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Mahendra Ramsinghani

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What Every Entrepreneur Can Learn From Facebook's Early Years

Posted: 08/30/11 03:17 PM ET

On January 4, 2011, Mark Zuckerberg woke up to some good news. TIME magazine named him the "Person of the Year" and had his photo on the cover. The same day's Wall Street Journal featured a story on MySpace, Facebook's once formidable competitor, and its dramatic downsizing.

Entrepreneurs dream of such fame, not to mention the total decimation of competition. Here are five lessons from Facebook's early years for every entrepreneur. These lessons have been woven together from various anecdotes in David Kirkpatrick's book, The Facebook Effect:

Can you get users to beat a path to your door?
When Facebook launched in February 2004, it generated 6,000 users within three weeks. After about 60 days, the number had grown to 30,000 users. One key to its early growth was its mastery of the controlled release. In particular, Facebook instilled an element of exclusivity into its sign-up process. First, it recruited the elite schools -- Harvard, Yale, Stanford, Columbia, Dartmouth -- which then got tier-two schools calling to get Facebook on their campuses. By 2005, eager VCs were hearing about Facebook, which had attracted two million users, but they couldn't even log on to the site because in those days users had to have an .edu email address. This controlled release strategy helped Facebook drive demand for its product as it moved into fertile territories, such as high schools and professional networks.

Economics 101 tells us that when supply rises above demand, value evaporates. Entrepreneurs tend to open their doors too fast in an attempt to grow quickly and attract venture capital. Stay exclusive at first to generate demand.

Can you get VCs to beat a path to your door?
While most entrepreneurs chase VCs, as many as twelve VCs chased Facebook to invest in its Series A. But, instead of negotiating terms on his own, Zuckerberg brought Sean Parker on board. Parker had cut his teeth in the Silicon Valley start-up world and knew how to raise money. Zuckerberg gave Parker 6.47 percent of equity and Parker introduced Zuckerberg to his first investor, Peter Thiel, co-founder of PayPal, who invested $500,000. Sean Parker also negotiated the Series A investment with Accel Partners. While Accel Partners doggedly chased Facebook, Sean Parker gleefully hung up the phone on them, cancelled meetings and pushed them away a number of times. Not many entrepreneurs I know have the gumption to do that. Such moves are two-edged swords that can either bump-up your value or relegate you to the annals of dead start-ups. Still, smart entrepreneurs do not try to kick down VC doors or negotiate ruthlessly -- it's better to first recruit team members who know how to play the VC game.

Can you block out noise from competition?
Facebook had over 20 competitors when it launched. Six months before its launch, Friendster, one of its competitors, had raised $13 million from top venture capital firms. Orkut, another social networking rival, re-launched its service three months before Facebook's launch with help from it its backer, search giant Google. And six months after Facebook's launch, MySpace boasted nearly 5 million users.

That's enough competition to make even the toughest entrepreneurs throw in the towel. But Zuckerberg and his team stayed the course. Therein lies an important lesson for any start-up entrepreneur: the unstoppable urge and the conviction to build something of value should rise above all the noise. Soft underbellies should snuggle up with Momma; take an egg with a tall glass of milk.

Can you build value and yet keep the keys to the kingdom?
When a company's value grows at a rapid pace, investors often pressure the company to sell itself so they can cash out. In 2006, when Yahoo offered $1 billion cash for Facebook, a deal that would have given Facebook investor Accel Partners a 14X return on its investment, Zuckerberg bluntly reminded Accel, "We cannot sell if I don't want to sell." After all, Zuckerberg controlled three of the five Facebook board seats at that point. Entrepreneurs who raise their first round are giddy with excitement -- and often cede too much control to investors. Creating value is good but keeping the keys to the kingdom is equally important.

So what about the exit strategy?
Zuckerberg once remarked, "I spend my time in building value, not thinking about an exit." VCs hate that. But then show me one VC that isn't willing to invest in Facebook and I will eat crow!

 
 
 

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