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By GARY RIVLIN Published: October 15, 2006

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JONATHAN ABRAMS was in a spot. He could take the safe bet and accept the $30 million that Google was offering him for Friendster, the social networking Web start-up he began only a year earlier, in 2002. Saying yes to Google would provide a quick and stunning payout for relatively little work and instantly place the Friendster Web site in front of hundreds of millions of users across the globe.

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The Fall of Friendster

But at the same time, some of the biggest names in Silicon Valley were lobbying Mr. Abrams, a computer programmer, to reject Googles offer. America Online had offered the two founders of Y ahoo a few million dollars each in the mid-90s for their Web site and both became billionaires because they said no. Sell us a stake in your company for $13 million, the advisers told Mr. Abrams, and we will help build Friendster into an online powerhouse worth hundreds of millions if not billions of dollars. It really didnt take much persuading, said Russell L. Siegelman, a partner at the venture capital firm Kleiner Perkins Caufield & Byers, which has poured around $10 million into Friendster since November 2003. Jonathan clearly wanted to go for it.

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With Friends Like These ...

Go for it, he did. Mr. Abrams spurned Googles advances and charted his own course. In retrospect, he should have taken the $30 million. If Google had paid him in stock, Mr. Abrams would easily be worth $1 billion today, according

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to one person close to Google. And with Googles ample resources, Friendster might have solidified its position as the pioneering front-runner in social networking. Instead, Mr. Abrams has the distinction of founding a company that is shorthand for potential unmet. Roughly once a week, David L. Sze, a venture capitalist at Greylock Partners, hears from entrepreneurs who say they have the next MySpace, the copycat social networking site that has trounced Friendster. The counter to that is, Tell me why you arent going to be the next Friendster, Mr. Sze said. Its become the iconic case of failure. Reality must smack even harder just after the blockbuster deal in which Google agreed to pay $1.65 billion for YouTube, the video-sharing Web site that has yet to celebrate its first anniversary or its first profits. Friendster essentially created the social networking sector three years ago by offering users a site where they could browse profiles posted by friends and the friends of friends in search of dates and playmates. But so badly did Friendster fumble its early lead that, as of last month, it ranked 14th among all social networking sites tracked by comScore Media Metrix, trailing even myYearbook.com, a site started last year by a 16-year-old high school student. It is not too late for Mr. Abrams and his investors to see a handsome payout from Friendster, a well-known brand in a nascent business sector. But why and how Friendster missed the mark is a salutary Silicon Valley tale so instructive that Mikolaj Jan Piskorski, an assistant professor at the Harvard Business School, uses the companys inglorious fall as a case study in his strategy classes.

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Jonathan Abrams, the founder of Friendster, in 2003. He turned dow n an offer from Google to buy the company for $30 million.

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From lef t: Marco Jose Sanches/Associated Press; Peter DaSilv a f or The New Y ork Times; Ruben Sprich/Reuters

Friendsters pow erful backers in 2003 included John Doerr, left, the venture capitalist w ho helped finance Google, Netscape and Amazon.com; Bob Kagle, center, an early venture investor in eBay; and Timothy A. Koogle, a former chief executive of Yahoo.

Jim Wilson/The New Y ork Times

Kent Lindstrom, now president of Friendster, said the board failed to address technical issues that caused the companys overw helmed Web site to become slow er.

Friendsters fate is a real puzzle, Professor Piskorski said. This was a company that had the talent and had the connections. he said. They had this great idea that people really took to. There is no single reason that explains Friendsters failures, Professor Piskorski added, which is what makes it academic fodder. Its a power story, he said. Its a status story. Its an ego story. But largely, he said, Friendster is a very Silicon Valley story that tells us a lot about how the Valley operates. EVERY good Silicon Valley start-up story needs an engaging tale about its founding. The

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Y ouTube boys Chad Hurley, Steve Chen and Jawed Karim supposedly conjured up the idea of a video-sharing product almost by accident, after a late-night dinner party. (That, at least, is the way two of the three founders tell it.) Earlier, Larry Page and Sergey Brin decided to start Google after Y ahoo declined to buy their search technology for a paltry $1.6 million. Mr. Abrams drew his inspiration to create Friendster from a broken heart brought on by a failed relationship and the eternal lures of the mating dance. Basically, Jonathan wanted to meet girls, said Mark J. Pincus, a Silicon Valley entrepreneur who provided Mr. Abrams with some of the seed money to finance his project at the end of 2002. He told me himself, he started Friendster as a way to surf through his friends address books for good-looking girls. The second half of the 1990s had seen any number of failed social networking sites, including forgotten enterprises like Six Degrees and SocialNet. We all basically hit the market several years before the market was ready for social networking, said Reid G. Hoffman, the founding chief executive of SocialNet and an early investor in Friendster. Mr. Abrams, though, had perfect timing. Friendster made its Web debut in March 2003, and though it was then a speck of a start-up that spent no money on marketing, it signed up three million registered users by the fall. Publications including Time, Esquire, Vanity Fair, Entertainment Weekly, US Weekly and Spin were writing about Friendster before anyone had heard of MySpace. So popular was Friendster in those early days that Mr. Abrams appeared on Jimmy Kimmel Live and then boasted that the Y ahoo founders had never been guests on a late-night television talk show. Jonathan is very much an acquired taste, said Larissa Le, a former Friendster employee and longtime friend of Mr. Abrams. Hes your typical engineer from the Valley who can come off as very arrogant. For a time Mr. Abrams, then in his early 30s, cut a high profile in the Valley, showing up regularly at parties with a strikingly attractive woman on each arm and his head in the stars. His fellow entrepreneurs might have shaken their heads over the size of Mr. Abramss ballooning ego, but they also could not deny that he had invented something significant at an opportune moment, when the area was still struggling to shake off its post-bubble doldrums. The list of venture capitalists enticing him to say no to Google and to go it alone included John Doerr, the legendary venture capitalist at Kleiner Perkins whose list of greatest hits includes Google, Netscape and Amazon.com, and Bob Kagle, the Benchmark Capital partner who first spotted eBay. Andrew L. Anker, a former venture capitalist who is now a top executive at Six Apart, a popular blogging company that considered buying Friendster last year, said he recalled Mr. Abramss quandary. Jonathan had the Google offer, he said, but he also had these very-well-regarded V.C.s saying, Lets make this thing huge. It did not take much to convince him. Mr. Abrams, a former engineer at Netscape, is a byproduct of the Valley, an environment finely calibrated to create monster-sized companies. There arent thousands of V.C.s running around Silicon Valley to fund a company just to flip it for a quick payout, Mr. Anker said. The Valley is all about making things huge. Mr. Doerr and Mr. Kagle took seats on Friendsters board, as did another investor, Timothy A. Koogle, who had been the chief executive of Yahoo through the second half of the 1990s. Other investors included Peter A. Thiel, a co-founder of PayPal, which eBay bought for $1.5 billion in 2002, and K. Ram Shriram, one of the first investors in Google and perhaps the most-sought-after angel investor in Silicon Valley. In turn, this goldplated group helped to recruit to Friendster an equally impressive cadre of top executives and computer programmers. Back in late 2003, Mr. Abrams spoke of the all-star cast that had joined him at Friendster

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the way a Y ankee fan might boast about the Murderers Row that George Steinbrenner assembles each year in pursuit of another World Series ring. Now, however, Mr. Abrams casts that same board then composed primarily of men in their 50s who were far older than the sites target demographic and the recruits they drafted as the main cause of Friendsters great stumble. Through a colleague from a previous tech start-up, Melissa Gilbert, Mr. Abrams declined to comment for this article, saying he was too busy working on a new start-up to talk about the past. Ms. Gilbert, though, who described herself as the first investor in Friendster, echoed the comments of others close to Mr. Abrams, who has loudly proclaimed that he will never again accept a dime in venture capital. Mr. Abrams believed that he had developed a sound business plan for building Friendster into an Internet powerhouse and that the plan foundered when his well-known investors shoved him aside and proceeded to mess everything up, Ms. Gilbert wrote in an e-mail message. Friendster ended up with three levels of V.P.s, C.E.O.s and board members who, although they had great rsums, they were not connected to the social networking concept and didnt really use Friendster, she wrote. Mr. Doerr, at Kleiner Perkins, disputed this. He said that he visited the Friendster site at least once a day. Its certainly not fair to say we were out of touch when we were willing to commit millions of dollars to this market, he said. We understood the opportunity. The company didnt seize that opportunity. But Mr. Siegelman, one of Mr. Doerrs partners at Kleiner Perkins, said Mr. Abrams had a point. The original board had little feel for the product, said Mr. Siegelman, who attended most meetings and eventually replaced Mr. Doerr. But Mr. Siegelman also described Mr. Abrams as a founder in way over his head, which is why, in April 2004, only a few months after investing in the company, the board replaced him as chief executive. All of a sudden Jonathan had all these high-powered investors to please, Mr. Siegelman said. He had all this money in the bank, so there was all this pressure to hire people and get things done. Open up new territories: China, Japan, Germany. Add all these new features. Meantime, he took his eye off the ball. But the board also lost sight of the task at hand, according to Kent Lindstrom, an early investor in Friendster and one of its first employees. As Friendster became more popular, its overwhelmed Web site became slower. Things would become so bad that a Friendster Web page took as long as 40 seconds to download. Y et, from where Mr. Lindstrom sat, technical difficulties proved too pedestrian for a board of this pedigree. The performance problems would come up, but the board devoted most of its time to talking about potential competitors and new features, such as the possibility of adding Internet phone services, or so-called voice over Internet protocol, or VoIP, to the site. THE stars would never sit back and say, We really have to make this thing work, recalled Mr. Lindstrom, who is now president of Friendster. They were talking about the next thing. Voice over Internet. Making Friendster work in different languages. Potential big advertising deals. Y et we didnt solve the first basic problem: our site didnt work. In retrospect, Mr. Lindstrom said, the company needed to devote all of its resources to fixing its technological problems. But such are the appetites of companies fixated on growing into multibillion-dollar behemoths. They seek to run even before they can walk. Friendster was so focused on becoming the next Google, Professor Piskorski said, that they werent focused on fixing the more mundane problems standing in the way of them becoming the next Google. The board replaced Mr. Abrams with one of its own, Mr. Koogle, the former chief executive of Y ahoo. But Mr. Koogle served only three months, a temporary caretaker who showed up at the office only sporadically, former Friendster employees said. The board next chose a television industry executive, Scott M. Sassa, to replace Mr. Koogle. That

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selection might have made sense if the company had been in position to start cutting big advertising deals. But it was not, given that its Web site was not up to speed. Mr. Sassa left after less than a year, which was nearly twice the tenure of his successor, Taek Kwan, who left at the end of 2005, six months after he started. After a while all the changes really wear on you, said Jeff Winner, who served under three chief executives in just 12 months as the head of the companys troubled engineering team. Every C.E.O. represented a change of direction, and when a company changes direction, the engineers really get jerked around. Mr. Winner left at the end of 2004, he said, because like a lot of people I no longer believed Friendster was on a course for massive success. People inside the company recognized that they needed to add new features to the site if it was to compete with the new crop of copycat sites trying to cash in on Friendsters early success. There really wasnt much to do once you set up your network and found your old friends, said Ms. Le, one of several people who could describe themselves as a former product manager at Friendster. Other social networking sites, including MySpace, were adding features like blogs and tools that people could use to jazz up their profiles. But adding new features to Friendster would only slow down the site further. People had great ideas all the time, Mr. Lindstrom said, but it always boiled down to, O.K., but first lets get the basic thing working. ONE of the good ideas, Mr. Doerr said, was to encourage users to organize around favorite bands the very idea that proved so crucial to MySpaces success. We completely failed to execute, Mr. Doerr said. Everything boiled down to our inability to improve performance. People inside Friendster were closely monitoring MySpace, which was founded by a pair of Los Angeles music aficionados in the fall of 2003, inspired by Friendsters early success. MySpace would have been hard to ignore, given its phenomenal traffic growth starting in early 2004. I was giving people regular updates on MySpace, said Jim Scheinman, who served as Friendsters head of business development from October 2003 until leaving in May 2005 to work at a social networking rival, Bebo.com. But a lot of people refused to take them seriously. Many people working at Friendster sneered at MySpace. The holy grail at Friendster and the cause of most of its technical problems was its closed system: users at Friendster could view only the profiles of those on a relatively short chain of acquaintances. By contrast, MySpace was open, and therefore much simpler from a technological standpoint; anybody could look at anyone elses profile. The two companies also mirrored their founders: where Friendster reflected the ordered vision of its engineer-founder early on, the company famously removed the profiles of people who put up joke pictures, like photographs of their dogs in place of themselves MySpace was more L.A.-laid back. At MySpace, they rode the wave instead of fighting it, and encouraged users to do pretty much as they pleased. Besides, those behind Friendster were so convinced that they were destined to be the next big thing that they instead fixated on the actions of their presumed peers at least that is Mr. Siegelmans recollection. I remember going to these board meetings and feeling disgusted, he said. Half of every board meeting was taken up by a discussion of what Googles going to do, or Y ahoo. Today, MySpace has more than 50 times the number of monthly domestic visitors as Friendster, according to comScore Media Metrix. The social networking offerings of Y ahoo

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and Google are also tiny when their American audiences are compared with that of the market leader: MySpaces audience is 10 times as big as Y ahoo 360, and 200 times that of Orkut, Googles answer to Friendster. Last fall, Friendster hired an investment banker to shop the company around. In part, the board was inspired by the $580 million that Rupert Murdochs News Corporation agreed in July 2005 to pay for Intermix Media and its primary asset, MySpace. In the end, though, the investors failed to find a suitor willing to pay even $20 million for the company. Friendster was nearly out of cash by the end of last year. It had halved its payroll, to 25 employees, and advertising was hard to come by on a site that, three years after its debut, still did not work right. The venture capitalists considered shutting down the company. But a sense of obligation (It was my feeling that the investors and the board had done something of a disservice to Friendster, Mr. Siegelman said) and economics (Friendster still had a well-known brand and millions of registered users, even if most had not visited the site in some time) prompted Kleiner Perkins, Benchmark and some of the private investors to sink an additional $3 million into the company at the start of 2006. THE venture capitalists reconstructed the board I took all the 50-year-old white guys off, said Mr. Siegelman, who is white and 44 and put Mr. Lindstrom, who had been with the company since mid-2003, in charge. The company hired yet another chief of engineering, who laid down the law: at least 80 percent of his people would work on performance and stability issues until the Web site worked as well as it should. In the past, we had often chosen the more exotic solution over the more simple solution, Mr. Lindstrom said. Trailblazing a new field like social networking was enough of a challenge. But we were also trying to innovate on the tech side as well, he said. The company finally licked its performance problems this last summer, Mr. Lindstrom said. The team now running Friendster valiantly soldiers on, hoping that it can position the company as a site for an older demographic group people 25 to 40 who do not have the time or inclination to spend hours each day on MySpace. Now the challenge, Mr. Lindstrom said, is to focus on a market for more than two months. A second challenge is figuring out ways to cash in on its popularity overseas. Three quarters of Friendsters users live outside the United States, mainly in the Philippines, Malaysia and other, smaller southeast Asian countries. In the past weve seen that as a problem, Mr. Lindstrom said, but now we see this as a huge opportunity. The investors apparently are satisfied with this new, less ambitious version of Friendster. In the summer, they sank another $10 million into the company. Friendster missed the chance to become a multibillion-dollar company, said Mr. Thiel, the PayPal co-founder who has continued to invest in Friendster. But I still see a lot of opportunity here. Mr. Doerr added: There are plenty of second acts in American business.
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