosenthal 1:40:19 Personalized newspaper, well, that becomes a true, true innovation in News Feed, but I think at the time, there was a lot of buzz and talk about personalized portals, and, like, Yahoo was really big on this, and Google was even kind of big on this, of like, "Oh, make this your homepage."

Ben Gilbert 1:40:36 Oh, iGoogle. Do you remember iGoogle?

David Rosenthal 1:40:38 Yes, iGoogle, exactly, and I think that might have been somewhat of the inspiration, although, obviously, Mark was thinking way bigger than that. But like, yeah, again, local business product, Yelp, each one of these, under the old paradigm, was its own company, and Mark was like, "No, this is all part of Facebook."

Ben Gilbert 1:40:56 Crazy.

David Rosenthal 1:40:56 Super crazy. And this really, I think, speaks to the genius of Mark as a product strategist. It's one thing to say, "I'm gonna add a lot of random features to my site, and I'm gonna throw spaghetti against the wall." This was not a random grouping of features. Everything reinforced one another and drove the engagement loop of the site. So just as one example, let's take from, you know, this roadmap that Mark lays out. Events, let's start there. Events and parties planned on Facebook get tagged with who's gonna attend the events. All of those tags get published out as activity to News Feed. That drives interest and FOMO among the friend network, so more friends come to the actual event. At the event, photos get taken, and now there's more people there. Well, those photos get posted back to the site afterwards, and they all get tagged with the people who were there, who are in the photos. All of that becomes activity that then gets published to News Feed. That generates more desire from more people who see that on Facebook in the News Feed to either engage with the photos and like and comment on them, or if they're hearing about it from their friends and they're not yet on Facebook, to now register for Facebook and get involved in this loop. All of that now gets published back to News Feed. So now it's time for the next party, and you can see how this just grows and builds on itself over and over and over again.

Ben Gilbert 1:42:36 It's funny, as you're saying all this, it sounds like very old hat, like, almost boring. Of course, it does all of that. At the time, it was so revolutionary.

David Rosenthal 1:42:44 Everything I just described was there within the next 18 months.

Ben Gilbert 1:42:48 So photos, I think, was, like, late summer of '05. Interestingly, photos did not originally include photo tagging. Photo tagging was, like, a pretty new concept. I think Flickr may have had it, but the idea that, like, you're tagging a person, and then you can go browse that person's profile by photos they've been tagged in, that wasn't brand-new innovation. That is a mechanic that was not thought of in social networks before. If you think about what Friendster and MySpace were, you could upload a limited set of photos, which, by the way, you'd have to delete one to add another.

David Rosenthal 1:43:20 Yes, so MySpace only allowed you to have eight photos maximum at the time, and this is, A, Ben, what you're describing of person tagging in photos, incredible innovation-

Ben Gilbert 1:43:32 Right

David Rosenthal 1:43:32 ... that drives the whole viral loop.

Ben Gilbert 1:43:34 And this is a through line through the whole episode. What social media or social networks are definitionally changes every year, and often, Facebook was the one, in the early days, to push the envelope and say, "This is what it means to be a social network." In the later years, it was Facebook's competitors, that then they had to sort of adopt that functionality. But the idea that a social network includes an infinite number of photos that you can tag and give XY coordinates on the photo to map to a specific person that is another entity in the social network, that was actually a new-... component to what it meant to be a social network. And as you were saying with News Feed, that wouldn't happen for another, what was that? Late summer of 2006 or something.

David Rosenthal 1:44:16 September 2006.

Ben Gilbert 1:44:18 Yeah, so another year, year and a half after this. That completely turned what social media, social networking was on its head again.

David Rosenthal 1:44:27 Yes. Oh, we're gonna talk all about it in a sec.

Ben Gilbert 1:44:29 To this point, a social network is a set of static profile pages that you can navigate to, and if you go to home, like the root, you know, facebook.com/ instead of /profilephp, it's pretty useless! Like, the homepage is actually an uninteresting place to hang out. There is no, "Hey, let me see what's going on in my network."

David Rosenthal 1:44:49 Yes, until News Feed. [chuckles]

Ben Gilbert 1:44:52 Okay, but before we get to that, 2005.

David Rosenthal 1:44:54 To your broader point here, though, yeah, for the first six or seven years of its life, Facebook was a change maker, defining what social networking was, and then after that, it became a change taker, and we'll talk about this when it happens. But, like, again, the mental flexibility of Mark and the company to be like, "Okay, [chuckles] I'm not gonna have pride about that anymore. I'm gonna adapt and still win," is incredible.

Ben Gilbert 1:45:21 Very Microsoftian.

David Rosenthal 1:45:22 Very Microsoftian. Okay, so even this, even though it takes two years to roll out the full roadmap, photos, events, but especially photos, the 2005-2006 school year is just off the charts for growth, sharing, engagement among college students. Ben, you found a, like, incredible stat about Facebook's page views, right?

Ben Gilbert 1:45:47 Yeah, this stat is crazy. By November of 2005, they were getting two hundred and thirty million page views daily, which means that they had passed Google in page views.

David Rosenthal 1:46:01 Wow.

Ben Gilbert 1:46:02 Google, the company, started six years earlier, and the reason is because when you're on Google, you do, like, one or two searches, and then you go to your destination. On Facebook, you get caught in an hours-long trance of looking at everybody you know and what they're doing. [chuckles]

David Rosenthal 1:46:16 Right, which was already the case when it was basically text only, but adding photos, I mean, oh, my God, every photo is a page view. With such a small user base at that point in time, I think, what, probably certainly less than ten million users, to have two hundred million-plus page views every single day and be passing Google in traffic is wild.

Ben Gilbert 1:46:40 I mean, let's say it's ten million, it's 23 page views per day, per person. That's assuming that every single person who is a monthly user is accessing it every day and loading a page 23 times.

David Rosenthal 1:46:50 Right, right.

Ben Gilbert 1:46:51 In our mobile age now, that doesn't really sound like much. I bet the number of photos that someone scrolls through on Instagram is way higher than that. But for the time, that interactivity was just nuts.

David Rosenthal 1:47:01 I mean, certainly Flickr, MySpace, Friendster couldn't hold a candle to that type of engagement.

Ben Gilbert 1:47:08 Yeah. So here's their user growth. In June of '05, as you mentioned, they were at three million. By September of '05, they were at five million users. That was 10X their user base just a year ago, in September of '04, and almost a third of all US college students were included in that five million. So by September of '05, they had a third of US college students. Of their five million users that they had, about 18 months in, seventy percent were daily active, eighty-five percent were weekly active, ninety-three percent were monthly active.

David Rosenthal 1:47:45 Wow. [chuckles] Those are just insane numbers.

Ben Gilbert 1:47:50 Yes. I could go on and on and on, but one interesting thing to also point out, at this period of time, October of '05, they were up to eight point three million users. They were the tenth-most visited site on the internet, but the important part is they were doing a million dollars a month in revenue. They had actually started figuring out the advertising business model. So here we are, nineteen months after founding, they're no longer burning capital.

David Rosenthal 1:48:15 Yes. Well, when you say, "figured out the advertising business model," they just had such a high volume of page views that they didn't have to figure anything out.

Ben Gilbert 1:48:25 Right.

David Rosenthal 1:48:25 You just plug in some crappy ad networks, and, like, print money. [chuckles]

Ben Gilbert 1:48:29 Fair. Yeah, you're right. Actually, I completely misspoke. I would say that they were nowhere near figuring out the advertising-

David Rosenthal 1:48:34 Yes. [laughing]

Ben Gilbert 1:48:34 -business model-

David Rosenthal 1:48:35 Yes

Ben Gilbert 1:48:36 ... but they had a traffic machine.

David Rosenthal 1:48:38 They were able to, through alchemy, turn page views into revenue. [chuckles]

Ben Gilbert 1:48:42 Yeah.

David Rosenthal 1:48:43 But they had not, by any means, figured out their business model. [chuckles]

Ben Gilbert 1:48:47 And in this world where startups glorify raising capital, burning huge amounts of money, delaying monetization, and then having these amazing screaming returns when they finally do turn on the money faucet, Facebook was just the opposite. They lost money, and not that much money, for, like, a year and a half, and then from that point on, they were just profitable.

David Rosenthal 1:49:08 Yes. So the 2005-2006 academic school year, incredible for the company, everything we just talked about. But there were a couple yellow flags, shall we say, that popped up. During that year, Mark, of course, was already starting to think about, "Well, how can this keep getting bigger? People graduate from college. This is great in colleges, but, like, I don't wanna just build a college site. I want this to be a lot bigger." And obviously, that was what Accel was investing in, too, at that valuation. So they launched two sorta tests throughout the year. One was opening up Facebook to high school students, and the other one was opening Facebook up to workplace groups, and both of them kind of flopped.

Ben Gilbert 1:50:03 And for different reasons, right? The workplace ones, they were like, "The workplace thing is gonna be awesome 'cause it's authenticated email addresses, the same way that the colleges had authenticated email addresses. Most high schools don't have authenticated email addresses, so we expect these workplace networks to work better."

David Rosenthal 1:50:19 Yep.... But the problem was, going into workplace networks, people didn't want to share with their colleagues. [laughing]

Ben Gilbert 1:50:26 I don't want some low-res party photos of me from last night showing up on my workplace.

David Rosenthal 1:50:30 And I think also, just the density wasn't there. It was violating the principles that got them there, of like, "This thing needs to be alive, and every way we fractally spread out needs to be bringing that nuclear reactor of what's happening along with it." Going straight into workplaces, like, you've got 60-year-olds, and they're like, there's gonna be nothing compelling for them right now.

Ben Gilbert 1:50:51 The extreme bear case on Facebook at this moment in time is you started with a group of people who are the most social and the most open to share in their entire lives. You've already saturated a third of them. Every single cohort that you add from here is probably gonna be worse.

David Rosenthal 1:51:09 Yep, and that was a very rational argument. Now, high schools, as you say, failed for a different reason. There wasn't the same standardized email architecture in high schools across the country. It was just way more fragmented, so you couldn't elegantly set up these private networks in the same way.

Ben Gilbert 1:51:27 Yep, and in fact, what they ended up doing, 'cause I was in high school at this time, it was technically a different Facebook. In fact, I will quote the homepage when you went to sign up. If you went to facebook.com in 2006, the title was, "Facebook is an online directory that connects people through social networks at schools. Now, there are two Facebooks, one for people in colleges and one for people in high school. The site is open to a lot of schools, but not everywhere yet. We're working on it." And so if you signed up as a high schooler-

David Rosenthal 1:51:54 You got the crappy one.

Ben Gilbert 1:51:55 You had to log in to hs.facebook.com, and it looked mostly the same. It had slightly different features, but there was this weird thing where somebody who was already in college had to invite you. It's not like anyone could sign up for high school Facebook. You needed a college student who went to high school with you to basically vouch for the fact that you were a real high school student, and thus eligible to sign up for hs.facebook.com.

David Rosenthal 1:52:20 Right! Oh, man, I vaguely remember this of my younger friends who were still in high school, asking for this.

Ben Gilbert 1:52:27 And the sub-domaining thing was, that lasted for a long time because the college Facebooks were sub-domained as a part of their, like, tech infrastructure. You know, harvard.facebook.com only went to the set of servers that they had set up for that. It made it all really easy from an infrastructure perspective. I was on hs.facebook.com [chuckles] for a long time as a college student.

David Rosenthal 1:52:51 Right. [laughing] Yeah, because there had to just be one hs.facebook.com for all the high schools.

Ben Gilbert 1:52:59 Yes, exactly, and it meant that they needed to, like, manage scale and load balance really differently, because very quickly, the largest network, or like, uh, certainly the largest subdomain, was the high school one. And so I think like within a month or two of allowing high school signups, you know, high school as a whole was much, much, much, much larger, and they had to solve for the technology constraint of, "What do we do with this? It doesn't behave like any of our college networks."

David Rosenthal 1:53:23 Yep. So the academic school year in the core college user segment went great, but once you hit summer 2006, all those kids go on break, and college growth stops for the moment. So summer 2006 was kind of a scary moment for the company. The initiatives to expand outside colleges were not going super well, college growth had stopped for the moment, and yeah, Ben, like you said, like, very rational argument that like, "Okay, this thing is gonna be a really interesting niche site for college students, and how valuable is that?" Well, Viacom, which owned MTV, thought that that was worth seven hundred and fifty million dollars, [chuckles] which is what they offered to buy the company for [chuckles] in the summer of 2006. Well, there was another party that really, really wanted to own Facebook at this point in time, and that was Yahoo! And Yahoo! was willing to top Viacom and pay a billion dollars to buy the company. So here we are, a billion-dollar offer on the table-

Ben Gilbert 1:54:36 And growth is slowing.

David Rosenthal 1:54:37 Exactly, exactly. There's this existential question mark about the company. Growth has slowed a lot. You've got a billion dollars on the table, which is a lot of money, especially in those days. It was shocking six years later, when Facebook bought Instagram for a billion dollars. This would have made the careers of everybody involved.

Ben Gilbert 1:54:59 Yep.

David Rosenthal 1:55:00 And, you know, Mark, of course, controls the company, controls the board. Thanks to Sean Parker, he doesn't have to sell. But the whole management team is like, "Yeah, we should probably sell." [laughing]

Ben Gilbert 1:55:11 [laughing]

David Rosenthal 1:55:11 And I think the board, you know, it's hard to know. They obviously know they can't force him to sell, but I suspect if you had asked all of their opinions, and certainly Mark did, they probably would've been like, "You know, it's been a great run. We should probably hit this bid." So Mark actually agrees to the Yahoo! deal. Billion dollars, it's gonna be all in stock, Yahoo!'s gonna buy the company. In the interim between when they shake hands on the deal and while the docs are being drafted, Yahoo! announces their quarterly earnings, and they have a bad quarter, and the stock drops 20%, and Terry Semel, who was the CEO of Yahoo! at the time, said, "Okay, the deal is, you know, for the same amount of stock." So commensurately, the deal is now worth eight hundred million dollars, not a billion dollars, and that was history turning on a knife point, and that was all Mark needed to say, "You know what? Thanks, but no thanks."

Ben Gilbert 1:56:16 And this part of the story never gets told, the fact that actually, at first, Mark did not turn down the billion-dollar offer from Yahoo!. Mark actually accepted, or at least said, "Let me turn over another card, and get one inch closer to the negotiation being final." You know, it wasn't an outright rejection at first. It was, "Yeah, come back with the papers."

David Rosenthal 1:56:34 Yep.... Totally. That is not the way it gets talked about today, but I think actually makes the story, like, kinda even more powerful. It almost really did slip away. [chuckles]

Ben Gilbert 1:56:45 Well, it's certainly much more realistic. It's a simple and powerful story to say they just outright rejected it, but that's just never how these things go. It's like, "Uh, show me you're real."

David Rosenthal 1:56:55 Yep.

Ben Gilbert 1:56:56 Okay, so analyzing, let's say he just did turn it down outright. Well, here's a reasonable way to look at it. If what you want to do is run a great company for the rest of your life, it actually was totally rational. Mark has said publicly, I mean, this is, like, fifteen, eighteen years ago, "I didn't have any more ideas as good as Facebook." But that's, like, way underselling it. There aren't better companies to start.

David Rosenthal 1:57:20 Right.

Ben Gilbert 1:57:21 Yes, it would've been nice to have certainty on a billion dollars or whatever percent of the billion Mark owned at that point, and also, a year before, MySpace had gotten bought for five hundred and eighty million dollars.

David Rosenthal 1:57:31 Right, by News Corp.

Ben Gilbert 1:57:32 So it's like, geez, okay, twice as much as MySpace? But rationally, if the optimization function is, "I want to run the best company I can for a very long time," almost nobody has started a better company since. So [chuckles] if you're looking at the engagement, you're looking at the potential... The rational thing actually is, "Just keep running this company, 'cause I'll never discover something like it again."

David Rosenthal 1:57:56 Yep. I completely agree with you, and Mark has said so much in so many words to you and me personally, that he's not optimizing for financial outcome here, he's optimizing for impact.

Ben Gilbert 1:58:09 And I think he likes running this company, where he would want to go start a similar company even if he didn't have this one.

David Rosenthal 1:58:14 Yes, totally. Also, though, to his skill as a strategist, even at this very young age... Yes, Ben, you and I just made a compelling argument about why you could've believed Facebook was going to top out with the college market at this point in time. Mark knew, though, and he had planted the seeds, that both News Feed and open registration were gonna be coming later that year, and he was definitely making that calculus here, too, of like, "Well, I don't know what the probability necessarily is that those are gonna hit," but Mark had the belief, like, A, if they do, they're gonna be really big, and B, I think the probability is higher than the people around me think it is.

Ben Gilbert 1:58:54 Yep, that's totally fair. Even if you weren't gonna bet on the growth, the user engagement was still currently great, and you had a lot of reason to believe that it was going to get even greater. And you compare all the metrics with Friendster and MySpace, as time went on, got worse. People churned, their daily active to monthly active would just go down over time, the page loads times would take forever, especially with... Well, actually, with both. Friendster just was not architected properly. It was a software engineering, computer science issue. MySpace was this weird thing that was sort of born out of this combined media conglomerate, and they just never really had excellent tech architectural talent. And so, as you sort of looked at not the high-level metrics of how many users have ever signed up, 'cause MySpace and Friendster, I think, were still way ahead at this point. If you looked at, like, "Hmm, but how is this gonna play out if it sort of keeps compounding?" And you looked at the deeper metrics, you kinda thought, "Oh, I'm running the better company by a lot." Once, especially, you know, we, we gotta figure out the business, but I am running the better product by a lot.

David Rosenthal 1:59:59 Yep. So okay, to figuring out the business, coming out of this episode with Yahoo!

Ben Gilbert 2:00:05 They say no, the whole management team churns.

David Rosenthal 2:00:08 The whole management team basically churns over the next set of months. Mark gets religion on a couple things.

Ben Gilbert 2:00:15 And actually, we should say, not Dustin, but a lot of the people around the table who were expecting a nice cash payout and now aren't getting one are, are not pleased.

David Rosenthal 2:00:24 Yep, totally. So what are they gonna do? The first thing is, I think Mark had always operated the company this way, but now he gets real religion of, like, "We need to get more revenue, and we need to focus on becoming truly cash flow positive so that we are never in a position again where we would even consider doing something like this." So in August of 2006, they do the first partnership with Microsoft. It's funny that, you know, the Microsoft-Facebook relationship, in some ways, is sort of a precursor to the Microsoft-OpenAI relationship today and how that gets built. Here's what it is: Microsoft says, "We're gonna take over selling all of the display ad inventory domestically within the US for Facebook, and we will give you a guaranteed CPM that we can sell, and then we are gonna use this to help bootstrap our online services division," which, as we talked about in our Microsoft series, becomes super, super important, not only for their efforts launching Bing, making that into, ultimately, a successful business, but even more importantly, for Azure, that comes out of it. Microsoft knows they need some scale to bootstrap up and get started with both the ad business, but also just, like, the online services division, period.

Ben Gilbert 2:01:46 Yeah. This is a ton of inventory. Like, you just think about the amount of page views that are happening here, suddenly Microsoft's problem is not, "How do we find enough inventory to sell?" It's, "How do we go find [chuckles] enough advertisers to actually fill all these slots on Facebook?"

David Rosenthal 2:02:00 Yes, and Microsoft had been trying to do this. They tried to do this with MySpace a little bit earlier, and they lost that deal to Google, so they really need Facebook.

Ben Gilbert 2:02:10 And on the other hand, this is a great deal for Facebook, because Facebook sucks at selling ads, and Facebook has no targeting or anything, so they really shouldn't justify high CPMs at this point.

David Rosenthal 2:02:19 Yeah, outsource it to a good third-party network.

Ben Gilbert 2:02:21 Right.

David Rosenthal 2:02:22 So this is, like, basically all of Facebook's revenue for the next couple years here. [chuckles] So Facebook had made nine million dollars in revenue in 2005, when they were selling themselves. This is, Ben, as you were saying, like, "Hey, they're starting to turn on ads in 2005. It's starting to work," like-... $9 million, that's amazing for year two as a company.

Ben Gilbert 2:02:43 Got to cash flow positive.

David Rosenthal 2:02:44 Got to cash flow positive. In 2006, with this Microsoft partnership, that jumps to $48 million [laughing] -

Ben Gilbert 2:02:52 [laughing] -

David Rosenthal 2:02:52 in revenue.

Ben Gilbert 2:02:53 Oh, that's where the money spigot is.

David Rosenthal 2:02:55 Now we're talking. And then the next year, in 2007, again, I think almost all of this is Microsoft, that goes to $153 million in revenue. So like, okay, we are way out of any league where we would consider selling ourselves here. We can control our own destiny.

Ben Gilbert 2:03:14 Isn't it wild thinking about, you thought it was crazy to turn down a billion-dollar offer, or many people thought you were crazy, and then just two years later, that is only a six X revenue multiple, and you're tripling year over year?

David Rosenthal 2:03:29 Oh, and by the way, in the second iteration of this Microsoft partnership, which we will talk about in just a minute, it included an investment from Microsoft at a $15 billion valuation. [chuckles]

Ben Gilbert 2:03:42 Whoa, hold your horses. Let's finish this great 2006, 2007 arc, and then we'll get there.

David Rosenthal 2:03:47 Yes. Point being, though, Mark made the right decision for all shareholders of Facebook to walk away from the Yahoo deal.

Ben Gilbert 2:03:53 I mean, it's at an all-time high.

David Rosenthal 2:03:55 Yeah.

Ben Gilbert 2:03:55 In walking away from every deal ever, he's made the right decision. [chuckles]

David Rosenthal 2:03:57 Yes. [chuckles] But, like, within a year, he made the right decision.

Ben Gilbert 2:04:02 Yes. Oh yeah, that's true, that this became obviously right, fast.

David Rosenthal 2:04:05 Very fast, very fast. So how does this happen? Okay, Adam D'Angelo finally graduates from Caltech, joins Facebook full-time as CTO.

Ben Gilbert 2:04:13 I love that Adam's our, like, second protagonist here.

David Rosenthal 2:04:15 I know, I know. [chuckles]

Ben Gilbert 2:04:16 I don't know if you did that intentionally, but [chuckles] yeah.

David Rosenthal 2:04:18 Well, he was right there. I mean, they were at Exeter together. Like, I don't think you can separate it out.

Ben Gilbert 2:04:23 Yeah.

David Rosenthal 2:04:23 And, uh, you know, I think here, part of the reason why Adam keeps coming into the story is he is a really, really great technologist, and even though he's young, same age as Mark, when he now arrives full-time as CTO, this is when Facebook starts to be taking the steps to be building, like, real technology infrastructure. So before Adam joins full-time, the team was shipping new code to the website, like, at a high velocity relative to everybody else out there. You know, it was weekly-ish, maybe every couple days, you know, maybe even up to daily, like-

Ben Gilbert 2:05:00 Well, they were a web company. For the first time in history, you actually could. All these companies with big client-- Microsoft would ship every three years with a service pack once a year. It's a whole new era where all you have to do is, you know, upload some new PHP code to the FTP server, and then, boom, the application behaves differently the next time someone pulls down the page. It's, uh, the new technology era of interpreted languages running on web servers in a browser. Now that products are in browsers, meant you could architect your company differently and ship differently.

David Rosenthal 2:05:31 Yes. And when Adam becomes officially the CTO, he's like: "Actually, we should probably just ship multiple times a day. We should just be shipping all the time. And also, we should probably start recruiting, like, a real top-tier engineering team." 'Cause remember, it's still kind of nuclear winter for start-ups. Great tech talent is available. [chuckles] So they start going and recruiting, like, really, really top-tier engineering hires, and it's a pretty compelling offer. Like, A, we've got real revenue from this Microsoft partnership. We're the best-funded start-up in the Valley. People want to buy us for a billion dollars; we turned them down. That's all sort of the financial reasons to take it. For a lot of people, too, it was, like, such a breath of fresh air. I think Facebook was potentially maybe the first company, first start-up, to have an open office plan. Like, just everything about how they ran the company was different.

Ben Gilbert 2:06:34 It was the prototypical start-up. I mean, to this day, early Facebook is still what most start-up culture is aspiring to be, I think often without knowing it. I mean, everything from the sort of posters on the walls with your mantras and your values, to almost having, like, an employment brand that you really care about cultivating, to the idea of, like, we're having just as much fun together socially as we are working together. I, I think the modern start-up culture, especially when you factor in the shipping every day, open office, Y Combinator kind of trains companies to become like Facebook was.

David Rosenthal 2:07:09 A hundred percent. I mean, there was Google out there, which had a lot of this element, but it was a very different thing. It was very academic, very wonky. These guys were hackers, and they shipped, you know, and they were all in it together.

Ben Gilbert 2:07:23 The other thing that was basically true is they were not really interested in recruiting industry veterans, especially on the technical side, and Mark says this in early talks, that he was just prioritizing raw intelligence over experience.

David Rosenthal 2:07:38 So one of those super intelligent, super talented young engineers with a high slope, who joined back in fall '05, was an engineer named Chris Cox, who joined from the Stanford AI Lab. And Chris joins a team of other young, smart engineers, led by Ruchi Sanghvi and Andrew "Boz" Bosworth, working on Mark's personalized newspaper product idea. Ruchi was one of Facebook's very first engineers, and along with her husband, Aditya Agarwal, they run South Park Commons now. Boz was two years ahead of Mark at Harvard and had actually been Mark's TA in the Intro to Artificial Intelligence CS class that he took. [chuckles] And then he later joined the company.

Ben Gilbert 2:08:22 Which is actually not how he ended up getting a job, but they did happen to cross paths that way before.

David Rosenthal 2:08:27 Yes. Boz went to Microsoft, I think, before joining Facebook.

Ben Gilbert 2:08:31 Yep, just for a few years.

David Rosenthal 2:08:33 So the three of them start working on News Feed, and so we've talked about things like photos and the fundamental architecture of the site.... News Feed required, like, a whole new level of engineering prowess to get this thing to work. Like, you're not just gonna code this up in PHP. Like, photos also required real engineering, but News Feed was, like, pushing the state of the art of what was possible in technology and on the internet.

Ben Gilbert 2:09:00 So the first question you have to ask yourself, if you're a good product designer, developer, capital allocator, someone in Mark's shoes saying, "Should we do this?" is, do people want this? If we build this, will it be valuable? The reason they knew it would be valuable is because the company is data-obsessed, and they watch the analytics like a hawk to figure out: what are people doing on our site? And they noticed this behavior where people were browsing to other people's profiles just to look at them and see if anything changed. The user was doing the heavy compute lifting, rather than having a personalized newspaper, of just bouncing around to a bunch of people's profiles and saying, "Anything new here?" So there was an engineer who did something really kinda hacky, because they didn't wanna at first put all the engineering resources into building out something like News Feed, which is, well, when something changes for some period of time, we'll just highlight it in yellow.

David Rosenthal 2:09:52 Yes.

Ben Gilbert 2:09:53 So it's easy for you, as you're bouncing around to different profiles, to just see, "Oh, hey, this thing changed," and that totally worked. They watched the lift in that, and they were like, "Oh, it's a good feature."

David Rosenthal 2:10:02 People like that.

Ben Gilbert 2:10:03 So that sort of gave them the confidence of, "We should find a way to make it more obvious to you when new updates happen, when things change." Technically, David, for people who aren't in the sort of tech ecosystem, why is it so difficult to build something like a news feed? 'Cause now we're all trained to believe that, like, a feed is, um, you know, a primitive that is available to you as a developer when you're building a product, because feeds are everywhere. Feeds are the core feature of most products. When you hit the homepage, it's some sort of feed. That was not true at the time. That was not true in any product. I actually challenge you right now, think back to 2005, what was a feed on the web? What was sort of an infinite scrolling-

David Rosenthal 2:10:45 They didn't exist. This was the first one.

Ben Gilbert 2:10:47 Right.

David Rosenthal 2:10:48 This was the invention of the feed.

Ben Gilbert 2:10:50 Like, maybe you've got Reddit and Digg, and you could sort of make an argument that they're feeds. They're paginated rankings of stories, so you could see, like, oh, what are the most important stories? But even that's a pretty different fundamental thing.

David Rosenthal 2:11:06 I don't think Reddit had launched yet. Digg maybe exists, but yes, as you said.

Ben Gilbert 2:11:11 Oh, yeah, Reddit was in the first YC batch, which was '05, so it wasn't really... It was right around this same time. Okay, so how do you make a feed? Well, if you are an algorithms developer, the way you would sort of think of it is, "Okay, well, first, I need to pick a point in time, and then from that point in time, and let's call that maybe the last time someone looked at their feed, I need to store that timestamp, and now I need to go look at every single profile of someone that you are connected to," so this is N, "and download or cache all of their recent updates since that time period." So I need to, like, store that somewhere. I need a new place to store a copy of all of this information that lives on someone's profile, or at least pointers to that on everybody's profile, and I need that to happen for every user. So now it's N squared. Every single person on [chuckles] the entire Facebook needs to have something running in the background that is looking at every other person on Facebook since a particular time, and then that compute and storage all needs to happen fast enough, such that by the time they wanna go check the feed again, it's happened again. And obviously, like, now that happens in real time, and I think it was something like every three hours, there was, like, a new batch.

David Rosenthal 2:12:34 Yeah, it was four times a day when it initially launched. There was, like, a four X a day refresh.

Ben Gilbert 2:12:39 Okay, so every six hours.

David Rosenthal 2:12:41 Yeah, it was a cron job, 'cause they didn't have enough memory to run it in real time.

Ben Gilbert 2:12:44 That's right. They needed to happen on separate boxes to run this process, cache the results, and then when you loaded your news feed, go fetch them. So this is, like, a whole new application using the same data that the company has to build in order to make News Feed happen.

David Rosenthal 2:13:01 And so what you just described is all the technical work, just making a feed possible.

Ben Gilbert 2:13:07 On the back end. This doesn't contemplate any of the front-end design or engineering or incredible permutations of how to display this data when it does come back, given a massive combinatorial problem of how might this data come back?

David Rosenthal 2:13:19 Exactly. Then you need to make the feed actually compelling. [chuckles] Like, I don't really care about, you know, somebody who I'm tangentially connected to, what they had for lunch today, but I really care about, like, a photo of Ben at the Acquired meetup.

Ben Gilbert 2:13:34 Right. So now you're telling me you wanna rank order it by something other than-

David Rosenthal 2:13:38 Chronology.

Ben Gilbert 2:13:39 Make another pass and figure out what I think is gonna be the most interesting to you, which on its own, is an incredibly difficult computer science problem. What is interesting to you? What data should we use to inform that decision?

David Rosenthal 2:13:50 Right. Totally. Who are your close friends? Who do you care about the most? You know, what general news do you care about the most? What types of stuff do you care about?

Ben Gilbert 2:13:59 Do we have to put weights on every relationship in this entire complex friend graph between every single entity and how close they are, and then re-rank that very often? Eventually, yeah.

David Rosenthal 2:14:10 Yes. So the team spends the better part of 2006 working on this. By September, it's ready, and so by September 5th, 2006, just in time for the new school year, they launch it. And, uh, people noticed- [laughing] ... 'cause they launched it, like, to everybody right away, and this is a massive paradigm shift.

Ben Gilbert 2:14:33 Yeah, it's not opt-in or anything.

David Rosenthal 2:14:34 This is Facebook changing the game of social. Not opt-in. Everybody gets it right away. [chuckles] ... They get 30,000 angry emails to support on the first day [chuckles] from users who are really upset about this. Ten percent of the entire global user base- [laughing]

Ben Gilbert 2:14:56 Yes

David Rosenthal 2:14:57 - signs up for a group, a Facebook group, called Students Against Facebook News Feed. I'm pretty sure I was part of this group. [laughing] The irony here is they had only just launched open groups across school networks-

Ben Gilbert 2:15:12 [laughing]

David Rosenthal 2:15:12 - days or weeks before, so, like, they enabled the tool of their own vitriol here.

Ben Gilbert 2:15:17 And also, guess how people are finding out about this group?

David Rosenthal 2:15:21 Through News Feed. [chuckles] Yes.

Ben Gilbert 2:15:23 This is the great irony of the whole situation. There's a literal panic in the streets. There are people protesting outside the office. There is somebody trying to use a crane to get into the third story. Basically, a TV truck is trying to cover what's happening and the, the pandemonium. And at the same time, despite everyone telling them, "I hate this thing, it's the worst thing ever," if you look at the analytics, people love it. People cannot get enough of scrolling through the new News Feed, and the reason they're really upset is actually quite interesting. They're saying, "Oh, it's sharing this with my whole network!" Okay, but you updated it on your profile, which has always been public to your whole network, and I think Facebook, for the first time, kind of stepped in it and realized, "Oh, even though technically this data has always... "You know, we didn't change how public or private it is. It's just as accessible. People react really strongly when you change the ease of obtaining that information, or whether it feels like you are pushing that information out versus someone is sort of pulling by going to your profile and viewing.

David Rosenthal 2:16:31 It went from pull to push.

Ben Gilbert 2:16:33 Yes.

David Rosenthal 2:16:34 So it's the start of the new school year. We've just come off this sort of tumultuous summer. Growth had slowed, walked away from the Yahoo deal. There's this revolt in the streets against News Feed, which, to Mark's mind, along with Open Reg, which was supposed to come, like, two days later [chuckles] of opening up Facebook to anybody, they delayed that because of the News Feed reaction. But to Mark's mind, the two of these things are, like, the big growth levers to reignite growth for Facebook. The board, the management team, everybody's like, "All right, we gotta roll News Feed back. People hate it. This is PR 101. We apologize. We roll it back." [chuckles] And to add a kicker, News Feed actually significantly hurt Facebook's revenue, because where do you think all the page views were coming from, and all the refreshes?

Ben Gilbert 2:17:31 Oh, loading a new ad.

David Rosenthal 2:17:32 Yep, loading all the profile views-

Ben Gilbert 2:17:35 Ah

David Rosenthal 2:17:35 ... and clicking around. So page views are actually gonna go down in this new paradigm. Every reason is aligned to roll this back. So Richie, and Chris, and Boz, though, are looking at all the data, and they're like, "Holy crap, engagement is through the roof."

Ben Gilbert 2:17:52 Yeah, people can't get enough of this.

David Rosenthal 2:17:54 People say they hate it, but yeah, it looks like they can't get enough of it. So Mark decides that he is going to write a post on Facebook about this, and it's titled, "Calm Down, Breathe- [laughing]

Ben Gilbert 2:18:08 [laughing]

David Rosenthal 2:18:08 ... We Hear You." [laughing] And he announces that they are going to launch a set of controls for you to control what of your activities get published to News Feed and what don't.

Ben Gilbert 2:18:20 Which, by the way, sounds like something that Mark would say today. I think this 2006 era is, like, the last time, and then you would've had, like, a 17-year break, and now we're sort of getting that Mark again.

David Rosenthal 2:18:34 Yes.

Ben Gilbert 2:18:34 You can't imagine Mark, circa 2018, saying, "Calm down, breathe, we hear you."

David Rosenthal 2:18:40 Yes. So it's kind of a brilliant strategy of like, "Hey, I acknowledge that this was surprising. We didn't handle the rollout right. I'm seeing that you all actually like this in the data. Let me give you some controls, so that what you're really worried about, you have some control over, and then let's just see what happens." And within two weeks, it's like magic. Everybody just gets used to it, and that this is now the way Facebook and social media operates, and engagement continues to skyrocket.

Ben Gilbert 2:19:16 Yep. But it's funny, I did just pull up, "We've been getting a lot of feedback about News Feed. We think they're great products, but we know many of you are not immediate fans, [chuckles] and have found them overwhelming and cluttered." I don't think clutter was what people were complaining about.

David Rosenthal 2:19:28 Little bit of redirection there.

Ben Gilbert 2:19:30 Yep. It's funny, "We didn't take away any privacy options. Your privacy options remain the same. The privacy rules haven't changed. None of your information is visible to anyone who couldn't see it before the changes," blah, blah, blah. And it's like, it is interesting, it's true and not relevant. That's not what people are mad about. People are pretty aware that this is the same information.

David Rosenthal 2:19:49 Well, and I think, to sort of set a theme here, that we're gonna come back to several times, the definition of what social media is is actually very fluid, and it changes in the consumer's mind.

Ben Gilbert 2:20:07 I'd even say before this, there wasn't social media, or at least Facebook wasn't social media. Facebook was a social network, but this was the first time they introduced a media component, a thing you would read.

David Rosenthal 2:20:18 Right, inspired by a newspaper.

Ben Gilbert 2:20:20 Right.

David Rosenthal 2:20:20 And I think when these paradigm shifts happen, people get upset because their expectations are being violated. [chuckles] So it actually doesn't really matter what the privacy is or isn't, it's the expectations.

Ben Gilbert 2:20:31 Right. I'm glad you planted the seed, because this will come back over and over again in their history of, people now feel differently, and the product needs to change with those societal expectations in order for people to not be upset about it.

David Rosenthal 2:20:44 Yep.... unfortunately, for the moment, I think the lesson that Mark and the company took from this experience was, "Well, we actually know what's best, and the user base will just get used to it," [laughing]

Ben Gilbert 2:20:56 [laughing]

David Rosenthal 2:20:56 "whenever we make a change." [laughing] It just happened to be that that was true with News Feed, but that wouldn't always be true.

Ben Gilbert 2:21:02 Yeah.

David Rosenthal 2:21:03 So originally, the two big initiatives, News Feed and open registration, were supposed to basically launch together, and they chose to do News Feed first because it was gonna be, A, a, a little bit easier to roll out, and B, more valuable to the core college audience that was just starting back for the new semester, the fall semester at school. So they launched that first, and then, yeah, the original plan was open registration, Facebook is now open to anybody in the world, was gonna come two days later on September 7th. They obviously put that on the shelf for a long time, two and a half weeks. [laughing]

Ben Gilbert 2:21:38 [laughing]

David Rosenthal 2:21:40 At the end of September, open registration launches. Anyone can sign up for Facebook. This is another major, major change. Before, all these networks were siloed. You had to be part of a verified email address network to join Facebook. Now, anyone can sign up.

Ben Gilbert 2:21:57 This is the beginning of, "Uh-oh, my mom is on Facebook."

David Rosenthal 2:22:00 Exactly.

Ben Gilbert 2:22:01 [laughing]

David Rosenthal 2:22:01 Exactly, exactly, which ultimately would be a problem because that's what created room for Instagram, for Snapchat, et cetera, et cetera. But that would actually be down the line. In a weird sort of perverse way, I think because of all the controversy around News Feed, when open reg launched, there wasn't the same kind of controversy. People were already desensitized, or they had just been through News Feed, and they're like, "All right. Yeah, whatever." Nobody even really, like, noticed that much, especially because the product experience didn't change for the already engaged users.

Ben Gilbert 2:22:37 And to the extent that you did feel that privacy had changed, you're now kind of used to, "Anything I put on Facebook gets broadcasted, so who cares if more randos come in? It's already getting broadcasted."

David Rosenthal 2:22:49 Yep, yep, and now with News Feed, there is this mechanism that makes sure, like, hey, even as randos, from your perspective, join Facebook, you're still seeing the updates of people you care about.

Ben Gilbert 2:23:04 Well, I don't think at first, when it was this, like, pure chronology-

David Rosenthal 2:23:08 Yeah, I guess that's a good point. As they make it more algorithmic.

Ben Gilbert 2:23:11 But this was still a period in time where your friends were your friends. I mean, Facebook was only two years old, and so for the vast majority of users, they'd joined in the last year, so they didn't have anybody who wasn't really their friend as a friend. Now, I just have to treat Facebook posts as if they're public because the group of friends is aged, but in that period of time, you could trust if something was getting published to your friends that, like, it's just going to your friends.

David Rosenthal 2:23:38 Right. The age of the network itself was only two years, so [chuckles] your friendships hadn't shifted that much. Well, open reg, despite high schools and workplaces not working well, open reg works really well. [chuckles]

Ben Gilbert 2:23:55 Yeah, I mean, Facebook has a brand at this point. It's the best social network. It's the fastest-growing social network. It's the one that all the... College kids will always be the cool people in any society at any time. That's the age group of trendsetting, and they have conquered that market. High school kids wanna be like college students, and people not in college wanna be like college students.

David Rosenthal 2:24:15 Yep. So over the summer, Facebook was adding, like, 5 to 10,000 users a day. By late fall, after launching open registration, they're now adding 70,000 users a day.

Ben Gilbert 2:24:28 Wow, by fall of '06?

David Rosenthal 2:24:30 Yeah.

Ben Gilbert 2:24:30 Wow!

David Rosenthal 2:24:31 Growth really picks up. So this brings us now to spring of '07 and the final piece of Mark's original product roadmap, I'm bored, AKA Platform. And Platform is this kind of forgotten thing right now. I mean, like, it's FarmVille, it's Zynga, it's apps on Facebook.

Ben Gilbert 2:24:53 It's quizzes.

David Rosenthal 2:24:55 It's quizzes, [chuckles] yes. [laughing]

Ben Gilbert 2:24:56 That will come back up later.

David Rosenthal 2:24:58 That'll come back. For a period of about four years, from 2007 to 2011, this is the most important thing in the company, and this is what everybody believes the core and future of the company is. Facebook has become a platform. This is the goal of a technology company: become a platform, be like Microsoft. This is now... Facebook is like Microsoft. We are a developer platform.

Ben Gilbert 2:25:27 And there was this incredible tension, at least it seemed like the m- tech media wanted to play up this tension, are they an advertising company or a platform company? 'Cause they're super different business models with very different incentives, and users kinda need to know how to think about it, and it was kind of at the same time, uh, Cheryl had just joined the company or was about to join the company.

David Rosenthal 2:25:47 The next year, in 2008.

Ben Gilbert 2:25:48 Yeah.

David Rosenthal 2:25:48 So, yeah, not yet.

Ben Gilbert 2:25:49 And so they really hadn't gotten serious. She sort of led them to figure out, "Hey, let's survey all the business models, do some work on each of them, and figure out and commit to being an ads company." At this point in time, like, they were showing ads, but the whole leadership team, at least I'm convinced, believed, "We are on the way to becoming a platform."

David Rosenthal 2:26:09 100%. So May 24th, 2007, Facebook holds its first developer conference to launch their developer platform, F8, which again, let's take a step back. This whole idea is kinda wild, a developer platform on the web. The web is a developer platform. [chuckles] Facebook is now becoming a platform on top of an open developer platform.

Ben Gilbert 2:26:33 But they have two important things that, as an application developer, you're interested in: one, user attention-

David Rosenthal 2:26:39 Yep

Ben Gilbert 2:26:39 ... you know, the same way that Microsoft had user attention with PCs, 'cause they had the install base of Windows, and two, a whole crap ton of data about each person that you could then build into your application to make it really rich and feel personalized.

David Rosenthal 2:26:54 ... And it turned out that that was really attractive to developers. So at F8, they announced that the Facebook user base is now over twenty million, and it is growing by over a hundred thousand users a day, so growth is accelerating.

Ben Gilbert 2:27:08 Wait, it's twenty million total and growing by a hundred thousand a day?

David Rosenthal 2:27:12 Yes. I mean, OpenRed had just launched a couple of months before, so, like, this thing is really taking off.

Ben Gilbert 2:27:18 Oh, my God! Every ten days, they're adding another twentieth of their user base, and they're growing by five per-- what is that? Uh, it's like seven percent every two weeks. It's like three and a half percent a week.

David Rosenthal 2:27:29 Yeah. Pretty good.

Ben Gilbert 2:27:31 Wow!

David Rosenthal 2:27:31 At a scale of over twenty million already. [chuckles]

Ben Gilbert 2:27:33 Wow.

David Rosenthal 2:27:34 It is the sixth highest trafficked site in the world, and they're announcing to all the developers in attendance, "The Facebook API, Facebook Graph, is now open to you. You can build apps and publish and run them natively on Facebook." For users, and part of Mark's original product roadmap from two thousand and five, this is huge. Until this point in time, Facebook was about digitizing everything that happened in your offline life, your real friends, your real parties you went to, the real photos you took. There wasn't anything detached from your offline reality to do on Facebook. Now, all of a sudden, you can play games on Facebook, you can take quizzes on Facebook, you can use apps on Facebook, and you can do them all with your friends.

Ben Gilbert 2:28:28 It's pretty compelling. I remember playing, was it Scrabulous?

David Rosenthal 2:28:32 Yeah.

Ben Gilbert 2:28:32 Yeah, I think I was playing with my sister, with my grandma. I mean, it is a great way to, like, do things digitally with the people that matter to you.

David Rosenthal 2:28:40 Yep. And I think it's also an early foreshadowing of the job that mobile and the smartphone would really do in people's lives, which is, hey, there's actually, like, a lot of white space where you're just bored [chuckles] during your day. [chuckles] I mean, Mark's original title of the feature of I'm Bored was perfect. This is the cure for boredom. It just so happened that it was on a desktop, and so when you were bored at your desk or bored at your home, mobile then opened that up to, like, "Hey, I'm bored anywhere."

Ben Gilbert 2:29:10 Right. And it gave Facebook, from a business perspective, it sort of gave them another stakeholder: "Hey, developers are someone who can keep people on the platform longer, so we can show them more ads. They might do their own advertising, so they might drive traffic to Facebook, that they could help grow the core platform itself. It gives us sort of more lock-in as people develop for us and as users seek out applications on us." They're hoping for sort of that Microsoft playbook of platforms get really epic lock-in.

David Rosenthal 2:29:43 Yep. "Oh, and by the way, developers on the platform will probably have their own business models, where they'll make revenue, and especially if we ultimately introduce our own virtual currency, we can probably make revenue from their revenue, too." [chuckles]

Ben Gilbert 2:29:58 Yeah.

David Rosenthal 2:30:00 So the internal goal of the company was to get five thousand developers in the first year, who would be making social apps on the platform.

Ben Gilbert 2:30:10 How many did they get?

David Rosenthal 2:30:11 They got five thousand in two days. [laughing] Developers went freaking nuts.

Ben Gilbert 2:30:18 It was a great keynote.

David Rosenthal 2:30:19 It was a great keynote, yes. [chuckles] You know, they went nuts because, yeah, Ben, as you say, like, "Oh, distribution to a lot of people," and then, like, bringing along your friends and data on them, like, that's very powerful incentive as a developer to go and go make an app or a game for the platform.

Ben Gilbert 2:30:35 You're building a web app that has an unbelievably rich set of data that you can hook into. The thing that I was... I don't think I could have put into words then, but I can now, is: Has a successful scale, durable platform ever been built that wasn't an operating system?

David Rosenthal 2:30:52 [laughing]

Ben Gilbert 2:30:54 Like, it always felt weird to me in that moment that Facebook thought they could be a platform, 'cause I was like: Well, it's a website. I mean, it's a web app, and I have a profile, and I have all this rich information, but it's not, like, running on my device.

David Rosenthal 2:31:10 [sighs] Well, Ben, turns out you would've been right. [chuckles]

Ben Gilbert 2:31:15 If only I had the, the words. But what do you do with that information? What was I gonna be, bearish on the company? That would've been a super wrong call.

David Rosenthal 2:31:22 Right. Well, this is the amazing story that we're telling here, of, like, they keep surviving and thriving despite not having the operating system.

Ben Gilbert 2:31:30 Yeah. Listeners, write in if you can think of one, a successful, scaled, durable platform, where the platform is able to make money, and they're able to make a lot of money for developers, for people on the platform, that is not an operating system that runs on hardware.

David Rosenthal 2:31:47 Hardware. Either captively controlled hardware like Apple or open hardware like Android and Microsoft.

Ben Gilbert 2:31:53 And this gets into the question of: What is a platform? Because let's say I make a web app that I run on my own website, I do my own marketing, I do my own monetization, but I let users authenticate Facebook, so I can pull some information out of their profile. It's like it's not really built on the Facebook platform. It's not like the core APIs that enable my application to run are using Facebook's APIs. I'm using Facebook's APIs to grab some data. The core API set that allows it to run is the browser.

David Rosenthal 2:32:23 Yep.

Ben Gilbert 2:32:23 It's almost like, if you think about the intermediation layers, Facebook was trying to build a platform on top of a browser, that was a platform on top of an operating system, that was a platform, and it... The reason why we aren't all using rich Facebook apps all the time today and think of it as the default platform, it was just too many layers of abstraction away from the hardware to win.

David Rosenthal 2:32:42 I think that is totally right. But for the moment, thousands and thousands of both indie devs and venture-backed companies, like, flocked to the platform.

Ben Gilbert 2:32:51 But what this does tease out is Facebook... And now we can talk about this f- fifteen-plus years later.... has kind of a weak position for launching a platform, since they don't control the OS or the hardware, and so they have to make a little bit more of an appealing sale to a developer. And that includes big distribution for you, but it also includes a ton of access to data. And I remember being an early Facebook developer, and after a user authenticates, looking at that JSON and being like, "Okay, so it's their whole profile. Oh, it's their whole friends list. Wow, I get a lot of stuff here!" And Facebook was incentivized to do that because they almost had to sell harder than other platforms who had controlled hardware historically would have had to.

David Rosenthal 2:33:34 Yep. It's a super great point. Now, also, the reality was, at the time, I think developers were getting plenty of value just out of the distribution, [chuckles] and that was coming from News Feed. If a user starts using your Facebook app, and then the activity that they're doing on your app is getting published to the news feeds of all their friends-

Ben Gilbert 2:33:56 Oh, yeah. You could build a whole Zynga on that interaction paradigm.

David Rosenthal 2:33:59 Oh, yes, you can. There's this great quote from Josh Elman in the Steven Levy book. Josh says: "If you're a developer, and you can get someone to bother ten friends to get one more user to join, you're very happy because you just got one more user. [laughing] Facebook, though, has nine other people who've just gotten bothered..." [chuckles] And he doesn't say it, but the, uh, "... and are quite unhappy about that."

Ben Gilbert 2:34:21 And that's the trade-off they have to weigh. That's sort of their-- In the type of platform they are trying to build, they have set up that incentive set, and they need to figure out what to do with it.

David Rosenthal 2:34:30 Yep. So for a year or two, that is the state of play. Facebook, brilliantly for them, eventually pulls back on organic News Feed distribution for apps. Says, "Hey, like, we've got to stop this. We've got to take care of the problem."

Ben Gilbert 2:34:46 You don't need to know every time there's a new mafia war move by so-and-so showing up in your news feed.

David Rosenthal 2:34:51 And that does effectively kill a large percentage of developers and apps on the platform.

Ben Gilbert 2:34:57 Yep, but it's the right long-term move. That was the right thing to do for Facebook with a twenty-year view.

David Rosenthal 2:35:03 Absolutely, and it doesn't kill the platform, though. It actually makes it even more valuable to Facebook. Because for the developers and apps who have gotten to scale, they kind of look at this, and they say, "Okay, my organic distribution just got kneecapped, but Facebook is still this pretty powerful platform. What if I just buy ads? How well would that work? Can I generate positive ROI if I buy ads to effectively accomplish the same thing natively on the platform [chuckles] and drive usage back to my app?" Turns out that there was a very profitable arbitrage there still for many years to come, and for Facebook, they're like, "Well, hell yeah! [chuckles] Okay, we're monetizing the platform through user engagement and ads that we're showing on the right rail while people are using Facebook apps. We are also monetizing through currency and commerce that is happening in the apps, where we're taking a cut of that through payments. Now we're gonna monetize platform in a third way, which is the biggest-scale developers and app distributors on the platform are going to use our native advertising as their primary form of distribution." [laughing] Uh, I mean, you can see why, for a couple years here, Facebook is like, "Well, this is it. We've won. [chuckles] You know, we are a platform. This is it."

Ben Gilbert 2:36:37 Yep.

David Rosenthal 2:36:38 And then mobile comes along. [chuckles]

Ben Gilbert 2:36:41 Oh, mobile. That is, uh, quite the chapter in the Facebook story. But before we do that, now is a great time to tell you about one of our favorite companies, the climate-aligned AI infrastructure company, Crusoe.

David Rosenthal 2:36:55 Yes, Crusoe is a vertically integrated cloud platform built specifically for AI workloads that was recently named the gold standard of AI cloud providers by Dylan Patel over at SemiAnalysis. And something that's new and really cool since we started working with Crusoe last year, they've opened up the raw metal in their data centers to customers. So let's say you're a large enterprise who wants to run your own infrastructure and not use a cloud layer. You can actually now do that with Crusoe directly as a data center customer, which several of the largest companies in the world are now doing.

Ben Gilbert 2:37:29 Yep. They've totally reimagined traditional data center architecture to support the huge power, cooling, and compute density needs of AI.

David Rosenthal 2:37:37 Yep, that's important because power demand in GPUs is increasing dramatically, which means the traditional data center design and engineering of the hyperscalers is no longer optimal. So Crusoe's infrastructure, built from the ground up for GPUs with elements like high-density racks, direct liquid-to-chip cooling, that enables them to support the most demanding AI workloads that traditional data centers just can't handle.

Ben Gilbert 2:38:01 And at the same time, as GPU cluster sizes continue to increase, there's an ever-increasing demand for energy. Crusoe has fifteen gigawatts in its development pipeline, which is an astronomical amount of power. Their Abilene, Texas, facility alone has over one point two gigawatts planned, which will make it one of the largest clusters in the world.

David Rosenthal 2:38:22 Yep, and it's also not just about the amount of capacity in the pipeline, it's about how fast it can come online. Crusoe's team has decades of experience constructing and operating data centers, which enables them to bring these new data centers online super fast.

Ben Gilbert 2:38:36 As many of you already know, Crusoe sources the energy for these data centers in the most efficient and climate-aligned way in the entire industry, through clean, low-cost, and abundant energy that otherwise goes to waste. For example, in oil fields where natural gas is flared, in congested parts of the grid where renewable power is curtailed, or other areas where energy is stranded, which actually accomplishing that is a crazy hard thing. Crusoe's energy-first approach means they can build data centers in some of the most challenging locations on Earth, bringing computing to the energy rather than the other way around.

David Rosenthal 2:39:11 ... Yep. The net of all of this is that Crusoe can provide nuclear levels of power for far less cost than other providers, and with low, or in some cases, actually negative emissions. And that's super important, because the biggest bottleneck to AI progress is actually energy, it's not compute.

Ben Gilbert 2:39:28 Yep. So anyway, they're just a great company. We're super proud to work with them and to be investors. So to learn more about Crusoe, you can go to crusoe.ai/acquired, that's C-R-U-S-O-E.ai/acquired, or click the link in the show notes and just tell them that Ben and David sent you.

David Rosenthal 2:39:44 Thanks, Crusoe.

Ben Gilbert 2:39:45 All right, so David, we're here in the era of mobile, right? This is January 2007, Steve Jobs just announced the iPhone. The whole world changed, right? [laughing]

David Rosenthal 2:39:55 Well, actually, ironically, no. Or at least not for quite a while. Yes, January 2007, Steve Jobs announces the iPhone. People forget, though, it took five years for mobile and smartphone adoption to really ramp up and, like, actually change the world. There was no SDK in that first iPhone and iOS. That didn't come till 2008.

Ben Gilbert 2:40:15 It was seven hundred dollars. Android was a BlackBerry clone at the time, not an iPhone clone. The Droid Does campaign wouldn't be another year or two.

David Rosenthal 2:40:25 Yep. Yeah, I think two years. I think that was 2009, if I remember right.

Ben Gilbert 2:40:28 Yeah.

David Rosenthal 2:40:29 So yeah, I mean, hell, Facebook Platform didn't even launch until May 2007, so after the iPhone announcement.

Ben Gilbert 2:40:35 Yep.

David Rosenthal 2:40:36 So for the moment, Platform is rocking and rolling. Like we were just talking about, Facebook is becoming the next Microsoft, which brings us to the second Microsoft partnership in October of 2007. So just five months after F8 and Platform launch, Facebook now has, like, all of the leverage. Dan Rose has some great stories on Twitter about how [chuckles] this negotiation goes down.

Ben Gilbert 2:41:01 Oh, yeah, you spent time with Dan, didn't you, prepping for this?

David Rosenthal 2:41:03 Yep, and I chatted with Dan about this. This is great. So Microsoft, perhaps obvious now in retrospect to everybody, really just wants to buy the company, but Mark's, of course, not gonna do that after the whole Yahoo experience, et cetera. Microsoft is also happy, though, to just keep the partnership going and expand it. Because, one, it is really helping them spin up their online services division and get really good at online ad sales and ad serving. And two, they know they made a huge error in missing search and letting Google get big, and social sure seems like it's gonna be the next search-sized platform. So they're happy to just be in bed with Facebook in a way that they never will be with Google.

Ben Gilbert 2:41:44 As long as they can keep it going. I mean, for them, I think the thing that shocked them about Google is: "Oh, my God, the business model of the web is advertising. Search, and browsers, and everything are monetized by advertising, and that's completely orthogonal to our traditional license-based business model." Social sure looks like where all the page views are going and is gonna monetize exactly the same way as search. So actually, the thing that's important to them is locking in those page views. To the extent that they can participate in this market, it kind of has to be either we own you, or we are the long-term ad provider, which they didn't end up being, or we're a big equity holder.

David Rosenthal 2:42:25 Yep. So enter this second partnership negotiation. October 2007, Microsoft comes down to Palo Alto. Facebook tells them that, "Hey, Google is actually really interested in taking this partnership over. Larry and Sergey have been banging down the door, and we've been trying to hold them off, but they're coming to meet with us tomorrow to talk about switching our Facebook ad-serving partnership- [laughing] ... over to Google. [laughing] And this has been great. You know, we love working with y'all. We want-- You are our preference, our preferred partner. We wanna keep it going with you, but we need to get the deal done tonight." [laughing] So they lock themselves all in a conference room. They start negotiating. It's getting late. Ten o'clock goes by, eleven o'clock. The Microsoft team, you know, by Facebook standards, is all old guys, like, they're getting tired. [laughing]

Ben Gilbert 2:43:17 God!

David Rosenthal 2:43:18 And then, you know, old guys, like, you know, 40. Like, ooh, [chuckles] so old. And then at midnight... This is amazing. You can't make this up. Facebook probably planned this. All of a sudden, this really loud, like, house music starts blaring, like, with, like, heavy bass in the office, and the office is hopping. Like, everybody's there. The whole company's there. It's midnight. The Microsoft guy is like: "What's going on?" And, uh, the Facebook, you know, side's like: "Oh, yeah, uh, we have a hackathon scheduled tonight." [laughing]

Ben Gilbert 2:43:52 [laughing]

David Rosenthal 2:43:52 And actually, Javier Olivan had just started at Facebook-

Ben Gilbert 2:43:57 Who's now COO.

David Rosenthal 2:43:58 ... who is now the COO of Meta, had just started at Facebook as an engineer, and, uh, he had organized this hackathon to begin work on internationalizing the site. So tonight is the beginning of internationalization, which is a critical, critical part of Facebook's next chapter of growth.

Ben Gilbert 2:44:18 Yes.

David Rosenthal 2:44:19 [chuckles] And it is beginning at the same time that this Microsoft partnership-

Ben Gilbert 2:44:23 Oh, my God!

David Rosenthal 2:44:23 -is happening in a conference room.

Ben Gilbert 2:44:25 And didn't this Microsoft deal end up being about international?

David Rosenthal 2:44:28 Yes. Yes, it did. So they keep going. At one point during the night, one of the Microsoft guys, uh, according to Dan, looks at him and says: "Wow, this is awesome. This is just like the old days of Microsoft." [laughing]

Ben Gilbert 2:44:43 [laughing]

David Rosenthal 2:44:43 So they finish the negotiation at six AM. They announce the new partnership that very same day, as promised, with the threat of Google. Microsoft becomes the worldwide exclusive third-party advertising network for all display ads on Facebook, so it was domestic in the US before. Now, it's international, too, and domestic everywhere around the world. Facebook, of course, can still also sell their own inventory themselves, but anything that they don't wanna sell themselves or that is excess inventory, Microsoft gets exclusive access to be the only ad network where you can access it.... And the big kicker, Microsoft is going to invest two hundred and forty million dollars in Facebook at a fifteen billion dollar valuation. This is like thirteen or fourteen months after the failed Yahoo deal for one billion dollars. [chuckles]

Ben Gilbert 2:45:39 That is the thing that no one talks about here. I'm so glad you brought this up, 'cause before they started this negotiation, the attempt was to buy Facebook. The highest offer floated, uh, we talked about this in the Microsoft episode, it was a complicated set of deal terms that basically netted out to a twenty-four billion dollar offer. And that was less than two years after the one billion dollar offer that everyone talks about with Yahoo! "Oh, remember the time where Mark Zuckerberg turned down a billion dollars?" Less than two years later, he turned down twenty-four billion, and they, they were really good for the money. It's Microsoft.

David Rosenthal 2:46:10 [chuckles] But turned it around into an investment at fifteen billion.

Ben Gilbert 2:46:14 Yeah, it's crazy.

David Rosenthal 2:46:15 So the great thing is, like all great partnerships, everyone makes out wonderfully here. [chuckles] So except maybe the venture capitalists in Silicon Valley, 'cause this just, like, breaks everyone's brain. [laughing]

Ben Gilbert 2:46:29 It was the high-water mark for Facebook's valuation for a while, 'cause then the great financial crisis would happen after, those valuations would all reset, and then Facebook's next deal would get done, I think with Yuri Milner, at ten billion?

David Rosenthal 2:46:41 Ten billion dollar valuation with Yuri. Yep, and Yuri would actually also buy common stock through a secondary tender offer in that, so his dollar cost average would get down to more like six. So he got a-

Ben Gilbert 2:46:53 Oh, wow

David Rosenthal 2:46:53 ... screaming deal. But, you know, for the moment, like, there are no comps to this, ever. Dot-com bubble, you name it, like, never has been a comp like this for an investment in a private technology startup. The closest comp that I can even sort of think of was Google's market cap at IPO [chuckles] was twenty-three billion, so, like, higher, but not that much higher, and Google at IPO was a two billion dollar revenue run rate, spitting off hundreds of millions of dollars in free cash flow annually. Facebook, at this point in time, is basically break even and doing a hundred and fifty million in revenue, most of which is Microsoft itself. [laughing] All that said, Microsoft, this is a home freaking run. Like we've been saying all along, helps them spin up Bing, doing all the ad serving for this, getting into, like, real online services. And then, B, you know, Microsoft is not a hedge fund, as we talked about on that episode, but that two hundred and forty million dollar investment, by the time they start selling it down, years after Facebook is public, ends up being worth eight billion dollars. [chuckles]

Ben Gilbert 2:48:02 Wow.

David Rosenthal 2:48:03 And then maybe the most important benefit to Microsoft out of all of this is, like, Microsoft and Facebook have always had a good relationship, unlike Microsoft has with Google and Apple.

Ben Gilbert 2:48:14 I remember Facebook Events, like, when you'd look at the page, it was a Bing map, not a Google map. That always, like, felt emblematic of the partnership to me.

David Rosenthal 2:48:23 Yep.

Ben Gilbert 2:48:23 Every single place it could be a Microsoft product, it was.

David Rosenthal 2:48:26 Yes, and it wasn't a Google product.

Ben Gilbert 2:48:28 Yep. Okay, so interestingly, here we are, 2007, Facebook is still saying, "We don't need to be in control of the core revenue creator for us. Like, we think platform is the future. Microsoft, you're our preferred partner to handle making the money." [chuckles]

David Rosenthal 2:48:46 Yes, and I think, you know, there's two things here. Yes, I think that is true specifically at this moment in time, but this is where, you know, again, Mark is just master strategist, you know, kinda like calling it all the way back to Civilization and the 4X strategy game. He's got multiple bets he's placing on the chessboard. One, as you said, is, like, platform. Like, "Hey, platform is rocking and rolling. We think we're building the next great technology company and the next great business model just on platform. Also, yeah, we're a social media company that involves a lot of page views and engagement, and, like, the right way to monetize that is advertising. So yes, we've just continued this big Microsoft partnership, but we have the right to sell our own inventory, and we should probably start building that muscle, too."

Ben Gilbert 2:49:36 The other thing that's happening here is Mark still kinda thought ads were gross at this point in history, so the things he cared about were product and engineering and design, and he kinda wanted to outsource everything else, or at least have someone else at the company think about it. And having Microsoft take care of the ads was, I think, in his mind, kind of a win-win. That way, the commodity stuff can happen elsewhere, and I can focus on the thing that really matters. And the company really did not have the insight yet, "Oh, we can do ads different and better than anyone has ever done them before."

David Rosenthal 2:50:11 [chuckles] Well, I'm smiling as you're saying that, because, um, in practice, for this moment, yeah. In reality, they were trying to build their own native Facebook advertising unit, so to speak. It was just Beacon. [laughing]

Ben Gilbert 2:50:31 Yeah, Beacon is one of the most epic failures in Facebook's whole history.

David Rosenthal 2:50:36 Yeah. Okay, so Beacon. Well, first off, you were totally right, and I think you were foreshadowing Sheryl Sandberg there-

Ben Gilbert 2:50:44 Yep

David Rosenthal 2:50:44 ... of, like, Mark wants somebody within the company to just, you know, run and manage this thing and build it great and world-class. Before Sheryl, do you know which Facebook executive led Beacon?

Ben Gilbert 2:50:58 I do not.

David Rosenthal 2:50:59 Chamath Palihapitiya. [laughing]

Ben Gilbert 2:51:01 No way!

David Rosenthal 2:51:02 Yep.

Ben Gilbert 2:51:02 I- he always talks about the growth team. I never knew he was in charge of Beacon first.

David Rosenthal 2:51:07 This was Chamath's big thing before growth-

Ben Gilbert 2:51:11 No

David Rosenthal 2:51:11 ... and actually, the epic failure here of Beacon leads directly to growth, as we shall see in a sec. Now, uh, what was Beacon? So, like you said, Mark is kinda allergic to traditional advertising.... But he's like: "Well, we have this incredible social activity happening on Facebook, and we know through News Feed that people engage with it, and they, and they love it. What if there were a way for a native ad baked into the very fabric of the product itself, that brands could sort of control and monetize? Well, if we gave brands a way to essentially boost how people are already engaging with them, that might be the way to do this." [chuckles] And what this ends up being in practice is brands publishing your friends' e-commerce activity into your News Feed. Now, to be fair to Mark and Chamath and the company, we didn't know yet what the right advertising unit on Facebook was gonna be, and this is