Like Many in Chicago, Facebook Moved West to Silicon Valley

The Boston Globe has a well researched story about how and why Facebook moved to Silicon Valley. Why can’t the Chicago newspapers cover technology in such a thorough and complete manner?

I thought I’d rip some of the better quotes out of it that apply to VC, Internet and Chicago and discuss them:

Zuckerberg told the senior associate that he was planning to go to California for the summer, and he wasn’t sure whether he would return to Harvard for his junior year. Summer was less than two months away. The senior associate was pretty sure that if Battery Ventures didn’t invest before then, a Silicon Valley venture firm would discover the deal. For venture capital firms, getting in first can often mean getting a bigger chunk of a start-up for less money – especially if the start-up isn’t talking to other firms. And Facebook wasn’t.

After a second meeting at the Charles, and a visit to Battery’s offices above the reservoir in Waltham, Zuckerberg said he thought Facebook was worth about $15 million, and was willing to accept an investment ranging from $1 million to $3 million, which would have given Battery a substantial chunk of the start-up.

But Battery had already made an investment in an earlier social networking site, Friendster, which was foundering. Zuckerberg struck some partners at the firm as a little too brash. And no one was sure whether Facebook would appeal to anyone other than college students, its target.

From my days in mutual funds and institutional investing, there is an old saying that says “Past performance does not indicate future results.” Why did these VC’s let it cloud their judgment? I especially like the next sentence about Zuckerberg being “too brash”. Many entrepreneurs and great business leaders share this quality, yet these particular VC’s thought that was a problem? Makes little sense.

Through a chance connection, Zuckerberg was introduced to Peter Thiel, a cofounder of the online payment system PayPal, who was running a hedge fund called Clarium Capital. He met with Thiel in August, at Thiel’s office in downtown San Francisco.

Thiel had also been an investor in Friendster, and he knew that the conventional wisdom was that all the social networking sites “were just fads that would come and go,” he says. Thiel listened to Zuckerberg’s pitch in the morning, asked him to go out and grab lunch, and by the time Zuckerberg returned in the afternoon, “we said we’d invest, and we agreed to the basic valuation parameters,” Thiel says.

“It seemed like a good company,” he said, adding, “Most of the time, we’re not that fast.”

Thiel put in $500,000 of his own money in return for 10 percent of the company.

Though I don’t fully believe the chance introduction thing, if the time line is accurate you have to respect Peter Thiel.

“Facebook was perhaps the most controversial deal we’ve done in several years,” says Jim Breyer of Accel Partners. “Some of my best friends in the business were wondering why we’d write a check to a company that had very little defensibility to their business.” Indeed, anyone could potentially build a better site and lure Facebook’s users away.

This is true of almost all start ups, especially ones in social networking.

Greylock partner David Sze, who works on the West Coast, admits that he had the opportunity to invest in Facebook in 2005, but says, “I was too busy – I just didn’t have the cycles to look at it. In retrospect, that was a mistake.”

Smart people always make time to meet with entrepreneurs and potential employees. I actually checked to see if Mr. Sze had a Chicago connection after this statement, but could find none. I do admire his honesty in regards to this after the fact though. According to his Linkedin profile, he’s a Board Member at Digg so he indeed was busy (David if you’re reading this I have a support problem with Digg that is not getting resolved with an email to support – would be happy to discuss privately).

(Looming over Facebook’s success – and any eventual public offering – is a lawsuit filed by several fellow Harvard students who allege that Zuckerberg built Facebook using software code he had originally written for their site, http://connectu.com/, and that he also borrowed parts of their business plan. A Facebook representative said that none of its founders were available to comment.)

I can think of several situations like this in Chicago, but will not name them publicly as I would not want to give the situations undue publicity.

“We don’t want to make Facebook the cornerstone of our growth strategy, but we’re happy to ride the wave,” says Dina Pradel, StyleFeeder’s vice president of marketing.

Very nicely stated.

When I put that question to Accel Partners’ Breyer, who is a native of Natick, he had a one-word answer: no.

“So many of the Facebook employees have come from top Internet companies like Yahoo, eBay, and Google that the culture that has been built at Facebook is fundamentally more consumer Internet savvy than if it would’ve been built anywhere else on the planet,” Breyer says, after praising the engineering talent in Boston.

I think this is a most unfortunate limiting belief.

“Folks in the Valley are incredibly geo-centric to a point of snobbery,” writes Battery Ventures’ Scott Tobin via e-mail. He acknowledges that Silicon Valley is producing more companies than Boston but “to make an argument that great companies can’t be built in any one place is bunk in my mind.”

He mentions Microsoft Corp. in Redmond, Wash., and Qualcomm Inc. in San Diego as examples. “It just takes a good driving attitude to make it happen.”

As for passing on Facebook, “that may turn out to have been a mistake,” Tobin admits.

Scott Tobin, it would be nice to meet you. I agree completely with your comment about driving attitude and I’d also unfortunately have to agree with your geo-centric comment. What do you think the root cause of this behavior is? Does Silicon Valley need more outside thought? I’d like to hear your thoughts.

I’d love to hear Don Dodge’s views on this subject, so I’ll tag him.

I’m also in touch with several mobile advertising and local concepts in the early funding stage, so reading this article was more than a bit fascinating to me. I look forward to hearing your thoughts.

Update: The author of this article has a blog post about it.

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9 Responses to Like Many in Chicago, Facebook Moved West to Silicon Valley

  1. Don Dodge September 11, 2007 at 8:24 am #

    David, I am in the process of writing a blog on this subject right now. I talked to Scott Kirsner about his story last week, and just yesterday I talked to Craig Ulliott, founder of Where I’ve Been, about his Facebook app, and his decision to stay on the east coast.

    I should have the story done later today. I will provide a link to post here in another comment.

    Thanks for the “tag”.

    Don

  2. David September 11, 2007 at 8:35 am #

    My pleasure Don! I think Scott’s article was wonderful in both it’s research and detail. It brings some highly interesting and unique questions near the surface that usually lurk in the deep below the conversation.

    Thanks for stopping by, you’re always a welcome guest.

  3. Don Dodge September 11, 2007 at 9:16 am #

    OK, here is a link my blog on Where I’ve Been. http://dondodge.typepad.com/the_next_big_thing/2007/09/where-ive-been-.html

    WIB is an interesting story. Launched on June 8th, they already have 2.9M Facebook users. They also just annonced a beta on MySpace.

    They are located in Philadelphia and plan to stay there. I also linked to my earlier story on AltaVista and Napster, two companies that started in Boston but moved to Silicon Valley. I was part of the management team at both companies.

  4. David September 11, 2007 at 9:30 am #

    Rod – While your comment makes valid points, I’d ask if you considered that editors and not writers frequently pick the article title? I learned this by quite by accident in my interactions with the authors of certain articles in the past who have openly stated that they disagreed with the chosen title. In many of those cases, they didn’t even know the title that had been chosen.

    I don’t know for a fact that this was the case here, but it’s quite possible.

    Regarding the local issues you bring up in Boston/Massachusetts, I have never lived there so I can neither agree nor have a basis to disagree with your comments. :)

  5. Rod September 11, 2007 at 8:46 am #

    The Boston Globe article is typical of its one-sided poor journalism and is not a “well researched story” but a narrow one that misses answering its own question. It asks the question “Why Did Facebook Go West?” only to ignore many of the drivers which cause firms to move outside of Boston and Massachusetts in general. Namely, a politically liberal environment that is traditionally anti-business and pro taxes. I speak as one who has lived and studied there, as well as, in Chicago and the west.

    They failed to answer their own question because they chose to ignore the realities before them. Massachusetts is nick named Taxassachusetts for a profound reason. Pro business Mitt Romney, a republican, was chosen to run for the governorship in an attempt to stem the tide of this excessive anti-business pro tax environment where companies were leaving at a pace unimaginable. How effective he was in that is another subject. What is clear is that numerous Boston based giants such as Fleet Bank, John Hancock, Gillette and the Atlantic Monthly (est. 1857) have all “fled!”

    Residents are leaving Mass. en mass as well for the very same reasons. For instance:

    According to U.S. Census Bureau statistics released last summer, Massachusetts is continuing to hemorrhage people — especially young people. The census found that Massachusetts had an average annual exodus, on balance, of 42,402 people.

    The population drop in Boston is consistent with the decrease on the state level. Of all the nation’s major cities studied, Boston had the third largest decline. The statistics showed that since 2000, the city has lost more than 30,000 residents, a 5.1 percent decrease.

    http://www.baystatebanner.com/issues/2007/02/15/news/news02150705.htm

    People also wrongly assume that Boston’s death grip on the Ivy League delivers the area a deep pool of quality candidates. The realities are those students are not commuters (locals) to MIT and Harvard and most leave. They are by their very nature transient. And Boston as wonderful a city as it can be, also tends to leave a bad taste in ones mouth when unaccustomed to the consequences of its political system and its impact on all facets of life and business.

    Recognizing this environment we can better understand the sociological, anthropological, political and economic reasons people and business have been fleeing Mass. for a long time.

    Following a venture capitalist’s chance meetings, mis-steps and missed opprotunites certainly adds to the incredible story of Facebook, but unquestionably misses the greater picture.

    The better question would have been “Why Would Any Business Stay in Massachusetts?” That is a question I promise you, the Boston Globe does not want to answer.

    Yet we are distracted by other tomfoolery. I note this uninteresting comment in the article:

    “There was a question about whether we on the East Coast side were going to lead an investment with a sophomore in college who was considering a move to the West,” says the senior associate.

    One, that sophomore in college was from New York and had little reason before him to stay in Boston. Two, what difference does it matter to these investers that he was heading west? Were they intending to run the day to day operations? That is a lame excuse in my opinion especially to investors in the information super highway.

    But more to the point is when Battery Ventures’ Scott Tobin says:

    “Folks in the Valley are incredibly geo-centric to a point of snobbery…”

    I almost spit my drink across the screen! Surely you jest. Snobbery? The Valley is geo-centric–so what? It appears to deliver many valuable technologies few others do. Which business environment isn’t though geo-centric or snobbery? New York or Boston? My word, give me a break.

    Boston’s “geo-centricity” is wrapped in an anti-business, pro tax, liberal Chinese finger torture trap and that along with some sunny skies in the west may be enough for some to leave.

    I’m just sayin’

  6. Rod September 11, 2007 at 10:15 am #

    Editorial decisions on article titles can be deceiving–I will grant you that. However, the “author” returns to subject several times proving the value of the title. I should also say, I liked his article and the research on that which he covered. So I take back this comment completely:

    The Boston Globe article is typical of its one-sided poor journalism and is not a “well researched story” but a narrow one that misses answering its own question.

    Instead, it was well done and well written in the areas it addressed. It missed however, in my opnion, a critical aspect of the story of which the title asks. And I will stand by that. It is the Boston Globe’s inherit bias that allows it to miss the critical political/economic aspect as to why businessess leave Boston.

    He said for instance:

    So even if Boston didn’t end up as Facebook’s home base, there are plenty of companies here now developing applications for it. Needham-based TripAdvisor, Inc. offers a world map that you can stick virtual pushpins in, to show your friends where you’ve been.

    and

    Could Facebook have succeeded if it had gotten an investment locally before Zuckerberg & Co. went West, and kept its headquarters here?

    When I put that question to Accel Partners’ Breyer, who is a native of Natick, he had a one-word answer: no.

    So, I think my comments still hold water. The question the author fails to andress is not why people are “attracted” to other locales but why they would not want to “stay” or “come” to Boston in the first place to do buisness. That is the bigger question of which the author failed to address.

  7. David September 11, 2007 at 10:23 am #

    Rod – Thanks for considering the point I made to your comment. I appreciate it. :)

  8. Tim Courtney September 13, 2007 at 12:38 pm #

    All of us ‘outside the valley’ wrestle with the very idea of being outside the valley. Yes some environmental factors exist there (nerd haven, more events) but a great business plan is just that and will win out regardless of geography (provided enough qualified talent, the right attitude, etc).

    What successful rural-sourced Internet companies are out there? That would make for an interesting discussion and analysis.

  9. Anonymous Guy January 22, 2008 at 2:54 pm #

    Too many entrepreneurs and VCs are stuck in the thinking of the 90s. It’s easy to build a distributed business. You can easily have your team in two places. It prevents your company from being filled with Valley speak and nerd-centric business models (e.g. Digg) which most normal people don’t care about. That being said, you need to have a Valley presence to attract engineering talent. Why not have the best of both worlds?

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