YouTube Acquisition An Entrepreneurial Success

By MissBiz aka Jacqueline Howatt
Published and Copyright October 18, 2006
Saint Mary's University, The Journal

It had to happen sometime. A week ago, and to no surprise, YouTube (the fastest growing video sharing network) was acquired by none other than Google. The $1.65 billion purchase (an all-stock deal) was by far the most extravagant investment Google has initiated in its eight-year operation. It is also said to be one of the most risky, as YouTube has been confronted by companies regarding copyright infringement laws. Nevertheless, after learning about the YouTube acquisition, I realized that there is an emerging, and all-too-familiar pattern taking shape. Some call it Web 2.0, others call it Bubble 2.0 – I call it a window of opportunity and entrepreneurship at its best.

Chad Hurley, 29, and Steve Chen, 27, were just your average University grads, trying to make a decent living in the USA tech-hub, otherwise known as California. They met while both working as employees for PayPal, before it was acquired in 2002. After the company was bought by EBay, Chen remained with the company while Hurley went on to become a personal consultant. They kept in touch over the next few years. In 2005, they both attended a dinner party hosted by a former PayPal colleague. During the party, a mutual friend, named Jawed Karim, complained that he couldn’t easily post video footage of that night on the internet for his friends and family to see. A light went off, and at that moment, Hurley and Chen gave birth to their brainchild, and named it YouTube.

For the next eighteen months, the development and operations of YouTube mostly took place out of Hurley’s basement in Menlo, California, and then eventually graduated to a small office above a pizzeria in San-Mateo, California. Like Google, YouTube obtained funding from the Venture Capital company, Sequoia Capital, for $11.5 million, who owns a cool 30% stake in the company. Since implementation, the company has grown incredibly. In January 2006, YouTube members were posting about 8,000 videos daily and watching 3 million videos per day. Jumping ahead just four months to April 2006, video posts were up to 35,000 daily, and views were an unprecedented 35 million per day!

During a casual luncheon at the American fast-food chain, Denny’s, Chen and Hurley sat down with a Google representative who agreed to purchase the company for $1.65 billion in Google stock. Soon after the news went public, Google’s share price jumped $8.50 to close at $429 on the NASDAQ. Needless to say, despite the swirling speculation that YouTube may undergo litigation due to copyright infringement (as YouTube members continue to post unauthorized artistic work), investors were satisfied to learn of the promising acquisition.

In favor of budding entrepreneurs everywhere, a recent and familiar trend of fast tech start-ups and buy-outs, similar to that of the dot-com boom is becoming more prevalent. Last year set the pace for this “bubbling” re-emergence of the dot-com era, with EBay purchasing Skype for a mind-boggling $2.5 billion in cash and EBay stock. Since then, small start-ups have been churning out social networks, which have collectively revolutionized the way people use the internet.

MySpace was acquired for $580 million by News Corporation in July of 2005, and has since exploded in popularity - becoming one of the company’s most valued investments. At its peak, about 250,000 people joined MySpace every day. The reason for this acquisition, and others like it (YouTube), is due to their advertising potential. This remains to be seen, as YouTube is surprisingly an unprofitable business, meaning, advertising revenue is less then operational expenses.

This trend has some market analysts thinking dejavu, and they believe that the next major acquisition could set-off this ticking time bomb. USNews.com describes this fear in detail in an article written last week entitled, “YouTube Fallout: Beware of Next Deal”. However, the fact that these sites are currently cost-centers is not dampening their alluring potential. Tech companies are still clamoring over themselves to get on the social network bandwagon, and offering large sums of money to purchase small, but rapidly growing companies.

The college-student networking site, Facebook, is another company in the upcoming acquisition role-call. Mark Zuckerburg, a Harvard student, created Facebook in 2004 as an alternative to student ID booklets. In the first three weeks, 6,000 Harvard students signed up as members, and Zuckerberg has since launched the network to schools everywhere. In March 2006, rumors were a-buzz that Facebook rejected a $750 million buy-out initiated by Viacom because it was holding out for a $2 billion sale. Just recently, speculation hints that Yahoo may be interested in acquiring Facebook for $1 billion. Either way, due to the hyper-competition of the tech world (companies actually cannibalize their own products just to stay ahead of trends), the popularity of Facebook will inevitably decline just as fast as it is growing. They can’t afford to hold out much longer.

Finally, another high-profile social networking site, myYearbook.com, is following on the heals of its two major predecessors, YouTube and Facebook. Still in a fairly infantry stage, the company is hoping to gain the volume necessary (and relatively quickly before the market goes bear) to harvest a nice profit. The website, which has been dubbed “The Next $1.65 billion start-up” by Inc.com, was founded by Geoff Cook - a 26 year old Harvard graduate who saw an opportunity for a worldwide online yearbook. There is little talk of acquisition yet, but with 6,000 new members joining daily, it wont be long before this company is making headlines on Wall Street.

Not only is there an obvious pattern of social networking start-ups, but most of these websites are founded by University-aged entrepreneurs. This is a major source of inspiration for students who are looking to start a business, or who already own a business. As the founder of myYearbook.com says in an Inc.com interview, “I started my first site with $600. All you need is hosting space and a merchant account (to accept credit cards).”

There is no doubt that the acquisition of YouTube feels like a mini-feat for all student entrepreneurs. It serves as a reminder that with the right skills, contacts, foresight, and ability to seize opportunities, it is possible to go from nothing to something these days, and in a short amount of time. Even though YouTube is an inspiration, it is also frustrating, because the rest of us feel left behind. The only way to overcome this cognitive dissonance it to believe in your own ideas, don’t be afraid to develop them, and make confident decisions along the way. Don’t let anyone tell you it can’t be done, persevere, don’t procrastinate, and as Donald Trump would say, THINK BIG!