A pivotal moment in venture capital history
- Don Gooding from Accel discovered Yahoo! while building his firm's website
- When mentioned at a UUNET board meeting, the name "Yahoo!" was initially met with laughter and skepticism
- Yahoo! was operated by David Filo and Jerry Yang from a trailer on Stanford University campus
- Bill Draper visited and was impressed by Yahoo!'s ability to quickly find information online
- Michael Moritz from Sequoia visited and, despite initial skepticism about their free model, understood the advertising potential
- Moritz compared Yahoo!'s business model to radio and TV networks that broadcast free content but make money from advertising
- In April 1995, Sequoia invested $975,000 for 32% equity (Yang and Filo each retained 25%)
- Masayoshi Son of SoftBank invested in Yahoo!'s Series B round
- The company was valued at $40 million, up from $3 million eight months earlier
- Son led a $5 million financing round, with Sequoia and Reuters participating
- Son returned with an unprecedented offer of $100 million for 30% of Yahoo!
- Used this as leverage, threatening to invest in competitors (Excite and Lycos) if Yahoo! refused
- Yahoo! accepted Son's investment but proceeded with IPO plans anyway
- Son ultimately invested over $100 million for 41% ownership
- Sequoia's stake was diluted to 19%, while Filo and Yang retained 17% each
- Yahoo! went public
- Shares closed first day at 2.5 times Son's purchase price
- Son made an instant profit of more than $150 million
The text highlights how Yahoo! represented a pivotal moment in venture capital history:
- It validated the model of backing companies that gave away products for free
- It introduced unprecedented levels of venture capital investment
- It demonstrated the potential for massive returns in internet companies
- It helped establish the importance of brand-building and audience growth over immediate revenue
- It marked a shift in how venture firms thought about holding versus selling shares post-IPO
The success of Yahoo! significantly influenced both Sequoia's and the broader venture capital industry's future investment strategies, particularly regarding growth capital and international investments.
