{"id":135,"date":"2018-06-14T19:04:37","date_gmt":"2018-06-14T19:04:37","guid":{"rendered":"https:\/\/pressbooks.ccconline.org\/bus3060\/chapter\/ch08\/"},"modified":"2026-02-17T18:44:21","modified_gmt":"2026-02-17T18:44:21","slug":"ch08","status":"publish","type":"chapter","link":"https:\/\/pressbooks.ccconline.org\/bus3060\/chapter\/ch08\/","title":{"raw":"8.1 Introduction","rendered":"8.1 Introduction"},"content":{"raw":"
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Learning Objectives<\/span><\/p>\r\n\r\n<\/header>\r\n

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After studying this section you should be able to do the following:<\/p>\r\n\r\n

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  1. Be familiar with Facebook\u2019s origins and rapid rise.<\/li>\r\n \t
  2. Understand how Facebook\u2019s rapid rise has impacted the firm\u2019s ability to raise venture funding and its founder\u2019s ability to maintain a controlling interest in the firm.<\/li>\r\n<\/ol>\r\n<\/div>\r\n<\/div>\r\n \r\n\r\n<\/div>\r\n

    Here\u2019s how much of a Web 2.0 guy Mark Zuckerberg is: during the weeks he spent working on Facebook as a Harvard sophomore, he didn\u2019t have time to study for a course he was taking, \u201cArt in the Time of Augustus,\u201d so he built a Web site containing all of the artwork in class and pinged his classmates to contribute to a communal study guide. Within hours, the wisdom of crowds produced a sort of custom CliffsNotes for the course, and after reviewing the Web-based crib sheet, he aced the test. Turns out he didn\u2019t need to take that exam, anyway. Zuck (that\u2019s what the cool kids call him)1<\/sup> dropped out of Harvard later that year.<\/p>\r\n

    Zuckerberg is known as both a shy, geeky, introvert who eschews parties, and as a brash Silicon Valley bad boy. After Facebook\u2019s incorporation, Zuckerberg\u2019s job description was listed as \u201cFounder, Master and Commander [and] Enemy of the State\u201d (McGinn, 2004). An early business card read \u201cI\u2019m CEO\u2026Bitch\u201d (Hoffman, 2008). And let\u2019s not forget that Facebook came out of drunken experiments in his dorm room, one of which was a system for comparing classmates to farm animals (Zuckerberg, threatened with expulsion, later apologized). For one meeting with Sequoia Capital, the venerable Menlo Park venture capital firm that backed Google and YouTube, Zuckerberg showed up in his pajamas (Hoffman, 2008).<\/p>\r\n

    By the age of twenty-three, Mark Zuckerberg had graced the cover of Newsweek<\/em>, been profiled on 60 Minutes<\/em>, and was discussed in the tech world with a reverence previously reserved only for Steve Jobs and the Google guys, Sergey Brin and Larry Page. But Mark Zuckerberg\u2019s star rose much faster than any of his predecessors. Just two weeks after Facebook launched, the firm had four thousand users. Ten months later it was up to one million. The growth continued, and the business world took notice. In 2006, Viacom (parent of MTV) saw that its core demographic was spending a ton of time on Facebook and offered to buy the firm for three quarters of a billion dollars. Zuckerberg passed (Rosenbush, 2006). Yahoo! offered up a cool billion (twice). Zuck passed again, both times.<\/p>\r\n

    As growth skyrocketed, Facebook built on its stranglehold of the college market (over 85 percent of four-year college students are Facebook members), opening up first to high schoolers, then to everyone. Web hipsters started selling shirts emblazoned with \u201cI Facebooked your Mom!\u201d Even Microsoft wanted some of Facebook\u2019s magic. In 2006, the firm temporarily locked up the right to broker all banner ad sales that run on the U.S. version of Facebook, guaranteeing Zuckerberg\u2019s firm $100 million a year through 2011. In 2007, Microsoft came back, buying 1.6 percent of the firm for $240 million2<\/sup>.<\/p>\r\n

    The investment was a shocker. Do the math and a 1.6 percent stake for $240 million values Facebook at $15 billion (more on that later). That meant that a firm that at the time had only five hundred employees, $150 million in revenues, and was helmed by a twenty-three-year-old college dropout in his first \u201creal job,\u201d was more valuable than General Motors. Rupert Murdoch, whose News Corporation owns rival MySpace, engaged in a little trash talk, referring to Facebook as \u201cthe flavor of the month\u201d (Morrissey, 2008).<\/p>\r\n

    Watch your back, Rupert. Or on second thought, watch Zuckerberg\u2019s. By spring 2009, Facebook had more than twice MySpace\u2019s monthly unique visitors worldwide (Schonfeld, 2009); by June, Facebook surpassed MySpace in the United States3<\/sup>; by July, Facebook was cash-flow positive<\/a><\/span>; and by February 2010 (when Facebook turned six), the firm had over four hundred million users, more than doubling in size in less than a year (Gage, 2009). Murdoch, the media titan who stood atop an empire that includes the Wall Street Journal<\/em> and Fox, had been outmaneuvered by \u201cthe kid.\u201d<\/p>\r\n\r\n

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    Why Study Facebook?<\/h2>\r\n

    Looking at the \u201cflavor of the month\u201d and trying to distinguish the reality from the hype is a critical managerial skill. In Facebook\u2019s case, there are a lot of folks with a vested interest in figuring out where the firm is headed. If you want to work there, are you signing on to a firm where your stock options<\/em> and 401k<\/em> contributions are going to be worth something or worthless? If you\u2019re an investor and Facebook goes public<\/a><\/span>, should you short<\/a><\/span> the firm or increase your holdings? Would you invest in or avoid firms that rely on Facebook\u2019s business? Should your firm rush to partner with the firm? Would you extend the firm credit? Offer it better terms to secure its growing business, or worse terms because you think it\u2019s a risky bet? Is this firm the next Google (underestimated at first, and now wildly profitable and influential), the next GeoCities (Yahoo! paid $3 billion for it\u2014no one goes to the site today), or the next Skype (deeply impactful with over half a billion accounts worldwide, but not much of a profit generator)? The jury is still out on all this, but let\u2019s look at the fundamentals with an eye to applying what we\u2019ve learned. No one has a crystal ball, but we do have some key concepts that can guide our analysis. There are a lot of broadly applicable managerial lessons that can be gleaned by examining Facebook\u2019s successes and missteps. Studying the firm provides a context for examining nework effects, platforms, partnerships, issues in the rollout of new technologies, privacy, ad models, and more.<\/p>\r\n\r\n

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    Zuckerberg Rules!<\/h4>\r\n

    Many entrepreneurs accept start-up capital from venture capitalists (VCs)<\/a><\/span>, investor groups that provide funding in exchange for a stake in the firm, and often, a degree of managerial control (usually in the form of a voting seat or seats on the firm\u2019s board of directors<\/a><\/span>). Typically, the earlier a firm accepts VC money, the more control these investors can exert (earlier investments are riskier, so VCs can demand more favorable terms). VCs usually have deep entrepreneurial experience and a wealth of contacts, and can often offer important guidance and advice, but strong investor groups can oust a firm\u2019s founder and other executives if they\u2019re dissatisfied with the firm\u2019s performance.<\/p>\r\n

    At Facebook, however, Zuckerberg owns an estimated 20 percent to 30 percent of the company, and controls three of five seats on the firm\u2019s board of directors. That means that he\u2019s virtually guaranteed to remain in control of the firm, regardless of what investors say. Maintaining this kind of control is unusual in a start-up, and his influence is a testament to the speed with which Facebook expanded. By the time Zuckerberg reached out to VCs, his firm was so hot that he could call the shots, giving up surprisingly little in exchange for their money.<\/p>\r\n\r\n<\/div>\r\n \r\n\r\n<\/div>\r\n

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    Key Takeaways<\/span><\/p>\r\n\r\n<\/header>\r\n

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