How They Started Page 10

Reid set himself the challenge of getting a million people to register for the site. LinkedIn’s premise—that people could search for other members and share information—meant the site had to have enough people signed up in order for it to be valuable. Right from the start, Reid planned to grow LinkedIn organically by word of mouth—it seemed the most cost-effective and efficient way to attract members. The speed of uptake would also help to demonstrate the site’s value to potential investors.

  The founders planned to look for a first round of funding to support the business’s growth plans once they had recruited a sizeable number of members. The LinkedIn founders began by inviting 350 of their most important, well-connected and trusted contacts to join, encouraging them to get their friends and contacts to join, too.

  This worked well. At the end of its first month in operation, LinkedIn had a total of 4,500 members in the network, and the business (using more of Reid’s money) set up offices in Mountain View, California, not far from Google’s company headquarters. Reid also recruited new staff members to work on the technical side, bringing the total number of employees to 13.

  The site wanted to emphasize the strength of the connections between members, so it dissuaded members from adding people to their network randomly. Instead, LinkedIn encouraged members to connect with colleagues, clients and people they had worked with in the past. Connections were therefore based on the trust and experience of those individuals. Reid believed that this increased the value of people’s networks by focusing on existing connections in the real world, as opposed to the random connections that are common in some social networks.

  On the up

  Member numbers were increasing, and timing now seemed to be on LinkedIn’s side. When it launched, there were no similar businesses in operation, enabling LinkedIn to develop its concept of online professional networking without worrying about competitors. It didn’t take long, however, for other professional networks to spring up, including Tribe and Friendster. With a growing interest in the sector, it was not surprising that investor appetite was waking up to the potential of social networking sites, particularly since the US economy was showing signs of a recovery. In December 2003, the stock markets were up for the first time since the Internet bubble had burst back in early 2000.

  The current LinkedIn homepage.

  LinkedIn was now ready to seek venture capital funds. Reid recalls how he was besieged by at least a dozen unsolicited visits from venture capitalists. At the end of October 2003, he signed a deal for $4.7 million from Sequoia Capital, a leading venture capital firm whose support he’d targeted in the first place. By this time, the site was doubling in size every six weeks and had gained users in more than 80 countries and 120 industries. Several months later, Reid says, he was still hearing from venture capitalists he’d never met, begging to be allowed to buy a piece of his company even though they’d heard about it second or third-hand.

  Although it was common for online businesses to use advertising as their main revenue stream, LinkedIn was determined to be different, having learned lessons from the dot-com fallout. In 2005, two years after launch, LinkedIn introduced two income streams: paid job listings and a subscription-based service, which offered users an enhanced search service allowing them to connect to people they didn’t already know.

  Reid decided that advertising, while not part of the original business plan, would become the site’s third revenue stream, as it had built up a demographic base that appealed strongly to advertisers. The self-selecting nature of LinkedIn’s membership (it targeted successful and ambitious professionals) would provide an opportunity for certain brands to reach their target audience in an efficient way. Just a year later LinkedIn turned a profit, the majority of the income coming from its premium services, such as job listings.

  LinkedIn became one of the few companies that thrived in the recession that hit during the late 2000s, benefiting from the increased number of people on the hunt for jobs. In March 2008, the site saw its traffic double to just under seven million users, up from 3.3 million a year earlier. Furthermore, the site continued to develop features to increase the value of its services for users.

  In September 2008, LinkedIn struck a partnership with financial news channel CNBC, enabling users to share and discuss news with their professional contacts. Community-generated content such as surveys and polls from LinkedIn are broadcast on CNBC, and in return the broadcaster provides the site with its programming, articles and blogs. The networking site sealed similar partnerships with other media owners, including The New York Times. Then in 2008, original investor Sequoia Capital, together with Greylock Partners and other venture capital firms, acquired a 5 percent stake in the company for $53 million, giving the company a valuation of nearly $1 billion, a remarkable achievement for a business that was just 5 years old.

  Where are they now?

  In 2010 the company’s value rose to new levels, with hedge fund Tiger Global Management purchasing a 1 percent stake for $20 million, doubling LinkedIn’s estimated value to $2 billion.

  Now LinkedIn can count itself as one of the largest presences on the Web, with more than 135 million members across 200 countries and territories. In June 2011 the number of unique visitors to the site reached 33.9 million, up 63 percent from the previous year and surpassing that of early social media giant MySpace for the first time. The company went public in May that year and saw its share price more than double in just a few months, making it the most successful tech IPO of the year. But for founder Reid, who is often dubbed “the most connected man in Silicon Valley,” LinkedIn’s success to date may only be the beginning.

  Match.com

  Love online

  Founder: Gary Kremen

  Age of founder: 30

  Background: MBA, founder of Full Source Software and Los Altos Technologies

  Founded in: 1993

  Headquarters: Dallas, Texas (originally San Francisco, California)

  Business type: Online dating

  Some say that the best business ideas come from trying to solve a problem that you understand. That’s certainly a view shared by Gary Kremen, founder and ex-CEO of Match.com, the world’s first major dating site and one that set the standard for much of the Web as it developed.

  “I actually started Match.com trying to find love for myself,” Gary admits. “I had this idea that if I could put all the women in the world on a database, and I could sort it, then I’d just marry number one.”

  It is not every day, of course, that a yearning for companionship gives rise to a multi-billion dollar global industry, but Gary is not an everyday person. Already a successful digital entrepreneur before he started Match.com, Gary’s tale is one of sharp business acumen combined with an understanding of what makes people tick.

  Early forays

  Gary was born in Skokie, Illinois, in 1963 to two teachers. From an early age it was clear that he had a formidable intellect. As a child he spent hours looking through his telescope and was one of the first among his peers to purchase a home computer (when he was just 12 years old). However, early disciplinary problems at school held him back. He describes himself as a “behaviorally challenged student” and was frequently in trouble for minor vandalism and computer hacking.

  Despite not having the best grades, Gary used his entrepreneurial instinct to “pitch” his qualities to Northwestern University, a strategy that worked. Graduating with a combined major in business and computer science in 1985, Gary worked as an engineer at the Aerospace Corporation for two years. It was while working here that he was first introduced to ARPANET, the Department of Defense’s early precursor to the World Wide Web. Although it was a secure job, it was dull, and Gary’s mind soon drifted to grander things. After taking night classes in accounting, he decided the time was right to go to Silicon Valley to earn his millions in the technology industry, and he turned down a prestigious scholarship at the University of Chicago to seek an MBA in California at Stanford Graduate Sc
hool of Business.

  At Stanford, Gary was part of a gifted generation of digital entrepreneurs, with classmates going on to become driving forces in household-name companies such as Microsoft and Sun Microsystems. After graduating, he found a job in a biotechnology company—nothing too exciting, but the company’s CEO allowed him to sit in on board meetings, something Gary says gave him the confidence to start his own venture.

  When the time came for Gary to start his own business, there was one area in which he boasted almost unparalleled expertise—the online world. “I was a nerd, okay!” says Gary. “I was online as early as 1985. How many people can say that?”

  This proficiency, combined with the skills he learned while completing his degrees, gave him an advantage over the many would-be digital entrepreneurs in Silicon Valley in the early 1990s.

  Gary’s first venture was Full Source Software, co-founded in 1991 with partner Ben Dubin. Full Source would download software from Usenet (an early Internet community that preceded today’s commercial Internet), putting it onto physical media for sale in bulk to large companies. The company was a moderate success, eventually making up to $2,000 a day, but it gave Gary an early glimpse of the enormous commercial potential the World Wide Web had to offer.

  A female genesis

  In 1989, Gary co-founded his second venture, Los Altos Technologies (LAT), a company that cleaned sensitive data off hard drives for the military and other businesses. (The company was sold to an employee in late 1992 and is still going strong.) While working at LAT, Gary noticed something important: large purchasers were beginning to use systems like IBM’s Lotus Notes, enabling administrative staff to send electronic purchase orders without the help of IT staff. It may sound insignificant now, but Gary saw what it meant: an increasing number of women were using these tools to go online for the first time.

  “It was the first time I noticed women using the Internet,” Gary explains. He was an avid user of what were known as “900 number” services: telephone-based dating agencies that enabled people to meet potential partners in exchange for a fee. He realized that the crux of these services’ success was their network of users, and he saw similar potential in the small but growing presence of women online. “It got me thinking, ‘I wonder if I could do what they do—and charge access to these women?’” he says.

  “I was a nerd, okay!” says Gary. “I was online as early as 1985. How many people can say that?”

  The relatively tiny female population online at the time (around 10 percent of users) did little to faze Gary—in fact, it encouraged him. “Because there were so few women, I realized that this was the key,” he says. “If you control the few women, you can charge a lot of money to the men.”

  Gary saw the huge revenues that print media made from classified advertising—and from dating ads in particular. At the time, papers such as the Los Angeles Times and Chicago Tribune made 10 percent of their total earnings from personal dating services and 40 percent overall from classifieds. But he also saw that the industry was slow to react to change and had some key flaws, such as slow turnaround time, lack of anonymity and potential for embarrassment. These were all problems that could potentially be solved by a secure, anonymous and instant online classifieds business. Out of these insights came the idea that would change Gary’s life and set him on the path to becoming one of Silicon Valley’s best-known entrepreneurs.

  First steps

  In 1993 Gary set out to realize his vision and founded Electric Classifieds, Inc. (ECI), under which Match.com was developed. The original name of the company was a reflection of the wider vision Gary had for the business: ECI was to be a billion-dollar online classifieds empire with dating being a headline-grabbing way of getting people to look at the Internet in a new way.

  Gary took out a $2,500 advance on his credit card to pay for the domain name Match.com, as well as a host of others, including Autos.com, Housing.com, Jobs.com, and (famously) Sex.com. The bill racked up higher as he bought a $10,000 SUN workstation to host the site and hired Kevin Kunzelmann as his first employee, finding him on Usenet. Early on, Gary was also assisted by experienced software engineer Peng Tsin Ong, who helped with the construction of the site, provided 10 percent of the initial startup funding and acted as Gary’s brainstorming partner. Gary also hired Scott Fraize, a software developer.

  ECI started operating out of a small room located in the San Francisco neighborhood known as the “Panhandle.” Gary recalls it as a “horrible” place: “I was the starving entrepreneur, living on two meals a day,” he recalls. “But it was really exciting having this small team working out of a little room, watching the business grow so fast—now it’s a cliché, but back then it was so powerful.”

  At this point, Match.com was barely more than a proof of concept; the site would not be built until 1994. Users would send a picture and personal details to ECI’s email address, which would then send profiles of other local users in reply (in exchange for a fee). Despite this rather clunky system, the enormous potential of online dating was soon becoming apparent, with the company seeing explosive growth almost from launch.

  “It was insanely fast,” Gary recalls. “We were growing 2–3 percent a day just from new sign-ups and traffic was growing even faster than that.” What made this growth even more impressive was that initially there was no money set aside for advertising, with the nascent service relying on word of mouth.

  “I was the starving entrepreneur, living on two meals a day,” he recalls. “But it was really exciting having this small team working out of a little room, watching the business grow so fast—now it’s a cliché but back then it was so powerful.”

  It wasn’t long before this growth attracted the attention of angel investors such as serial Silicon Valley entrepreneur Ron Posner, and just a few months after launch Electric Classifieds had raised $200,000 in funding, giving the project a much-needed cash injection after Gary maxed out his credit card.

  Selling the concept

  Although online personals were an attractive concept for consumers and investors alike, the problem remained of marketing the business to the wider world, and early on, ECI made a bold decision: to focus the marketing entirely on women who were already online. In the mid-1990s, as the Internet was growing in popularity, women made up a large proportion of chat room users, through the likes of AOL and Compuserve.

  “I had the vision that one well-connected woman could get 50 other women—who could get 5,000 guys,” Gary explains. The company began to target the small proportion of women who were already online, advertising on female-focused chat sites such as Compuserve’s Women’s Wire. The marketing emphasized the safety and anonymity of the Match.com model; online security was still a concern for many women and ECI promised a risk-free service where phone numbers and home addresses were not needed. Initially, Match.com was a free service, but ECI began charging users a monthly fee shortly before the site was finished.

  An early version of Match.com.

  Early on, ECI made a bold decision: to focus the marketing entirely on women who were already online.

  Later on, the company widened its reach and began a multifaceted campaign through traditional print and television media, targeting the 25 million Americans who already used dating services but did not have a compelling enough reason to go online.

  Growth, growth, and more growth

  It was not long before the company’s continued growth attracted the attention of more outside investors, and in 1994 Electric Classifieds received its second round of funding from venture capitalists, raising $1.7 million led by Silicon Valley venture capital firm Canaan Partners.

  “It was pretty easy to raise funding because it was pretty novel—there was some skepticism at first, but once we became the market for new relationships, that disappeared.” Gary says.

  In 1995, just after the first round of venture capital, the early pace of expansion forced Gary to buy one of the largest servers offered by Sun Microsystems, costi
ng $300,000. The problem was, the venture capital money had already been tied up in other parts of the expansion, leaving the company with no money to pay for the server.

  “I told the sales guy that it was great, the machine looked good, but we had one problem—I had no money to pay for it!” he says. “He told me I was going to put him out of business—so I gave him my new venture guy’s home phone number and told him to call him up and get the money from him. I made it his problem!” Needless to say, Gary recalls that particular venture capitalist being less than impressed. Despite these early hurdles, the Match.com website finally went live in April 1995, marking the birth of the site as we know it today.

  Gary shows how Match.com sorts ads according to the user’s location and preferences.

  The combination of Electric Classified’s innovative business plan and its huge growth soon proved irresistible to the mass media and Match.com was catapulted out of obscurity to become the darling of the business world. It was the subject of articles in Wired and Forbes, with Gary being named #36 on a list of the 100 most influential people on the Internet. His quirky persona as CEO also proved appealing, with a notable example being an early television interview in 1995 in which he proclaimed that Match.com would “bring more love to the planet than anything since Jesus Christ.”

  Electric Classifieds also saw Match.com’s appeal spread to some unexpected sectors. The site quickly proved popular among older women, for example. Gary had thought that this group would be the most resistant to an online dating service, but their troubles finding men in real life led them to embrace the connectivity and global appeal that Match.com offered.

  Investor troubles

  Despite this success, troubles were beginning to grow between Gary and his investors. The board had doubts about Gary’s ability as CEO, aggravated by what he admits was his early immaturity. A major flashpoint developed when investors found out that Match.com was beginning to target the gay and lesbian sector. Gary saw this group as a loyal market that deserved to be served—but certain investors perceived it differently. “They went ballistic,” says Gary. “We had some towering arguments about it.”