[Chapter 5: The Birth of Yahoo!]
"Alright, gentlemen, I think it's time we get down to business and discuss the specifics," John said after they all settled down.
"Mr. Leighton, I didn't expect the first person to come knocking on our door to be a young man like you. David and I honestly didn't see that coming. You can take a look at our business plan here. After you review it, we can talk in more detail," Jerry Yang said as he handed John a document.
Actually, John wanted to tell them it was simpler than that -- he had $500,000 and all he wanted was a piece of the company.
He took the business plan anyway, scanning through it while listening to Jerry and David's explanation.
According to them, the plan mostly highlighted how impressive the website was, but the actual profit model was vague. After all, the internet was still new and everyone was just feeling their way through.
"I believe the numbers you mentioned about the site. However, there's one crucial thing I want to make clear -- you know it too -- how exactly will you turn this directory into a profitable venture?
That's the key issue, the revenue model. Without a clear profit plan, I doubt the directory will last long. Please forgive me for being straightforward," John said.
"Yes, Mr. Leighton, that has become a headache for everyone in the internet business. As the internet's usage grows, we all see the vast commercial potential but just can't pin down a clear way to make money."
"Gentlemen, I've come with two things in mind. First, funding -- this is initial development capital, not a huge amount; second, the future development and clear business model for your network directory."
"What?" Jerry Yang and David Filo both stood in surprise.
"Of course, you know this isn't a free deal."
"If you have a clear profit model, we would welcome you on board," Jerry said, representing them both with confidence.
Meanwhile, Zach sitting beside was so shocked he almost fainted. After all, they had been together the whole time; there was no way John could have figured out a profit model just by looking at the directory. If that were true, his business talent would be off the charts.
This was a problem that had been plaguing every internet entrepreneur at the time.
"Let's not dwell on the profit model for now. We'll discuss it later. For now, let's talk about the specifics of the investment. Honestly, I don't have a huge amount of capital at present; I can provide an initial $500,000 and, along with my ideas -- including future development directions and the revenue model. Speaking strictly business, although I know little about computers or networking tech, how much equity am I looking at?"
"To be honest, we have approached several financial investors but either haven't heard back or were declined outright. Regarding equity, David and I agreed that our directory is valued at $5 million. Considering your capital, that's about 10%. As for your ideas, it's harder to quantify now, but if there's a clearly feasible business and growth plan, that might add another 10%."
When Jerry mentioned equity, John nearly jumped up to accept immediately -- this was way beyond what he anticipated.
But even though John was from the future, he wasn't a venture capital guru nor really tuned into the startup world.
He just knew this was Yahoo's first investment and didn't have much grasp on the specifics or who the investors really were.
After all, he was just an ordinary guy. Who cares how much Sequoia Capital had invested?
Back in the future, the first seed funding from Sequoia Capital was $1 million for a 25% stake, meaning the company was valued at only $4 million -- much less than the $5 million valuation Jerry was proposing.
John didn't know any of this at the time, only thinking about how to get rich -- he was investing in Yahoo! now.
Even if his shares got diluted later, he felt he'd taken a giant step toward becoming a billionaire. Of course, more money never hurts, and he wanted to negotiate his stake.
"Gentlemen, let me be clear. At the start, having a chunk of funding is enough for your directory's immediate needs. If there's a clear profit plan, when we seek additional capital later, the directory could grow exponentially. So, from my perspective, my ideas might be even more valuable than my money. Since I'm committed to investing, I'll lay out my thoughts for you to evaluate. If you both agree, I'd like an additional 5% equity."
Upon hearing John's proposal, the two exchanged a quick glance and nodded in agreement. After all, compared to 5% more equity, a solid profit model was far more important.
Of course, this reflected their youth and idealism. Though older than John, their scholar's pride was still strong -- after all, they were yet to leave campus.
...
John then outlined the concept of a portal website, inspired by future internet portals, laying out the content-traffic-advertising model.
Actually, internet advertising largely followed two models: one was content-traffic-advertising and the other involved search engines.
Yahoo, although a search engine as well, mainly functioned as a web directory and site internal search, curated manually -- not a true search engine as we'd come to know it.
Before the portal concept emerged, Yahoo's search directory wasn't profitable, with only some ad revenue here and there.
This was a concept that Yahoo would pioneer in 1996, distinguishing online media from traditional outlets like newspapers.
John even drew a rough sketch on paper, clearly outlining the portal site's basic model.
For experts like Jerry and David, John's ideas were astonishing. He laid out a clear path for the site's development and diverse advertising revenue streams.
The two then jumped right into discussion, brainstorming strategies without much input from John.
...
"Ahem... I guess you two understand my concept of the business and profit model now. What do you think?"
"Mr. Leighton, you're a genius!" David exclaimed with excitement.
"Mr. Leighton, your idea was tailor-made for our directory. It's fantastic. I almost think 5% is too little," Jerry said, giving a thumbs up.
"If it's too little, I don't mind more," John joked.
"Ahem..." Jerry choked on his drink.
"Ha ha..."
Everyone laughed at Jerry's embarrassed expression.
"Alright, I'll get Zach to draft the investment agreement. The three of us can then discuss the next steps," John said with a smile. "I think the very first order of business is to incorporate the company. Also, 'Guide' is no longer a good name; we need a domain and a website name. What do you think about YAHOO?"
John didn't overthink the name, simply borrowing it from the future's internet lore. In the future, many stories surrounded how names were chosen, but this time there were none.
"Oh, YAHOO, that sounds great."
"Very good!"
Hearing John's suggestion, Jerry and David both liked it. Eventually, following how it sounded, they added an exclamation point in jest.
"Second, we need to incorporate, clarify the shares among the three of us, find a place to move out of campus -- it's no longer appropriate to operate from school.
Third, we need to hire some technical staff to support you two. David can be tech director in charge of support, and Jerry will handle overall operations.
Last, we need to prepare for future financing. You know my funding is limited, so raising capital will be necessary.
Now, with a clear profit model, I want us to revamp and launch the website before the next financing round, officially opening the gates to the internet world and making Yahoo synonymous with new media.
Then, we won't be begging for money; they'll come to us."
"Yes, exactly! We've been turned down several times before. Next time, we want them chasing after us," David exclaimed, punching the air.
"Ha ha..." The two had tried raising capital before but were rejected.
In reality, getting investors to come knocking from the start was impossible. Reports about venture capital pursuing startups were more PR than fact.
John, of course, didn't mention this and told them not to worry -- soon, people would come knocking.
"Gentlemen, the contract is basically set. Let's sign. Have you decided on the share distribution in the new company?"
Jerry and David discussed in front of John, finally agreeing with 40% to Jerry, 35% to David, and 25% to John.
They formally signed the contract.
John asked Zach to register the company and for Jerry and David to find a new office soon.
John proudly thought to himself, "I am now a co-founder of Yahoo."
After all, the company hadn't officially formed until now, but he was already one of the early shareholders. That effectively made him a co-founder and an angel investor.
Unexpectedly, Jerry and David proposed dropping out of school to focus on the business, just like in the future.
John didn't object. After all, if they succeeded, they'd all become brilliant legends -- history is written by the winners, after all.
*****
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