How to Create the Next Facebook: Seeing Your Startup Through, From Idea to IPO

by Tom Taulli

  How to Create the Next Facebook: Seeing Your Startup Through, from Idea to IPO

  Copyright © 2012 by Tom Taulli

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  ISBN-13 (pbk): 978-1-4302-4647-3

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  Contents

  Foreword

  About the Author

  Introduction

  Chapter 1: The Mission

  Chapter 2: Legal Structure

  Chapter 3: The Product

  Chapter 4: Raising Capital

  Chapter 5: The Pitch

  Chapter 6: Deal Terms

  Chapter 7: Go-to-Market

  Chapter 8: The Financials

  Chapter 9: The Business Model

  Chapter 10: Being a Great CEO

  Chapter 11: The Team

  Chapter 12: M&A

  Chapter 13: Selling Your Company

  Chapter 14: The IPO

  Chapter 15: Wealth Management

  Chapter 16: Conclusion

  Glossary

  Index

  Foreword

  Being an entrepreneur is hard. It’s a roller coaster every day. You need a strong stomach, eyes on the future, a soul that wants to change the world, and a heart that believes you can do it. You learn, you fail, you learn some more. The Internet landscape has changed a lot since I started my first company in 1999. Since Facebook launched, we’ve all been pushed to step up our game. There’s been a shift in the technology field to move faster than ever before, while creating value for your users.

  “Move fast and break things.” “Done is better than perfect.” Before these clichéd mantras made their way into mainstream startup culture, they described a simple Facebook philosophy—to ship code fast and continuously iterate. Although we’ve always moved pretty quickly in Silicon Valley, Facebook has driven us to move even quicker. At BranchOut, we’re pushed to keep up with Facebook’s weekly development cycles because we’re an application built on their platform. We’ve embraced the developer-driven culture behind the “move fast” mentality because the faster we ship code, the quicker we can make mistakes and learn from them.

  There are a lot of competing interests at play when you’re building a company. Facebook had a lot of interest early on in diverging from the path they were on. In 2004, Friendster attempted to acquire Facebook for $10 million. Had that happened, who knows if Facebook would have added photo sharing the next year, eventually opened up to anyone with an e-mail address, and ultimately made the world as open and connected as it is today? When you’re building a company, there’s a lot of outside pressure to hit particular metrics and deadlines. You get a lot of advice. But it all comes down to listening to your users. If you don’t build a passionate company, they won’t come back. At BranchOut, we’re trying to make our users’ lives better. We’re trying to help people represent themselves professionally so they can network, find mentors, and land their dream jobs.

  Create value. Run fast, go big, and change the world.

  Rick Marini

  Founder of BranchOut

  About the Author

  Tom Taulli is based in Silicon Valley, in the heart of IPO land. On a regular basis, he talks with many of the top tech CEOs and founders to find the next hot deals and discover which startups are stinkers. A long-time follower of the IPO scene, Taulli started one of the first sites in the space, called WebIPO, in the mid-1990s. It was a place where investors obtained research as well as access to deals for the dot-com boom. From there, he started several other companies, such as Hypermart.net, which was sold to InfoSpace in 1999. Currently, Taulli is an advisor to tech companies and writes extensively on tech, finance, and IPOs. His work has appeared on Forbes.com, TechWeb, and BusinessWeek. He is also frequently quoted in publications like the Wall Street Journal and is regularly interviewed on CNBC and BloombergTV. You can follow him on Twitter at @ttaulli.

  Introduction

  OK, the title of this book is definitely provocative. Who wouldn’t want to create the next Facebook and become extremely wealthy and famous? No doubt, the company’s success has inspired many people to become entrepreneurs. It has become the hot thing nowadays.

  But my book is not about replicating Facebook. After all, the company has become the mega winner in social networking. History has shown that when critical mass is established in a new market, the leader usually keeps its position for many years. Just look at Google, Microsoft, Skype, and eBay.

  Achieving dominance is often a matter of a few key decisions. Companies like MySpace and Friendster could easily have become the leader. Hey, my book might have been called How to Create the Next MySpace or How to Create the Next Friendster if history had been different.

  The goal of this book is to look at the critical aspects of how Facebook went from $0 to over $50 billion in 8 years. But I don’t just cover the success; I also look at the mistakes. Some were almost fatal.

  Here’s a rundown of the book’s main areas:

  Chapter 1—“The Mission”: Your mission should be a huge goal. You want to change the world in some way, and this is a powerful driver for success. It gets employees excited as well as investors and customers.

  Chapter 2—“Legal”: This stuff is boring and tedious but critically important. In the early days, Mark Zuckerberg nearly destroyed his company as a result of b
ad legal decisions.

  Chapter 3—“The Product”: Zuckerberg is a product genius. But to be successful, you don’t have to be a natural-born prodigy. This chapter looks at best practices to make products that customers love.

  Chapters 4, 5, and 6—“Raising Capital,” “The Pitch,” and “Deal Terms”: Here’s everything you need to know to get investors to write checks. Even highly successful companies need to raise money—and Facebook has been fundraising from the start. In its history, the company has raised more than $18 billion.

  Chapter 7—“Go-To-Market”: This topic gets little attention from entrepreneurs, and it’s a big oversight. If you don’t have a solid go-to-market strategy, your venture will probably fail.

  Chapter 8—“The Financials”: This is another boring topic (sorry!). But don’t skip it. Although the tech industry goes through periods where fundamentals don’t seem to matter much, they are temporary manias. In the end, you need to understand the nuts and bolts of a company’s financials.

  Chapter 9—“The Business Model”: This is how your company makes money. Chances are, you have one core revenue stream. This Chapter looks at some of the main business models that have worked.

  Chapter 10—“Being a Great CEO”: Zuckerberg was not a natural-born CEO. In fact, he was terrible at the role, at least during the first couple of years of Facebook’s history. But he was determined to get better. Being a CEO is definitely something that can be learned.

  Chapter 11—“The Team”: Zuckerberg has always understood the importance of creating a cohesive team. But he also realizes that there are times when people need to be let go.

  Chapter 12—“M&A”: Since 2007, Zuckerberg has struck over 25 acquisitions. Most were ways to get talent, a process known as an acqui-hire. This chapter explains how to bolster your company with deal-making.

  Chapter 13—“Selling Your Company”: Zuckerberg is focused on keeping his company independent. But the fact is, most companies are eventually sold off. This chapter looks at how to maximize the value of a transaction.

  Chapter 14—“IPO”: In 2012, Facebook came public. Yes, it was a challenging deal, but the company had the second largest transaction in US history. This chapter shows what it takes to go public.

  Chapter 15—“Wealth Management”: As an entrepreneur, you have the opportunity to get rich. However, you need to make sure you manage your wealth properly. There are many horror stories about entrepreneurs who have lost fortunes.

  Chapter 16—“Conclusion”: In this chapter, I look at some takeaways and big opportunities for you to think about.

  Why should I be the person to write this book? Well, I do have a unique perspective. I have started several companies in tech and have raised capital from angels and venture capitalists. I also sold one of my companies to a public company. At the same time, I’ve made angel investments and have advised companies.

  All of these experiences have been extremely valuable. In this book, I try to bring out these lessons. I wish I had known these things when I started my first business!

  For the past 15 years, I have also been a writer. I have written 10 books on finance and technology. I have also written for publications like BusinessWeek and Forbes. In the process, I have talked to many great entrepreneurs, such as Google’s Sergey Brin and Twitter’s Evan Williams. It has been a great learning experience.

  Enough with the intro. Let’s get started!

  The Mission

  The revolution is not an apple that falls when it is ripe. You have to make it fall.

  —Che Guevara

  If you go to Mark Zuckerberg’s Facebook page, you’ll see that it says: “I’m trying to make the world a more open place.”1 It’s a grand mission for any person. But, of course, it is essentially the mission of his company. In Zuckerberg’s letter to shareholders in Facebook’s initial public offering (IPO) prospectus, he says: “Facebook was not originally created to be a company. It was built to accomplish a social mission—to make the world more open and connected.”2 This is not the kind of mission you often associate with a company, but all great companies are about a cosmic vision, and that vision is always based on the power of a founder like Howard Schultz, Walt Disney, Henry Ford, Steve Jobs, and Bill Gates. They are more than just chief executive officers (CEOs). They are revolutionaries.

  Every day, Facebook affects the lives of millions of people. It helps make friendships strong and even leads to marriages. Facebook makes it possible to understand different cultures and ideas. In some cases, its impact can be game changing. Facebook is an essential communication tool in times of disaster, such as when the horrendous tsunami hit Japan in March 2011. It can even lead to radical changes in societies, as seen with the Arab Spring.

  In Facebook’s IPO prospectus, Zuckerberg wrote:

  By giving people the power to share, we are starting to see people make their voices heard on a different scale from what has historically been possible. These voices will increase in number and volume. They cannot be ignored. Over time, we expect governments will become more responsive to issues and concerns raised directly by all their people rather than through intermediaries controlled by a select few.3

  __________

  1 www.facebook.com/pages/Mark-Zukerberg/156559947734345

  2 “Facebook IPO Prospectus,” May 17, 2012, www.sec.gov/Archives/edgar/data/1326801/000119312512240111/d287954d424b4.htm

  Now, it is true that, despite its mission, Facebook is no utopian paradise. Change can get messy. Facebook can actually destroy friendships or lead to bullying or divorce. It is a place where mean, terrible things happen. Yet on the whole, Facebook has been a positive force in the lives of countless people around the world. Why else would more than 500 million people visit the site every day?

  The popularity and empowering nature of Facebook has turned Zuckerberg into one of the towering figures of his generation. Besides being one of the richest people on Earth, he has many other notable accomplishments, such as being selected as Time Magazine’s Person of the Year in 2010. He even got to meet the president. All of this and Zuckerberg is only 28 years old.

  But it all started with a mission—something that resonates with everyone on Earth—and that’s a big lesson for entrepreneurs. You need to create something worth working for. You must want to wake up every morning with a sole and abiding obsession with your mission. The mission will drive your employees, it will get your customers excited, it may even change the world.

  Zuckerberg’s mission was not necessarily original. In fact, the concept of a social network had many historical precedents, the first of which—the telegraph—sent electronic messages across wires and required the knowledge of a special language called Morse code. The mastermind of this technology was Samuel Morse. While attending Yale in 1808, Morse became interested in the concept and uses of electricity. Then, in 1832, Morse took a voyage that would change his life and the course of history. On this trip, he met Charles Thomas Jackson, an expert in electromagnetism, who showed Morse several experiments with his electromagnet. It was then, after he began to understand the physics of electromagnetism, that Morse started to develop the idea of a telegraph, which would use electromagnetism to send messages across long distances using cheap, low-quality wire. There were several other inventors who had the same idea at the time, but Morse had more financial resources and was quicker than the others to share his invention. Morse launched the telegraph in Morristown, New Jersey, in 1838, and the technology spread quickly. It even led to the creation of a fast-growing communications business—Western Union.

  The telegraph was only the jumping off point in the history of social networking. In 1876, Alexander Graham Bell invented the telephone. As was the case with the telegraph, there was someone else, Elisha Gray, who had the same idea at the same time. However, Bell got to the patent office first—by only a few hours—which demonstrates that speed is always crucial in technology!

  __________

  3 Ibid.

  Zu
ckerberg had the same kind of experiences with Facebook. There were other sites, like Friendster and MySpace, that were also based on the same concept of an online social network. But Zuckerberg did things better and faster. Is it any wonder that one of his favorite songs is Punk Daft’s “Harder Better Faster”?

  As is the case with all great new technologies, Facebook had many doubters. It’s natural for critics to doubt anything that is truly innovative. When Western Union evaluated the telephone, its conclusion was: “It has too many shortcomings to be seriously considered as a means of communication. The device is inherently of no value to us.”4 With regard to Facebook, critics doubted that people would put all their personal information on a web site. But when Zuckerberg launched Facebook, he was convinced of his mission and that Facebook would be the best way to pursue it.

  Facebook is not alone in the determined way it seeks to fulfill its mission. All of today’s successful companies—companies of all kinds and in all industries—similarly air their commitments to the world and then strive, day in and day out, to keep them. Table 1-1 contains the mission statements of just a handful of today’s most successful companies.

  __________

  4 Western Union internal memo (1876)

  Have Passion for What You Do

  You may have a great mission but it must be something you are extremely passionate about. If not, it will be mostly hollow. As a blogger for Forbes.com, I hear a lot of pitches from startup entrepreneurs and it is usually clear when they are not excited about their mission or that they do not even have one!

  I can only select a few startups about which to write, and they need to catch my attention quickly. If the first few sentences of their pitch e-mail are not interesting, I’ll probably just transfer the message to the “Media” section of my Gmail account. Rarely do I look back at any of them. And even those companies that pique my interest and with which I agree to set up a meeting to hear what they have to say, I find that many of the presentations are lackluster. The founders usually spend too much time on their background and the technology of their product. When it comes to explaining their company’s vision and strategy, their message is usually muddled, which is an ominous sign. Based on my experience, I know that many of these companies eventually just fizzle out.