The Facebook Effect Read online

  Kevin Efrusy was a principal at Accel, not yet a partner—a venture capitalist in training. His mandate from Breyer: get out there and find Internet companies that could grow huge. The firm’s latest interest was social networking. Accel methodically identifies the central trends at any given time, and creates a short list, which it calls its “prepared mind initiatives.” One of the three at this point was “social and new media applications.” But the problems with Friendster and other networks made the entire business seems risky. “Social networks sort of had this dirty name,” says Efrusy, referring to a reputation for sexual material and rambunctious members. “But we’d talked about whether it was possible to keep one clean and relevant to certain demographics.” He’s a big, balding guy with the friendly but intense and slightly aggressive manner not uncommon among venture capitalists.

  Breyer had gotten Accel close to an investment in a company called Tickle, which had been shifting its business from offering clever quizzes like “What breed of dog are you?” to becoming a true social network. By early 2004 Tickle had become the second-largest social network after Friendster, with two million members actively connected to others and exchanging messages. Accel prepared a term sheet, but Tickle’s board decided to sell it to job-hunt website Monster.com instead in May 2004. An Accel partner named Peter Fenton had tried to get Accel to invest in Flickr, a photo-sharing site with some social networking features. Again, it agreed on a term sheet for the deal. But before Accel could complete that deal, Yahoo swept in and bought Flickr. Then in December 2004 Chi-Hua Chien, a Stanford graduate student doing contract research for Accel, told Efrusy about Thefacebook.

  The two did a little research and Efrusy got hold of an alumni email address from Stanford, his alma mater. When he got on Thefacebook he was impressed. “They essentially had the rope outside the nightclub,” he explains. “The context was there for you. It was in your college. It was Facebook Stanford, not Facebook worldwide.” But Efrusy saw a problem—what kind of business would it be to run a social network for people who had no money? Then a former business school classmate explained that college students were a precious demographic for marketers. It’s there that critical lifelong buying habits are formed—your first car, bank account, credit card. “But at college there was no way to reach you,” says Efrusy of what he learned as he continued his research. “College was a black hole. You stopped watching TV. You stopped reading the newspaper.” Thefacebook might be a way around that.

  Efrusy heard how quickly Thefacebook was growing. Through a friend who had interviewed for a job at Thefacebook he got an appointment to talk by phone with Parker. Parker canceled. Then Efrusy heard Matt Cohler had joined Thefacebook. He had met Cohler at LinkedIn. Efrusy called, asking for an introduction to Parker. Cohler replied politely that the company wasn’t interested in talking to venture capitalists. Then a month or so later one of Accel’s partners, Theresia Ranzetta, heard that Thefacebook was talking to other VCs about raising money. Efrusy decided he had to meet these guys. After all, they were right in the neighborhood. He emailed. No response. He called. Sean Parker wouldn’t return his calls.

  Efrusy isn’t easily deterred. He learned Reid Hoffman was an investor in Thefacebook. So he asked Accel partner Peter Fenton, who was close to Hoffman, to call and ask Hoffman for an introduction. Hoffman also demurred. He said that Thefacebook guys thought dealing with venture capitalists would waste their time because they wouldn’t really understand Thefacebook and wouldn’t be willing to pay what it was worth. Of course, by that point Parker was already talking seriously to several VCs. He was just deliberately avoiding Efrusy. He’d heard that Accel had lost its mojo and didn’t want to deal with them. Zuckerberg, for his part, was focused on the potential Post investment. He was only half aware of how much time Parker was by now spending courting VCs.

  Efrusy asked Fenton to go back again to Hoffman. This time Hoffman relented and agreed to arrange a meeting with Parker and Cohler, who was doing much of the day-to-day managerial and organizational work for the financing. However, Hoffman insisted Fenton promise that Accel wouldn’t try to come in with a lowball offer. Thefacebook was pretty far down the road with a possible strategic investor, he said.

  Typically the entrepreneur goes to the office of the VC, deferentially seeking funds. Efrusy spoke again with Cohler, Hoffman’s former employee, and invited him to bring his partners to Accel’s offices. But even then the guys of Thefacebook put Efrusy off. “He was hounding us,” Cohler recalls. Efrusy had been at Accel for less than two years. He hadn’t yet done a major deal of his own. He needed to prove himself.

  Finally, on Friday, April 1, 2005—April Fool’s Day—Efrusy decided to just go to their office. Parker had said he’d be there. Efrusy didn’t realize it, but his timing was superb. The Post talks had not quite concluded because of haggling over the board seat. Efrusy walked four blocks down Palo Alto’s University Avenue to an office Thefacebook had just rented on Emerson Street, about a mile from Stanford. He brought along Arthur Patterson, the tall, gray-haired, patrician co-founder of Accel, who was curious to learn why Efrusy was so excited about this little start-up. They walked up a long stairway, newly spray-painted with graffiti art. At the top was a giant, suggestive image in Day-Glo colors of a woman riding a giant dog. In the large open loft space, the company hadn’t finished moving in. There was more in-your-face multicolored graffiti art all over the walls, including a few nudes. The furniture was in various states of assembly. A couple of days earlier, Thefacebook had inaugurated the space with a blowout party for Cohler’s twenty-eighth birthday. Half-filled liquor bottles were scattered everywhere.

  Parker had said he’d be there, but he wasn’t. And Cohler and Moskovitz, who were, were hardly ready for a serious financial meeting. They were struggling to assemble do-it-yourself furniture they’d bought at Ikea. Moskovitz had hit his head on a piece of furniture and his forehead was bleeding. Cohler, usually well put together, had caught his jeans on a nail. His left pant leg was hanging open and his boxer shorts were sticking out. “Hey Kevin,” Cohler greeted Efrusy.

  The chaos didn’t deter Efrusy. He was a man on a mission. “Our meeting was just with Matt initially,” he recalls. “Sean and Mark were unavailable or sick or something. So Matt took us through the business. He was very articulate about the statistics and the repeat usage rate. I already kind of knew it, but Arthur was pretty excited. Then Sean and Mark showed up—not sick, eating burritos.

  “I knew they thought we’d take too long asking questions. I said ‘Hey, here’s the deal. I get how valuable this could be. Come to our partnership meeting on Monday, and I promise I’ll either give you a term sheet by the end of the day Monday, or you’ll never hear from me again. I will not drag this process out. We can move quickly.’”

  Before they left, Parker did get excited about one thing. He proudly led Efrusy and Patterson into the girls’ bathroom. There he pointed to another mural, this one done by his girlfriend. It showed one naked woman embracing the legs of another. Up in a tree a French bulldog puppy looked down on them. Efrusy was nonplussed. “Sean, won’t this make women uncomfortable? Aren’t you worried about harassment or something?” he asked. “Look,” Parker replied. “I’m not going to worry about that.” Then Efrusy convinced Parker to meet him for a beer the following evening, a Saturday.

  As Efrusy and Patterson were walking back to their office, Patterson slapped him on the back and said, “That was great fun. Really interesting. We have to do this.” Patterson was known inside the firm for his tough-minded skepticism. This wasn’t like him at all.

  Over the weekend Efrusy’s research went into high gear. Midday Saturday he and his wife went to Stanford and hung around Tresidder Memorial Union, the campus student center. Efrusy collared students to ask them what they knew about Thefacebook. Did they use it? How ubiquitous was it, really? The answers were what he’d hoped for. “Have I heard of it? I can’t get off of it.” “I don’t study. I’m addicted.” �
��Everyone’s on it. You stay in touch with friends at other schools. Then all the professors get on there. It’s become sort of the hub of my life.”

  Efrusy called the younger sister of Accel’s CFO, a sophomore at Duquesne University in Pittsburgh. “She’s like ‘Oh yeah, Thefacebook. It came here on October twenty-third.’ I was like ‘You know the exact date?’ She’s like ‘Of course. We were on the waiting list for months. We were number seven on the waiting list.’ I’d never heard of anything like this. She remembers the date it was turned on. There was this rabid, pent-up demand. I talked to my wife and said, ‘I’ve got to invest in this company.’”

  That night he met Parker and his girlfriend as well as Cohler at the Dutch Goose, a grungy Stanford student dive. The talk quickly turned to money. “Kevin,” Parker began, “we think this is a really valuable company. You’re not going to want to pay the valuation.” Efrusy begged just to be given a chance. That was exactly the reaction Parker had hoped for. Efrusy again urged Parker to come Monday morning, and to bring Zuckerberg. He was not at all sure they would show up.

  But on Monday at 10A.M., Zuckerberg, Parker, and Cohler appeared. Zuckerberg wore a T-shirt, shorts, and his Adidas flip-flops. Parker and Cohler opted for the T-shirt-under-sports-jacket look. They didn’t bother showing the slides they’d displayed at other VC firms. Parker did most of the talking. It was a masterfully self-conscious display of reticence, aiming to hook Accel hard. Zuckerberg himself said very little. Then they left.

  “So what do you guys think?” Efrusy asked his partners. One of the senior ones piped up. “It sounds like you’ve got a lot of convincing to do,” he said. “Okay, but let’s put that aside for a second. Do you like the business?” Efrusy asked. The room was unanimous. They did. There wasn’t any debate. Patterson was enthusiastic. So was Jim Breyer. But while, as usual, Parker had presented Thefacebook’s pitch, Breyer had made a critical discovery while watching the boys demonstrate Thefacebook’s site. “First page of the website,” Breyer wrote in a note to himself, “this is a Mark Zuckerberg company. Mark Zuckerberg is the guy.” Until that moment, it had not been clear to Accel—or to any of the company’s prospective investors aside from Don Graham—that Zuckerberg was the decisionmaker upon whose opinion a deal would rise or fall. Efrusy had barely met Zuckerberg. During the presentation Breyer had asked Zuckerberg to talk a bit about his background and his vision for the company, and Zuckerberg talked for only about two minutes. Since the founder’s presentation is usually the most compelling part of any pitch to VCs, this reticence was noteworthy and confusing.

  The Accel partners’ meeting quickly turned to a strategy—how could Efrusy get Thefacebook to take Accel’s money? Parker had told them that Thefacebook just about had a deal with the Post, and he roughly outlined the Post’s deal terms. They decided to get a deal proposal over there fast. Efrusy and Breyer had Accel’s lawyer draw terms up for an investment valuing the company at the same price as the Post had but putting in slightly more money. Efrusy got it to Thefacebook that evening. Late that night Efrusy got an email from Cohler saying thank you, we’re sticking with the Post. But separately, and unbeknownst to Parker and Cohler, Breyer that evening began an email dialogue directly with Zuckerberg. The VC suggested they try to get together again the following day, Tuesday.

  In reality, Parker was glad Accel was so interested. It enabled him to test the waters with the other venture firms that were still in the game. Maybe Thefacebook shouldn’t do the Post deal after all. The next morning he spoke with Tim Draper of Draper Fisher Jurvetson, who said he was willing to match Accel. Parker told Efrusy that when he called a few minutes later. Efrusy suggested he might go higher and threw out a few numbers. Parker is a good negotiator, shameless. And he was excited. “No way!” shouted Parker, he recalls. “There’s no way we’re considering that. We want one hundred pre!” Then he hung up on Efrusy. The boys, all listening in by speakerphone, giggled.

  Back at Accel, Efrusy was huddling with Jim Breyer, who wanted this deal as badly as Efrusy did. Breyer had come to see Thefacebook as something unique—a company with a kind of potential that he’d rarely felt before. They really wanted this deal to happen, and they were willing to pay to get it. But if Thefacebook wanted to go with the Post, maybe there was a way to get in on it. Breyer knew the Post’s Don Graham—they’d served on a company’s board together. He was sitting at lunch at his favorite restaurant, the Village Pub in Woodside, talking to one of Accel’s largest investors, when his assistant finally succeeded in connecting with Graham. Breyer excused himself and stepped outside.

  “Don, I understand you are talking to Thefacebook about an investment. They’ve also come and presented to us. We’d love to figure out a way to work with you, and split the investment 50–50,” said Breyer.

  “I don’t think I’m authorized to do that, Jim,” responded Graham. “These are the terms Mark asked for. I think we already have a deal.”

  “I know you have an offer on the table, but I don’t think you have a deal yet,” replied Breyer. “We would be happy to invest together with you if you chose to do that.”

  As he was leaving after lunch, Breyer made a 7 P.M. reservation at the same restaurant for dinner that night. After he got back to the office, he and his partners huddled and decided to take Accel’s bid considerably higher. Tuesday afternoon, Efrusy and Accel partners Theresia Ranzetta and Ping Li walked back down University Avenue and barged uninvited into Thefacebook’s office, where everybody was in the middle of a meeting. Efrusy just walked in and interrupted. “He slapped the term sheet down on the table. It showed an offer for $70 million pre, with a $10 million investment. That would make the postinvestment valuation for Thefacebook $80 million. “You’ve got to do this,” Efrusy implored. “We get this. We have full conviction about it. We will move heaven and earth to make this a successful company.” A slightly stunned Parker replied, “Okay, this is worth considering.” Before he left, Efrusy noticed that the office’s murals had seen some slight editing. On all the most strategic spots, someone had laid the tiniest pieces of masking tape.

  After Efrusy left, the young entrepreneurs looked at one another in jubilation. Eighty million? Amazing! “But what about the Post?” Zuckerberg asked. Nobody had a good answer, but they were being offered a deal that valued Thefacebook at $80 million!

  But it wasn’t a clear-cut decision. On one hand Graham was a believer in the company and would let Zuckerberg and Parker do what they wanted. Though nothing had been signed, Zuckerberg had come to an oral agreement with Graham for a deal at the lower valuation. If Accel invested it would be very intimately involved, which might mean less freedom. Its offices were only three blocks away. But it also might mean more Valley wisdom and connections. Parker had no attachment to doing a deal with the Post, and Matt Cohler, the most experienced of them all, felt strongly they should raise as much money as possible. The tide was shifting toward Accel. The VC firm’s term sheet explicitly provided for the possibility that the Post might invest alongside them, but there was little interest at Thefacebook in that, partly because it would have involved selling too much of the company.

  With a few calls Parker determined that neither Tim Draper nor any of the other remaining VCs were willing to follow Accel to this level. It was down to Accel and the Post.

  That night, Jim Breyer hosted a dinner for Thefacebook’s leaders at the elegant and expensive Village Pub near Breyer’s home in tony Woodside, north of Palo Alto. At the table were Zuckerberg, Parker, Cohler, and Efrusy. The Pub is known for its wine list, and Breyer, a wine connoisseur, ordered a $400 bottle of Quilceda Creek Cabernet. Zuckerberg, still only twenty and below drinking age, ordered a Sprite. The point of the dinner was in part for Efrusy and Breyer to get better acquainted with Zuckerberg, who had been mostly quiet in their meetings up until then.

  Breyer by now had made known his own Harvard connection—he’d gotten his MBA there. He was even on the board of trustees of the Harvard Business School.
Breyer was doing everything he could to loosen Zuckerberg up. There was some serious talk about strategy, and Breyer and Efrusy reiterated in the strongest terms how much they wanted to invest and work with Zuckerberg and his team. Breyer was starting to admire the young CEO’s clearheaded way of thinking about strategy and his absolute devotion to the quality and usefulness of Thefacebook’s product. Yet it was clear Zuckerberg remained uncomfortable about something. Then he started to tune out.

  People often think Mark Zuckerberg isn’t listening to them. He has a way of saying nothing and appearing uninterested. He does not offer the body language or nods or other conventional conversational signals that tell someone he’s listening. However, that usually doesn’t mean he isn’t listening. He’s just unemotive and quietly pensive. On the other hand, there are times when he really doesn’t listen. It happens when he’s either bored or very uncomfortable. On those occasions, he will repeatedly, at fairly random times in the conversation, simply mutter, “Yeah.” This distinction is only apparent to people who know him well. In the middle of the dinner at the Village Pub, Zuckerberg went into nonlistening mode. Matt Cohler noticed.

  Zuckerberg went to the bathroom and didn’t return for a surprisingly long time. Cohler got up to see if everything was okay. There, on the floor of the men’s room, sitting cross-legged with his head down, was Zuckerberg. And he was crying. “Through his tears he was saying, ‘This is wrong. I can’t do this. I gave my word!’” recollects Cohler. “He was just crying his eyes out, bawling. So I said, ‘Why don’t you just call Don up and ask him what he thinks?’” Zuckerberg took a while to compose himself and returned to the table.