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How Mark Zuckerberg Hacked the Valley


How Mark Zuckerberg Hacked the Valley

Photograph by Carlos Serrao

(Corrects graphic in third paragraph. Removes reference to timber in Alisher Usmanov’s businesses.)

In 2006, when he was 22, Mark Zuckerberg gave up writing computer code to focus on managing his rapidly growing startup. Like Jim Brown retiring from football at 29 or E.M. Forster abandoning the novel in his forties, the prodigy who programmed the very first version of Facebook was walking away from his transcendent talent. Or so it seemed. A few years later, Zuckerberg began setting annual tests of discipline for himself, vowing to wear a tie to work every day in 2009, learn Mandarin in 2010, and personally kill any animal he ate in 2011. Earlier this year, unbeknown to all but a few friends and co-workers, he gave himself a new challenge with unknown ramifications for what is soon to be Silicon Valley’s newest public company. Mark Zuckerberg pledged to return to his roots and spend time programming each day.

Zuckerberg’s true skill has always been a facility for hacking. That’s a foundational verb at Facebook, to hack. In its offering prospectus, Facebook repeatedly describes its corporate culture as “the hacker way”; on its new campus, a 57-acre office park abutting San Francisco Bay in Menlo Park, Calif., there’s a building with a big sign that reads “The Hacker Company.” Those slogans don’t mean Facebook is teaming up with Anonymous or breaking into NORAD. They’re talking about achieving a goal in an unconventional way.

Zuckerberg and his crew have made a series of high-risk moves—five hacks that have changed Silicon Valley forever—that were far more daring than wearing a hoodie to an IPO roadshow. Instead of allowing himself to be replaced by a more seasoned chief executive officer early on, Zuckerberg consolidated his authority with bylaws that gave him an incontestable voting majority on the company’s board. He preserved that power by rebuffing repeated acquisition offers. Instead of rushing to go public, Facebook delayed its offering well past the usual ripening date of other successful startups. Even conventional hacking—manipulation of computer code—is executed in an unusual way at Facebook.

Every Zuckerberg hack is in the service of an overarching vision: that technology and online authenticity can bring people together. And the easier it is for people to find one another, the more time they’ll spend online, sharing photos of their kids, their moods, what they read, who they date, and on and on with all the people they have met in their life (or, if they neglect their privacy settings, with the whole world). Neither Zuckerberg nor other Facebook executives would comment for this story because of the quiet period mandated by the Securities and Exchange Commission before going public. But just as Jobs evangelized for simple, elegant devices, and Gates extolled the productivity-enhancing power of software, Zuckerberg has long argued his case to an often skeptical audience. “I think Mark Zuckerberg is ‘The One,’ ” says Roger McNamee, a longtime Valley venture capitalist whose firm, Elevation Partners, is an investor in Facebook. “Like Bill Gates and Steve Jobs, he has set a tone that everyone else has lined up behind.”
 
 
Hack #1
Friend the enemy of your enemy, even if that means hooking up with Microsoft

On April 9, Facebook acquired the mobile-photography startup Instagram for $1 billion in cash and stock. The acquisition, an attempt by the social network to strengthen its presence on smartphones, was unusual for a number of reasons, among them that it occurred during a quiet period. It was also notable in that Zuckerberg conducted the negotiations himself with Kevin Systrom, co-founder of the rapidly growing San Francisco startup, before bringing the deal before the Facebook board.

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Systrom, a clever technologist who once worked at Google (GOOG), sensibly took the payout while joining forces with his most powerful competitor. Over the years, the founders of promising startups such as Flickr and Skype have done the same. During Facebook’s formative stages, Zuckerberg confronted a similar situation. Unlike Systrom, he refused to sell.

In 2006, Yahoo! (YHOO) was far more formidable than the wounded portal now churning through CEOs, and early that summer it tempted several Facebook executives and board members with a buyout proposal of the same amount: $1 billion. Zuckerberg had rejected an earlier acquisition offer from Viacom (VIAB), but he tentatively agreed to the Yahoo deal although he never gave his final approval, according to several people at both companies who recall the discussions. McNamee, the venture capitalist, remembers talking to Zuckerberg at the time and seeing the anguish on his face as he worried about contravening the wishes of several members of his board.

When Yahoo’s stock fell more than 20 percent after a disappointing earnings report on July 19, Zuckerberg’s decision became easier. Terry Semel, then Yahoo’s CEO, cut his offer to $850 million, according to executives on both sides of the deal, yet tried to entice Zuckerberg with a personal payout that remained the same as the earlier offer. Facebook rejected the deal and Zuckerberg celebrated his renewed independence by slapping high fives with colleagues, according to an account in The Facebook Effect by David Kirkpatrick.

Zuckerberg’s independent streak extended to forging alliances. In 2007, Google seemed like the friendlier alternative to Microsoft (MSFT), the belligerent but waning software giant from the north. At the time, Facebook was enjoying exponential user growth but had yet to develop its advertising system and needed a way to fund its expanding infrastructure and payroll. Facebook had an earlier partnership that allowed Microsoft to sell banner ads on the social network in the U.S., and now Zuckerberg needed to extend that capability to the rest of the world. Both Microsoft and Google were competing for the deal while fighting for the right to make an investment in the promising startup.

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Facebook played Google and Microsoft against each other, driving up the value of both the ad deal and the equity investment. Zuckerberg went with Microsoft. According to people who worked with him at the time, Zuckerberg correctly assumed that Google would come to recognize the importance of social networking and that forming an alliance with his neighbor could set up a conflict. After heated discussions between Microsoft CEO Steve Ballmer and Zuckerberg that fall, during which Ballmer offered to buy Facebook outright, according to multiple people involved in the matter who were not authorized to speak publicly, Microsoft agreed to invest $240 million in Facebook at the then-astounding valuation of $15 billion. The highest amount Ballmer could invest without seeking clearance from his board? $240 million.
 
 
Hack #2
Find low-maintenance overseas investors instead of know-it-all Americans

Over the next few years, Facebook’s growth required even more money. Usually at this stage a startup visits one of the many venture capital firms along Sand Hill Road. But venture capital comes with strings attached. The new investors want a seat on the board, a say in decision-making, and the ability to be the first in line to sell their shares in an IPO or other “liquidity events.” Zuckerberg was uninterested in sharing decision-making and instructed his moneymen that he would not offer board seats to new investors.

During the housing crisis that gathered in 2007, when U.S. investment firms were retrenching, Facebook looked overseas and raised money from Hong Kong industrialist Li Ka-shing and German Internet entrepreneurs the Samwer Brothers. Those investors wanted a piece of the action but, unlike their U.S. counterparts, didn’t care about having a hand on the wheel. “Control is incredibly important to Mark, and not because he runs things like a dictator,” says Mike Murphy, a former vice president of global sales. “Control for him is more about his belief that in the long run, his perspective on the company and what he hopes it can become would be something that very few people could understand.”

Facebook’s unorthodox fundraising strategy reached its apotheosis when the company turned down investment offers from General Atlantic and Technology Crossover Ventures, two established U.S. private equity firms that valued the social network at more than $5 billion. (Gloom from the recession had depressed Facebook’s valuation from the earlier $15 billion established by the Microsoft deal.) Instead, Zuckerberg and his team brokered a deal with Digital Sky Technologies, a barely known Russian firm whose primary backer was Alisher Usmanov , a Russian industrialist who made his fortune in heavy metals. DST invested $200 million for a 2 percent stake, valuing Facebook at $10 billion.

DST was also willing to do something else: purchase shares from employees and investors. Former Facebook employees and early investors were already beginning to trade shares without the company’s authorization on private secondary exchanges such as SecondMarket. With new buyers acquiring shares this way, Facebook was in danger of prematurely crossing the 500 shareholder limit at which the federal government would require it to stage an IPO. Executives were also concerned that the ability to sell Facebook shares on secondary markets might persuade impatient employees to leave the company so they could have the freedom to unload their shares. (Selling on secondary markets became a firing offense at Facebook, and at least one employee was terminated for violating the policy.) Allowing DST to buy one huge chunk of employee equity was an orderly, controlled way to bring in new capital while satisfying the urges of employees to cash out at least some of their holdings.

There was one potential snag with bringing in DST: Some of Facebook’s advisers and executives had reservations about Usmanov, who had amassed great wealth during Russia’s messy transition to capitalism. Zuckerberg dismissed those worries, privately calling them “xenophobic,” and approved the deal. Next, instead of downplaying its new investor, Facebook proudly brought DST’s principals to D7, an Internet conference held that July in Carlsbad, Calif. DST and its founder, Yuri Milner, charmed the techies and would go on to become one of the most prolific investors in the industry, backing Twitter, Zynga (ZNGA), Groupon (GRPN), and the music service Spotify, among others. In one stroke, Zuckerberg raised money, pleased employees, further delayed a distracting IPO, and introduced a vast new source of capital to Silicon Valley.Click for moreClick for more
 
 
Hack #3
Hire a deputy who completes you

Several of Facebook’s early financial backers wanted to bring in a babysitter to watch over Zuckerberg. After the company raised its first significant outside capital in 2005, more than $12 million from Accel Partners, the investors began introducing him to a long line of experienced managers. Ellen Siminoff, a former Yahoo executive, Bud Colligan, a veteran of Apple (AAPL) and now a partner at Accel, and Jeff Jordan, an EBay (EBAY) executive who would later go on to run OpenTable (OPEN), were among the candidates who visited Facebook’s first offices on Emerson Street in Palo Alto to discuss senior executive positions, according to several people who were there at the time. Zuckerberg didn’t hire any of them and instead promoted one of his deputies, Owen Van Natta, then in his late thirties, to chief operating officer. (Van Natta later quit.)

Those rounds of discussions have never been disclosed, and it is unclear why Zuckerberg was reluctant at first to hire a more seasoned second-in-command. A year later, in a March 2007 speech at Stanford University to members of the Y Combinator startup program, he offered a clue. “If you want to found a successful company, you should only hire young people with technical expertise,” he said. “Young people just have simpler lives. Simplicity in life allows you to focus on what’s important.” Imagine him saying that as the head of a public company.

Zuckerberg sought to build a youthful company that could understand and embrace future technological waves as well as bypass generational resistance over sharing and privacy. He believed that Internet users would eventually be less guarded in the way they used the new social services that were popping up online—and he resisted putting any old-fashioned voices on his own management team.

He would eventually find a simpatico outsider with management chops: Sheryl Sandberg, the former Google executive he personally recruited and hired as chief operating officer in 2008. She focuses on the ad business and operational requirements, while he concentrates on the engineering side and opportunities for the future.

The partnership has created yet another aspect of Zuckerberg’s legacy that other Silicon Valley entrepreneurs now try to emulate. Founders once sought professional executives, such as John Sculley at Apple or Meg Whitman at EBay, to take over a business when it got too big to handle. Now they try to find proven executives, such as Sandberg, who are comfortable supporting their vision. Not that it’s easy to do. “Good luck if you can find someone else like that,” Zuckerberg told Bloomberg Businessweek in 2011.
 
 
Hack #4
Know what your users want better than they do

In September 2006, when Facebook introduced the News Feed, the list of activity seen by each member on his or her Facebook home page, 700,000 users out of 9 million joined a group to protest the change. In a blog post, Zuckerberg apologized for the way the company communicated the feature, but didn’t back down. He wasn’t interested in what his users were saying; with Jobsian audacity, Zuckerberg believed—accurately, in this case—that he knew what his users wanted better than they did. “When we launched the status update, the reaction from the outside world was, ‘Why would anyone want to share some small snippet of what they are doing right now?’ Well, no one is asking that anymore,” he said in a 2009 interview. “We think the world is moving to more sharing and more connections.”

The next year was humbling for Facebook. While basic features such as photo sharing, friending, and establishing a profile page continued to attract new members, the company’s own applications, meant to give users new things to do on the site, kept bombing. A blogging feature, Notes, went nowhere, as did Facebook Gifts and a classified advertising section called Marketplace.

Zuckerberg decided to harness the creative energies of the crowd and created the Facebook platform in May 2007, inviting developers to write their own applications that could run on the social network. The move was straight from the playbook used by IBM (IBM), Intel (INTC), and Microsoft when they introduced layers of technology on which other companies could build. Facebook’s platform spawned a flurry of invention—Zynga, the social game maker, came into being around this time—and allowed the company to focus on what it was good at: making the social network available and appealing to even more people. It asked its users to collaborate in translating its pages into foreign languages, an approach pioneered in 2001 by the online encyclopedia Wikipedia. It also introduced another important new feature, “people you may know,” which algorithmically suggested new social connections to users. Across the Facebook universe, members started discovering new classmates and old flames. That year the social network doubled in size, to nearly 200 million members.

Following the lead of early Internet sharing services such as Delicious.com, Zuckerberg then created a button that would allow users to signal an endorsement on Facebook, and eventually on other websites, of a video, picture, article, or even a brand. Other engineers wanted to call it the “awesome” button. Zuckerberg decided to name it the “like” button. “It sounded bland and generic,” said Justin Rosenstein, an early Facebook engineer who went on to found Asana, an online collaboration tool, with Facebook co-founder Dustin Moskovitz. “I feel foolish in hindsight to have missed the genius: Facebook has managed to take concepts as basic as ‘friend,’ ‘event,’ and ‘like’ and co-opt them.”

The company had seen how other closed and self-contained Internet services in the past, such as AOL (AOL), had withered. To avoid that fate, Zuckerberg had other ideas about extending Facebook’s reach across the Web. One was to allow members to use their Facebook user name and password to log onto other websites and then to experience personalized versions of those sites populated with the activity of their friends. When that idea was first expressed as an advertising service called Beacon, users rebelled. Zuckerberg wrote a personal apology (again) but continued to tinker with the idea, adding ways for reluctant users to block access. Facebook Connect, a variation on the same theme, was introduced a year later. “I remember congratulating him on his courage,” says Vinod Khosla, a Sun Microsystems co-founder and founder of Khosla Ventures, a venture capital firm. “Other people may have been afraid, like ‘Will people steal my users and build their businesses?’ ”
 
 
Hack #5
Be a hacker CEO

Sandberg is the chief architect of Facebook’s advertising business, which tries to make ads more meaningful by pairing them with the endorsement of a user’s friends. The company’s expected to bring in more than $5 billion in revenue this year. Sandberg will also have her hands full steering the company through the pressures of being public. On May 18, Facebook could be worth more than $100 billion—many times the buyout offers proffered by Viacom and Yahoo so many years ago, and more than the market capitalizations of Walt Disney (DIS) and McDonald’s (MCD). (Zuckerberg could be worth more than $20 billion after the IPO.) Google was worth only a quarter of that when it went public, which allowed the search firm to reward investors with share price growth for years. That will be much harder for Facebook, which will have to quiet skeptics who think the market is being absurdly optimistic about the prospects of a company that makes money with small display ads that many users don’t look at. “There’s a maybe 10 or 15 percent chance you’ll look back and say ‘that was a good deal,’ ” Bob Rice, managing partner of institutional investing firm Tangent Capital Partners, says of the IPO.

One area Facebook will have to prove itself in is mobile. Earlier this month, it amended its public filings with the SEC to disclose that it doesn’t collect any meaningful revenue from smartphones and tablets, and its failure to do so is dampening per-user revenue. Mobile has flummoxed the company for years. In 2008, Jobs asked Facebook to present its iPhone app at Apple’s Worldwide Developers Conference. Instead of taking advantage of the opportunity himself, Zuckerberg sent a Facebook engineer and a marketing manager to handle it. They did such a poor job in auditions attended by Jobs and other Apple executives that Apple pulled them from the presentation, according to the person, who declined to be named for fear of alienating both companies.

Even now, relations between the two companies are tense. Last year, Apple integrated Twitter functions into its iPhone software, a move that seemed to deliberately exclude Facebook. (Apple declined to comment.) One person close to Facebook partly attributes the company’s mobile fumblings to Zuckerberg’s long affection for the BlackBerry (RIMM), which he traded in for an iPhone in 2010.

A newly public Facebook will also have to contend with heightened scrutiny from the Federal Trade Commission. Zuckerberg’s strategy on user privacy has always been to push the limits, weather the backlash, pull back slightly, and then do it all over again. Last year, Facebook agreed to 20 years of FTC privacy audits stemming from the government’s investigation into how it revamped users’ privacy controls at the end of 2009. Facebook has beefed up its staff in Washington to improve its relations with the government. Joel Kaplan, a deputy chief of staff for President George W. Bush, runs the office, and Joe Lockhart, a press secretary for President Bill Clinton, is the company’s vice president for communications.

Facebook, like Twitter, tries to leverage an obvious advantage in dealing with Washington: politicians’ own dependency on the social network to connect with constituents. “The thing that has kept regulators at bay, and which was part of the original strategy, was to introduce elected officials and other political figures to the power of Facebook as a social and electoral platform,” says Chris Kelly, the company’s former chief privacy officer and general counsel who helped establish its Washington presence before leaving in 2009. Last spring, President Barack Obama perched on a stool next to Zuckerberg and hosted a town hall meeting from Facebook’s headquarters. A video of the talk plays regularly on the large flat-screen TV in the main lobby of Facebook’s new campus.

Zuckerberg’s greatest challenge may simply be retaining the talented engineers who got him this far. Over the years, many have flocked to Facebook, attracted by the technical challenges. Each day, for example, the company adds 300 million photos, a total greater than all other photo-sharing sites combined. Facebook had to invent new database and analytics tools to handle such volumes of data and mine it for insights about its users—problems that captivated its ambitious geeks. Products with names such as Cassandra, Hive, and Thrift emerged from “hackathons”—marathon coding sessions—and Facebook then turned around and charitably shared elements of the technology with the public. It was right-brain heaven.

More recently, though, some of that enthusiasm appears to have subsided. Key engineers have left, among them co-founder Moskovitz, Zuckerberg’s Harvard University roommate (who decided to create his own software startup), and Adam D’Angelo, a computer science wunderkind who bailed out to start Quora (an online question-and-answer service). Zuckerberg is determined not to get absorbed with projects like self-driving cars, as Google has, but as a result some of Facebook’s finest engineers got bored.

“We had solved a lot of the hard problems,” says Jeff Hammerbacher, one of the first data scientists at Facebook, who left in 2008 to start Cloudera, which makes data analytics software. “I kind of knew what it would look like in five years, and the mission was primarily going to be around efficiency and operations and not new stuff.” Hammerbacher calls Facebook’s high-octane engineers “autonomous hackers.” As the phrase suggests, once the IPO furnishes them with unimaginable wealth, these freethinking techies may no longer find the company a terribly rewarding place to work.

Zuckerberg will need a new hack for that. That’s one of the reasons he’s back to coding every day. Colleagues say he wants to immerse himself in the daily lives of his underlings. If he’s going to keep inventing new ways to keep users coming back, figure out mobile, please Washington, navigate future privacy outrages, and fight off Google, he needs to keep Facebook’s core talent motivated. Not even Zuck can program the future all by himself.

With Ashlee Vance, Adam Satariano, and Dina Bass
Stone_190
Stone is a senior writer for Bloomberg Businessweek in San Francisco. He is the author of The Everything Store: Jeff Bezos and the Age of Amazon (Little, Brown; October 2013). Follow him on Twitter @BradStone.
MacMillan is a reporter for Bloomberg News and Bloomberg Businessweek in San Francisco.

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