YouTube: Silicon Valley Start-Up Lands Google Deal
“MOUNTAIN VIEW, Calif., October 9, 2006 - Google Inc.(NASDAQ: GOOG) announced to day that it has agreed to acquire YouTube, the consumer media company for people to watch and share original videos through a Web experience, for $1.65 billion in a stock-for-stock transaction.”
Those words above, that were all over the papers and repeatedly reported on newscasts on that Monday morning last month, were likely read or seem with a sense of “wow, why didn’t I think of that” or “wow, this company is less than a year old and they sold for $1.65 billion, why can’t I find the dream investment like that?”.
Yes, YouTube, the US based video sharing company that launched less than a year ago was just bought by the “Mother of all online companies” Google. Is this a story of luck or right place at the right time? Maybe even a foolish acquisition that is threatening the real World multiples of valuation? Or, is it simply a matter of getting it right with the best technology and attracting the numbers of users that substantiate the value for what Google is looking for? My take is that it is a little bit of everything. At the end of the day, the deal has happened and someone is walking away with dream returns from this sale. Who stands to reap the windfall? The founders? The initial investors? Google? Let’s start by taking a closer look at just who and what YouTube is.
YouTube – What?
According to the company; “YouTube is a consumer media company for people to watch and share original videos worldwide through a Web experience.” Everyone can watch videos on YouTube—both at YouTube.com and across the Internet. People can see first-hand accounts of current events, find videos about their hobbies and interests, and discover the quirky and unusual. As more people capture special moments on video, YouTube is empowering them to become the broadcasters of tomorrow.
Some of the site’s features include:
• Video embedding, which lets users insert a YouTube video into MySpace accounts, blogs, or other Web sites where anyone can watch them
• Public or private videos— users can elect to broadcast their videos publicly or share them privately with friends and family upon upload
• Subscriptions allow users to keep track of their favorite users’ new videos By registering, users are able to upload and share videos, save favourites, create playlists, and comment on the videos. YouTube is building a community that is highly motivated to watch and share videos.
The You Tube service is free and will be supported by advertising. «The company also states; « You Tubeoriginally started as a personal video sharing service, and has grown into an Entertainment destination.
YouTube is creating a community for personal video, musicians, amateur filmmakers and comedians, and professional content owners. Anyone can broadcast themselves by creating content and distributing it through YouTube».
O.k, sounds interesting enough and I have even used it myself when wanting to see a quick movie preview or a comedy skit. Basically, just about anything that can be watched in a few minutes and allows for society’s short attention span.
The company also states they receive over more than 65,000 videos being uploaded and 100 million video users DAILY! Plus, according to Hitwise, YouTube videos account for 60 percent of all videos watched online and people are spending an average of 17 minutes per session on the site. Clearly, something is working and the novelty of this business is just that, business.
YouTube – Who?
YouTube Inc. was founded by Chad Hurley, 29, Steve Chen, 27, and Jawed Karim on February 14, 2005. According to company reports, Jawed Karim decided to leave the company to furtherhis studies at Stanford University in the US. Chad Hurley and Steve Chen, at least prior to the Google acquisition, serve as Chief Executive Officer and Chief Technology Officer respectively.
From the garage of Chad Hurley’s home in California, YouTube began their humble beginnings on that February in 2005 and officially launched the company and service in December 2005. It is reported that Hurley and Chen are characterised by friends as being ``humble’’ and `low key.’’
Hurley, a native of suburban Philadelphia who studied design at Indiana University of Pennsylvania, first met up with Chen, who describes himself as a “math geek”, at the payments processing start-up PayPal in 1999.
Meanwhile, Chen was attending the University of Illinois studying computer science when Max Levchin, a PayPal co-founder and former classmate, recruited him. Hurley shortly after this landed a position there by emailing the company a job application. Like many of the “golden team” of former PayPal alumni, neither had senior roles at the company. They did however stay in touch after the company was acquired in July of 2002 by eBay. (Chen stayed on; Hurley left to become an independent consultant.) According to Tom McInerney, Chief Executive of video-sharing service Guba and friend of Chen, “It only took them a few hours to come up with their architecture, which is something they still use’’.
He also ads, “The whole idea was just to do something really simple and elegant; it was very commonsensical.’’ Fast forward to an informal dinner early last year, one attended by a number of PayPal alumni. When their friend Jawed Karim noted that he couldn’t easily share his video footage of the evening, a light went on for both Hurley and Chen. A company was born; Karim was made an adviser. Fast forward even further and the story gets even a little more interesting. Silicon Valley Venture Capital giant Sequoia Capital steps in for round one of funding and Chen and Hurley secure $3.5 million in November 2005. The company officially launched the next month.
Press Release: MENLO PARK, Calif. - November 7, 2005. YouTube Receives $3.5M in Funding From Sequoia Capital. Sequoia Capital
Without doubt, Sequoia Capital is the Godfather of venture finance start-ups. Based in the Silicon Valley hotbed of some of the most exciting and successful start-ups, this firm has what most would agree as “The Midas Touch” when it comes to identifying which companies are not only likely to succeed, but succeed with a capital “S”. Since their inception in 1972, Sequoia Capital has been providing start-up venture capital. They brand themselves as the “Entrepreneurs Behind the Entrepreneurs”. They presently have operations and are active in the US, China, India and Israel. Sequoia Capital’s Partners have funded and worked with innovators such as:
• Steve Jobs, Apple Computer
• Larry Ellison, Oracle
• Bob Swanson, Linear Technology
• Sandy Lerner and Len Bozack, Cisco Systems
• Jerry Yang and David Filo, Yahoo!
• Jen-Hsun Huang, NVIDIA
• Dan Warmenhoven, Network Appliance
• Michael Marks, Flextronics
• Larry Page and Sergey Brin, Google
• Chad Hurley and Steve Chen, YouTube
The companies organised by Sequoia Capital now account for about 10% of the entire value of NASDAQ. Obviously just by having Sequoia on board as an investor would give any company a huge platform to launch, provide added credibility and help to attract interest in the company’s products or services. One of the tips and philosophies of Sequoia is; “Start with only a little money. It forces discipline and focus. A huge market with customers yearning for a product developed by great engineers requires very little firepower.” Ironically, smart and wise advise nonetheless, Sequoia is a huge player in the VC start-up market and has put their money where their mouth is. As noted above, they invested the first round of $3.5 million into YouTube and then another reported $8 million this past spring. In total it was believed they invested a total of $11.5 million into YouTube. However, until just recently and according to PE Week, it was reported that there was another co-investor on that Series B round by the name of Artis Capital Management, a hedge fund in San Francisco. For reasons unknown, this was previously undisclosed.
So on that Monday on the 9th of October last month, what did all of this mean to the founders and investors who took the chance to fund these three guys from California?
The press release saying “Google To Acquire YouTube for $1.65 Billion” obviously doesn’t need that much explaining to do for someone to determine that anyone involved in this company is going to do quite well. According to various sources, Sequoia Capital (with or without Artis Capital management) invested a total of $11.5 million in YouTube from November 2005 to April 2006 and may make more than 43 times that amount from Google’s acquisition. Its stake in YouTube has been estimated at approximately 30 percent, which would give it a value of approx. $495 million.
And what about the founders? The $1.65 billion acquisition will leave YouTube’s founders Chad Hurley and Steve Chen perhaps the biggest winners of all. One source states that founders Chad Hurley, Steve Chen, and Jawed Karim each stand to make between $100 and $200 million from the deal. It was also a stock-for-stock transaction, making this Google’s largest acquisition in its 8 year history. The stock price and the number of shares to be issued will be set by a 30-day average ending two days before closing. When it’s all said and done, the entrepreneurs were beyond handsomely rewarded for their initiative, ideas and sound business sense.
Can anyone hold this against them? I certainly hope not because ideas and initiative are crucial to new business and successful companies and investments. Can anyone hold anything against Sequoia Capital for turning their $11.5 million into $495 million? I certainly hope not and these returns are what we all aspire to achieve in angel investments. Well done Chad, Steve, Jawed and of course, Sequoia!