The long, painful start-up saga that was Friendster ended today, with a reported $100 million sale to a Malaysian finance company. The news was announced in a press release, and the Financial Times has some additional details.
Friendster invented the modern social network, launching in 2003 and quickly attracting millions of users. The site famously inspired the founders of MySpace to launch a similar site, which would sell to News Corp. for more than $500 million. MySpace executed well, and Friendster did not. Another early competitor, Facebook, rocketed to a $15 billion valuation. Meanwhile, Friendster sputtered, fired its founder, then sputtered some more. It went through a series of CEOs, business plans, and costly redesigns.
For most companies, a $100 million sale is a dream come true, but in Friendster's case this is pyrrhic victory. The company had raised more than $45 million from venture capitalists over seven years, and it had gone through a recapitalization that essentially wiped out the initial founders and shareholders. Founder Jonathan Abrams was offered $30 million in Google stock just a year after launching and, crucially, before Google went public. That stock would be worth $1 billion today. (Don't feel too bad: As I reported in 2007, Abrams did manage to take roughly $5 million off the table in an early fundraising round. So he's doing all right.)
The fact that Friendster sold itself to a Malaysian company suggests a lesson to this saga. Friendster's failures are often used as a case study in the mismanagement of technical resources. Friendster was unable to keep up with its growth, and its website often failed to load properly. But as I wrote in "How to Kill A Great Idea," the bigger problem was Friendster's failure to pay attention to its customers. As early as 2004, Friendster employees noticed that most of the company's traffic was coming from the Asia, particularly the Philippines:
From a business standpoint, the revelation was devastating. Friendster, it turned out, was paying millions of dollars a year to attract eyeballs that were effectively worthless to its advertisers. Says Abrams: "We needed to make a tough decision"--either spin off the Asian business or become the No. 1 Filipino social network. But because the Filipino users had come by way of their American friends, there was no easy answer. If Friendster cut the cord to Asia--either by drastically cutting back on engineering resources or by kicking the Asian users off the site altogether--it risked damaging its American user base.
In hindsight, Abrams should have focused on Asia, where a burgeoning virtual goods economy would make it easy for websites like Friendster to generate cash. Instead, it was years before Friendster's management started paying attention to its Asian business.
The story of Friendster will likely remain a cautionary tale, but the fact that the company managed to survive and sell itself is no small accomplishment given its beleaguered state. This is a company that endured management infighting, technical snafus, and bad press. The fact that the current managers have been able to squeeze a reasonable sale out of it is a credit to them and testament to the strength Abrams's initial creation. (By comparison, Imeem just went to MySpace Music for the fire sale price of $1 million.)
Failing to the tune of $100 million is the kind of failure most entrepreneurs can live with.