Yahoo- 1994-March 2000

Welcome to today’s episode called Yahoo- 1994–March 2000, and look regular listeners will know that I have a special grá as we’d say in Ireland, or a love for the whole internet bubble era- it’s when I first got into business and it was such a wild time, and the Yahoo story encapsulates this so brilliantly- 2 guys working on a hobby and within just 4 years their hobby is worth $100 billion, helped in no small way by an unheard of $100 million investment from Masayoshi Son of SoftBank, they turn down the opportunity to buy Google for just $1 million but do buy lots of other companies at crazy valuations- it’s a cracking story- enjoy.

So the story of Yahoo starts with 2 young Stanford undergraduates.

Jerry Yang had come to America from Taiwan in 1978 at age ten with his widowed mother who was an English teacher.
At the start of the 1990s, Yang entered Stanford's electrical engineering program and finished both his bachelor's and master's in four years. And while he was hyper-competitive, he was also very outgoing, very sociable and considered a disarmingly nice guy.

In the autumn of 1990, Yang enrolled in a math course where David Filo was the teaching assistant. Filo was two years older, raised in Louisiana- his father was an architect and mother a social worker. Filo was a young man of few words, and zero pretension- even when he became a billionaire he still drove an old Datsun car- he was the systems guy with a reputation for deep technical focus.

Throughout 1991 and 1992, the two worked at Stanford’s Design Automation research group, focusing on computer chip design software.

Then in early 1993, the NCSA- The National Center for Supercomputing Applications at the University of Illinois released Mosaic, the first browser to display images inline with text.
At that time, the internet was still largely an academic tool — text-heavy, built for researchers, techies, hobbyists rather than everyday users. Mosaic made the internet that bit more accessible- but just to note, it was still the playground of early adopters but it was starting to grow.

Yang and Filo’s academic advisor had gone to Italy on sabbatical, which meant they were largely unsupervised. They were supposed to be finishing their dissertations. Instead, they were in a cramped portable trailer on campus — spending most of their time surfing the web, because new sites appeared constantly — research labs, hobby projects, personal pages. But there was no reliable way to keep track of any of it. No real search engine. No structure. If you found something worth revisiting, there was a good chance you'd never find it again.
So Filo, ever the systems guy, started keeping a list — not as a business idea, just as a way to remember where he'd already been.
Yang soon joined in.
At first this list lived only on their own machines. But as it grew, in January 1994 they put it online and they called the project "Jerry and David's Guide to the World Wide Web.” The web at this time had fewer than 1,000 sites globally, and as volume expanded, they started categorising sites into folders like Art, Business, and Economy.
They were filtering and indexing the sites manually, but what I never realised is that they continued to index manually for 8 years up until 2002. Human judgement, they believed, not a computer algorithm, was necessary to create the type of quality index they were building.

By March that year, traffic was increasing and they realised that the name they had was too clunky so they spent a few late nights brainstorming names before settling on "Yahoo!" partly for the definition of a Yahoo from Gulliver’s Travels which means 'rude and uncouth' and partly as an acronym for 'Yet Another Hierarchical Officious Oracle.'. The exclamation point was added to differentiate the brand for trademark purposes, as other companies already held rights to "Yahoo" for various products.

Then a major turning point occurred not just for Yahoo, but for the entire internet. In March 1994, Marc Andreessen, who had helped create Mosaic, launched Netscape. Now there were other browsers like Mosaic, but they were slower, unstable, and largely confined to research or technical communities, whereas Netscape was fast, polished, and designed for ordinary users, not just the technically minded. Suddenly, the web was very accessible. Pages loaded quickly, images rendered smoothly, and for the first time, the internet began moving toward the mainstream. Netscape captured over 75% of the browser market.

Andreessen recognised that while his software was the engine, users still needed a map and so prior to the launch of Netscape's updated browser in December of that same year- 1994, he met with Yang and Filo and they formed a partnership- Andreessen put a “Directory" button at the top of every browser window. This button pointed directly to the Yahoo server at Stanford, which essentially turned Yahoo into the default front door for the entire internet.

As a result, by December 1994, Yahoo was getting 1 million hits a day- now hits doesn’t equal visitors- it’s a bit technical but in simple terms it equates to about 100–200k visitors per day.

Of course this put a huge strain on Stanford's network infrastructure, regularly crashing servers and slowing down academic research. University administrators, who had previously been supportive, pressed Filo and Yang to make a decision- between their dissertations or their accidental startup and if they chose the startup option, then they needed to move off campus.

Well we know what they chose- in January 1995 they left Stanford and moved to a small Santa Clara office.
While Yang and Filo were busy building and organising the directory, they knew they were out of their depth on the business side. They knew they needed to raise some capital so Yang contacted Tim Brady, a friend from Stanford who at this stage was finishing his MBA at Harvard. Brady, Yahoo’s first employee, was tasked with writing a business plan/pitch, something that could convince wary venture capitalists that a free website full of links might actually make money.
And they started shopping it to VC firms.

Kleiner Perkins — the firm that had backed Netscape, one of the most powerful in the valley — passed. Their reasoning? The internet would eventually grow too fast for humans to index it manually. Yahoo, they believed, would break under its own weight.

But then, enter stage right Michael Moritz from Sequoia Capital. Now Moritz features in so many Silicon Valley stories- he is a very interesting character- a Welshman who started his career as a journalist, had covered Silicon Valley for Time magazine, he wrote the first major book on Steve Jobs and Apple way back in 1984 called The Little Kingdom- it was Moritz who made public the fact that Jobs had a daughter whom he was denying paternity of and also reported on Jobs' bullying managerial style- and as a result Jobs famously said, "I don't ever want to talk to that guy again." But by all accounts, the book is considered to be the definitive account of early Apple- I gotta read it.

In 1986 Moritz was hired by Don Valentine, founder of Sequoia Capital and widely known as the "Grandfather of Venture Capital.” Valentine reportedly told Moritz that most MBA types were too focused on spreadsheets and missed the "human drama" of a startup. He wanted Moritz’s ability to "read" people- and Moritz turns out to be brilliant at this and goes on to become one of the most influential VCs of the last 40 years.

Anyway, back to his meeting with Yahoo- while it was a free service, Moritz realised that because the site was so sticky- as in people stayed on it for a long time, combined with the huge growth potential, the revenue opportunity from advertisers would soon follow. He also knew that he needed to move fast because AOL and Netscape were also circling Yahoo. In Sebastian Mallaby’s excellent book The Power Law, he describes how Moritz really listened to Yang and Filo, asked sensitive questions and just connected with them on a human level- exactly the reason why Don Valentine hired Moritz. Yang later said that he ultimately chose Moritz and Sequoia over other investors because Moritz had soul.

That April Sequoia invested $1 million for 25%, establishing a four million dollar valuation. Yang and Filo retained 25% each and the balance of the equity was retained for staff. For Sequoia, this would become one of their most profitable investments, but at the time it was a high-risk bet on a company with zero revenue and the internet was still an unknown entity. It was difficult to find out how much they actually made from the investment but it appears that they sold most of their equity well before the peak but still cashed in to the tune of $5 billion- so a 5,000 to 1 ROI- which in turn gave Moritz and Sequoia the capital and reputation to go on to invest in the likes of PayPal, Google, LinkedIn and YouTube.

As the company scaled, Yahoo hired Tim Koogle as CEO and Jeff Mallett as COO. This was very common for the first few years of the internet- the VCs felt that the founders were too young and too inexperienced. If they were going to give them millions, they wanted more experienced managers to be in charge.

I’ve always felt a startup works best when the founders are the ones really in charge — it doesn’t guarantee success, but it usually gives the company its best shot because founders have the vision and drive.

And in fairness, I don’t think this insistence on having professional managers running these startups was all down to the VCs- I think many of these young founders didn’t have confidence in their ability to manage the money, the growth and everything that comes with it.
Anyway, Yahoo hired Tim Koogle as their CEO- he was 44 years old at the time, sported long grey hair, and played guitar in a rock band, providing a cool parent persona while also bringing a stabilising "adult" presence to the company, which was necessary to convince the broader business world that Yahoo! was more than a student project.

And they also hired 33-year-old Jeffrey Mallett as COO- Mallett had a background in marketing at Novell and WordPerfect.

Yang and Filo sat in cubicles right next to Koogle and Mallett. No corner offices. No closed doors. They could overhear each other's calls — which meant decisions got made faster, and nobody needed a meeting to figure out what everyone already knew.

On August 1, 1995, Yahoo introduced banner ads. They weren’t the first website to do this but it was very controversial in the early internet community, which viewed the web as non-commercial- I mean jeeze. When the ads went live, 1 Yahoo employee reportedly said, "We just fucking sold out." The email inbox flooded with backlash. Despite this, the ads succeeded financially, with advertisers paying rates ranging from twenty to sixty dollars per thousand impressions. And because at this stage they were getting over 1 million visitors per day, not hits, actual visitors, the revenue potential was huge.

Now in November 1995 another person was getting very interested in what Yahoo was doing- enter stage right none other than Masayoshi Son of SoftBank- or Masa as he’s more commonly known as. Now I’ve read a few books on Masa and I am definitely going to do a few episodes on him. So for context as to how he got to be in Silicon Valley at the start of the internet bubble.

So in 1980 he graduated from Berkeley, having only arrived in the US 6 years earlier from Japan. While in Berkeley he developed and then sold a translator patent for one million dollars, which gave him the seed money to return to Japan and launch SoftBank in 1981.
Throughout the 80’s and 90’s he dominated the Japanese market by cornering the software distribution trade, eventually controlling fifty percent of the retail software business in the country. This led him to buy up major publishing houses and technology trade shows, which meant he controlled both the tech products Japanese consumers bought and the media that influenced their decisions.
Masa had become kind of a legend in Japan by positioning himself as a permanent outsider in Japan’s rigid business culture, using an aggressive, American-style approach to disrupt the status quo. He was actually labelled back then as the Bill Gates of Japan.
SoftBank's Japanese IPO in 1994 gave the company a $3 billion valuation. Masa could see the internet was moving faster in the U.S. than in Japan, so flush with money he went on a spending spree in the US.
In early 1995 he spent $800 million to buy COMDEX, the world's largest tech trade show- now in the book Gambling Man by Lionel Barber, it reveals that Sheldon Adelson, who owned COMDEX, and would go on to build an empire in Las Vegas, had told his business partner that he was willing to sell COMDEX for $325 million. Then that same year Masa bought Ziff-Davis, the publisher behind PC Magazine for $2.1 billion- again way over the odds. Now throughout his life he has always made huge bets- he’s convinced that outsized risk is the price of outsized returns- that can work sometimes, but it doesn’t always.
Anyway these 2 acquisitions now made him someone who was very important and powerful in the US tech sector.
And whatever about some of Masa’s huge risky bets, he could see very early on that the internet was going to be huge- if he could own the dominant portal (Yahoo!), he would control the flow of traffic for the entire digital economy.
And he more or less said at his first meeting with Yahoo that he wanted to buy a big chunk, but Moritz told him that they weren’t selling a lot of the company, so Masa had to settle for a $2 million investment, for a 5% stake, valuing the company at $40 million up from $4 million in just 7 months.
By year-end 1995, Yahoo was still tiny- $1.4 million in revenue- but that was just 4 months of advertising, so a good start, and they were getting 6 million daily page views.

So with this kind of growth other search engines started emerging posing a serious threat - you had Excite, Lycos, and Infoseek.

In a major blow, Excite, which was backed by Kleiner Perkins - the same VC firm who had turned down Yahoo, won the right to replace Yahoo on the Netscape Navigator Directory button by bidding five million dollars. The Yahoo team spent the final days of 1995 watching their logs, fearing their traffic would crater without the prime placement on Netscape. But traffic continued to grow proving that Yahoo had successfully built a brand that users would seek out directly.

Yahoo kept growing through early 1996.

Then in March 96, Masa came back with an offer that would reshape not just Yahoo, but totally upend the whole investment ecosystem — he told Yang and Filo he wanted to invest a hundred million dollars for a 33% stake.

Funds at the time typically managed around $250 million in total, and no one had ever put $100 million into a single company, and then doing so without taking a majority stake was just mind-boggling. It marked a new era.
The offer floored the founders and Yang told him they didn't need that much money. Masa's response became legendary: "Jerry, everyone needs 100 million dollars."
But Yahoo was preparing for an IPO, so they weren't convinced they needed the capital. That's when Masa turned to one of his people and asked who Yahoo's biggest competitor was. The answer was Excite. Masa looked back at Yang and Filo and said, "If I don't invest in Yahoo, I'll invest in Excite and I will kill you."
A hundred million dollars to Excite meant they could outspend Yahoo on marketing, infrastructure, and talent. The threat was real, so Moritz reluctantly advised the founders to take it.
Masa was 100% correctly betting that the internet was in its infancy, that traffic would continue to grow exponentially and whoever controlled the gateway would capture a disproportionate share of the value. The $100 million gave Yahoo a war chest large enough to win the portal war.
But there was a second piece to the March deal, and it turned out to be even more valuable. Yahoo Japan was formed as a 60:40 joint venture, with SoftBank holding the controlling stake. And spoiler alert, while Yahoo in the U.S. would eventually unravel, Yahoo Japan would go on to dominate the Japanese market throughout the 2000’s.

On April 12th, 1996 Yahoo went public on NASDAQ. The demand was unprecedented. When the market opened, the stock started at $13 and peaked at 43 dollars within sixty minutes, briefly giving the company a one billion dollar valuation. It eventually closed the day at $33.

By September, Yahoo launched its UK portal, the first localised international site. By year-end, daily page views grew from 6 million to 20 million. Annual revenue reached $19.1 million.

Then in the first quarter of 1997, Yahoo posted its first profits—a rare milestone for the dot-com era. The advertiser base had tripled to 1,700 corporate clients.
For the full year 1997, revenues grew to $67.4 million dollars. Average daily page views reached 65 million and the stock price had soared 500% over the year.

And so now they started using their huge valuation to hoover up other companies, each adding new features like Yahoo Mail, Yahoo Games, Yahoo Fantasy Sports- each service aimed at keeping people on the site for longer.

But there was one potentially historic acquisition that they turned down in September of that year- Google.

While Yahoo was building its human-curated directory, Larry Page and Sergey Brin, two Stanford PhD students, were treating the internet as a graph. Their algorithm, PageRank, looked at which pages linked to which, so the more quality links that pointed at a page, the more relevant it was. PageRank allowed them to scale in a way human curation never could- by 1998 it was indexing around 30 million web pages.
But Page and Brin weren’t really that interested in launching a company and all the hassles that came with growing a startup. They incorporated Google that September mainly because they needed a legal entity to deposit a $100,000 investment from Andy Bechtolsheim (Beck-toll-shyme), a co-founder of Sun Microsystems. Now as a side note, Bechtolsheim (Beck-toll-shyme) is a very interesting character- while I couldn't find out when he eventually cashed in his Google shares- we do know that when Google went public his $100,000 was worth $1 billion so that’s a 10k ROI, he also founded Arista Networks which is now valued at $140 billion.
Anyway, as mentioned Brin and Page had zero interest in running a company so approached Yahoo with an offer: buy Google for $1 million. Yahoo passed for 2 reasons- they didn't think search mattered. They had their Yahoo directory and so they believed that clicking through their directory folders was the best way to find stuff on the internet. And so they didn’t see search as a core business.
But more so, and I think this is the underlying reason that influenced why they believed search in itself wasn’t a core business, is because of the revenue- which you can split into 2- first they couldn’t see how you could make money from search alone, but also and more importantly they worried about the impact Google's search would have on their revenue because Yahoo's revenue depended on users staying on the portal long enough to see banner ads. A search engine that worked too well would get the visitor off the site- so fewer page views, fewer impressions, less money.
Now Google also went to Excite and they turned them down for the same reasons.
Now of course not buying Google ended up costing Yahoo big time, but they fell into a trap that lots of companies do and it’s called the innovator’s dilemma- a trap where successful companies protect what’s already working instead of embracing what might replace it.
They prioritised protecting their existing advertising model over improving the user experience.
Consumer companies live and die by user behaviour. If something is genuinely better for your user, and you don't provide it, someone else will. But by providing it, you risk cannibalising your own business model — so it takes someone who is both very brave and visionary to make that call. And I use visionary deliberately, because maybe the people running Yahoo and Excite simply couldn't imagine that users wanted to search the web the way Google let them.
Steve Jobs showed that vision and bravery when he launched the iPhone. It effectively killed the iPod — which, remember, was Apple's most successful product at the time - responsible for not only totally rejuvenating the company but also accounted for 40%–50% of Apple’s revenue. Jobs understood that if Apple didn't bring out a device like the iPhone, someone else would.
Anyway Google's impact on Yahoo wouldn't be felt for a few years yet.
By the end of 1998 Yahoo’s market cap was $8 billion, 600 employees, 95 million daily page views, 3 times more than Excite, its nearest rival and revenues of $245 million.
By 1999, Yahoo was spending aggressively, and made two very expensive acquisitions.
In January, they bought GeoCities for roughly $4.6 billion in stock. GeoCities was one of the web’s most popular destinations; it had 3.5 million active users who created personal pages on whatever interested them like movies and finance - it was like an early reddit/blog hybrid- and it brought in about 50 million daily page views.
Some, at least those caught up in what was called the "irrational exuberance" that defined the dot-com bubble, saw it as a very good fit. Others however pointed to GeoCities' revenue of just $18 million- so Yahoo had paid roughly 255 times revenue- remember normal companies go for 5 to 10 times revenue.

Then on April 1st came their biggest acquisition - Mark Cuban’s Broadcast.com for $5.6 billion in stock. Now I covered this already in the episode on Mark Cuban, and as mentioned back then, Yahoo way overpaid.
Broadcast.com had only 570,000 users, valuing each at approximately $10,000 dollars.
Their reasoning behind paying such a premium was that rich media, the type of content that Broadcast.com was streaming, was seen as the future of the web.

These acquisitions were massive "valuation vanity projects" that successfully inflated Yahoo’s share price during the bubble, but ultimately both services were mismanaged and shut down within a few years.

Yahoo ended 1999 with revenues of 588.6 million dollars, more than doubling 1998's, its global audience hit 120 million unique users and its market cap reached $100 billion in early January- just over a year earlier it had been worth about 8 billion.
So we’re now nearing the height of the bubble - Yahoo is now more valuable than Disney, Ford, and Boeing combined. When you become that big, you become a target.
And on February 7th, Yahoo.com was knocked offline by a DDoS (Distributed Denial of Service) attack — it wasn’t a theft of data, but a flood of fake traffic designed to overwhelm its servers. The site went dark for hours while Filo and the engineering team scrambled to stabilise the system. The attacker was later identified as a 15-year-old student in Canada known as “MafiaBoy.”
And while the attack exposed how easily Yahoo and other internet companies could be disrupted by very basic tools, Yahoo’s shares actually jumped the next day. The attack and the publicity it generated only served to boost Yahoo’s reputation as being the most important internet company in the world.
But now we’re moving into March 2000 and that’s where we end the story- the bubble is at its peak- Across the board, the Nasdaq had soared 800% in just five years. The average tech IPO saw its stock price triple on the first day of trading, regardless of whether the company had a product or even material revenue.

So when I pick up the story sometime next year, no prizes for guessing that it all starts to go wrong for Yahoo- it’s a fascinating story- and that brings us to our listeners' emails and this one is from Khalid and Khalid would love to hear a story on Ingvar Kamprad of IKEA- Khalid, he was on my list and I really can’t wait to dig into it, because I really don’t know much about him or the company so thanks so much for the suggestion Khalid and for listening, and remember, if you have any comments, any corrections, or any story you’d like me to cover, email me at info@gbspod.com.
All the best, folks.