YouTube

Recorded on the eve of Google possibly becoming the world's most valuable company (earnings speculation, not something the show usually conjectures about), episode 7 covers an older acquisition: Google buying YouTube. YouTube was founded in early 2005 by two former PayPal engineers and one former PayPal designer — part of the much-ballyhooed PayPal mafia;Roelof Botha, another mafia member, made it one of his first Sequoia investments ("keep it in the family"). Sequoia and Roelof led a $3.5 million Series A in November 2005.

Months later, in December 2005, SNL's Lonely Island-era Lazy Sunday aired; people filmed their TVs and posted it to YouTube, and one version generated 7 million views — huge when the site had only ~100,000 people before. (Even at acquisition, an audience of 72.1 million but only 19.1 million monthly actives — and surely a lot of college kids watching over and over; filming your TV was basically what Vine looks like now.) On the back of Lazy Sunday and other viral hits, YouTube raised an $8 million Series B in April 2006 from Sequoia with Artis Ventures; by July 2006 it was serving about 100 million video views a day.

On October 9, 2006 — barely 18 months after founding, literally in a garage, with only $11.5 million of venture capital raised — Google announced it would buy YouTube for $1.65 billion: roughly a 120x multiple. "This kind of stuff didn't happen in 2006": the internet bubble's aftereffects still reverberated through the valley, and a company going from founding to an actual sale to a real company (not funny-money IPO) in 18 months for over $1.5 billion was insane — even Instagram's $1 billion on their first episode had been a splash.

The acquisition closed by December 2006. In March 2007, Viacom filed a $1 billion lawsuit against YouTube (and the directors; whether Google was named escapes the hosts) for knowingly and blatantly violating copyright law and posting material like Lazy Sunday — an NBC, not Viacom, property — knowingly letting it persist without the copyright. The protracted battle over content rights was only finally resolved in 2014, seven years later, through dismissals, appeals, and judgments, ending in a settlement.

An amazing byproduct: as part of discovery, Sequoia and Roelof's Series A investment memo for YouTube is available online (linked in show notes) — an incredible, genuinely fun document. The key risks identified in it could not be more candid or more real. Key risk one: "competition / defensibility" — and ten years after the acquisition, Facebook is stealing video share revenue. Especially interesting: addressing competition and defensibility, Roelof and Sequoia wrote that "the team will need to remain laser focused on improving the user experience" — not what you'd expect for defensibility. Nowhere does the memo talk about network effects, though you'd think YouTube's defensibility would be content-brings-viewers-brings-content network effects. And that's not how you'd describe YouTube today: its greatness has almost nothing to do with user experience — and in many ways YouTube has actually failed.

Who goes to YouTube.com to discover or search? No — you come in through other channels and leave. One host is a bit bearish on YouTube because it's not a destination site: it relies on traffic from other channels — namely Facebook, where people go first to decide what they'll watch, and which is building its own platform, actively pulling people in and driving traffic. "YouTube is effectively a super fancy CDN at this point": a place where videos get hosted, not where people rely on it for discovery. Uninteresting. And the hosting is paid for by YouTube and Google — free hosting; if a better place existed, people would easily throw videos up there.