Topics >  Money and Finance >  Financing a Small Business >  Venture Capital > 

How to Kill a Great Idea!

The beauty of Friendster was its exhaustively complete network. Every time a homepage loaded, Friendster's servers calculated a single user's connection to other users within four degrees of separation, which could mean hundreds of thousands of individuals. Because the network was constantly changing as new users joined and connected with one another, these calculations had to happen on the fly--in what would eventually amount to trillions of rapid calculations. The effect was to give users a vivid sense of how they fit into their social groups as well as into the larger world. Abrams, it seemed, had created a piece of software that could tell us who we were.

Prototype in hand, Abrams began looking for seed funding. He delivered his first pitch on Thanksgiving Day in 2002 to a former HotLinks vice president, Melissa Lloyd, over dinner with Lloyd and her husband at their home in Sun Valley, Idaho. Abrams's hosts had no idea what he was talking about but agreed to invest a few thousand dollars anyway. "We believed in Jonathan," Lloyd says. "So we said, 'Here's your money; we don't want to hear about it again.'" The Lloyds sent Abrams home with a check for several thousand dollars and eventually invested tens of thousands more. What happened next, says Lloyd, who now lives in Seattle, was "one of the most exciting times of my business life."

Over the next few months, Abrams rounded up $400,000 from a dozen investors. He opened Friendster in March 2003. The site grew virally as Abrams's friends invited their friends, and by June it had 835,000 registered members. Four months later, there were more than two million, generating some 10 million page views per day. The growth presented immediate engineering headaches. In theory, Abrams's intricate network was a beautiful thing. In practice, the constant calculations, which were being continuously served on millions of homepages, required more than a terrabyte of expensive RAM memory. By late 2003, load times regularly clocked in at over a minute and users were beginning to complain in blogs and forums. Abrams's software would need to be scaled somehow. "We would fix one problem, and then a few days later there would be another bottleneck," recalls Ian McFarland, a software developer who joined Friendster in April 2003. Simply buying enough servers to keep up with the growth was a major challenge.

The problem might have been solved if someone had reworked the software to ignore distant connections--for example, by calculating only connections between friends. But Friendster's engineers were so preoccupied with day-to-day slowdowns that they neglected to step back and ask what was causing them. Abrams, for his part, was distracted by business needs: hiring, recruiting investors, looking at partnerships, and--most time-consuming of all--public relations. Between March and October of 2003 Friendster was all over the media. Time called it one of the best inventions of 2003 and Entertainment Weekly named Abrams "Friendliest Man of the Year" in its annual "Breakout Stars" issue. With no outside PR help and no marketing personnel, Abrams handled everything from talk show appearances to chatting with reporters. While the press coverage was exciting--and undeniably helpful in building Friendster's user base and increasing its attractiveness to a burgeoning online ad marketplace--it monopolized his attention, preventing him from making even small fixes that would have dramatically improved the site's performance.

If the engineering challenges at Friendster were obvious, Abrams was having too much fun to worry. He assumed that with enough money and the right people, the problems would solve themselves. By July 2003, with the site pushing a million members, Abrams raised $1 million from Ram Shriram, an early investor in Google; Peter Thiel, who co-founded PayPal; and Tim Koogle, who'd served as CEO of Yahoo from 1995 to 2001. Three months later, he turned down a $30 million acquisition offer from Google in favor of a $13 million VC round from Kleiner Perkins and Benchmark Capital, at a valuation of $53 million. The deal, one of the first big transactions since the bursting of the tech bubble, was widely portrayed as the harbinger of a dot-com renaissance. In December, the Venture Capital Journal called social networking "the new Internet gamble," adding that "the Net is hot again."

Kleiner and Benchmark were, in fact, so eager to grab a piece of Friendster that they agreed to a highly unusual condition: a $4.7 million cash payout for Abrams. Nonetheless, Abrams believes he made a critical mistake in negotiating the deal. He kept about a third of the company's stock but no longer had control of the five-person board. The deal specified that "preferred" shareholders--the VCs--would pick two board members, that Abrams would pick two, and that there would be a tiebreaker who would be mutually acceptable to both sides. Abrams says he didn't pay much attention to the issue because he had resolved to let the experienced VCs take charge.