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1. Why might Sequoia Capital have considered Yahoo! to be an attractive
investment opportunity? What might have tempered Sequoia’s enthusiasm for
investing in Yahoo!? (20 marks)
2. What funding options were available to Yahoo!? What are the costs and benefits
of each of these? Should Yahoo! accept Sequoia’s offer? Explain your answer. (20
marks)
Stanford Technology Ventures
Program (STVP)
STVP-1998-005
Revised August 22, 2001
Yahoo! 1995: First-Round Financing
“I guess, three and a half years ago, if we were looking to start a business and make a
lot of money, we wouldn’t have done this.”
– Jerry Yang, 1997.
It was April of 1995 – a key decision point for Jerry Yang and David Filo. These two
Stanford School of Engineering graduate students were the founders of Yahoo!, the most popular
Internet search site on the World Wide Web. Yang and Filo had decided that they could
transform their Internet hobby into a viable business. While trying to decide between several
different financing and partnering options that were available to them, they attended a meeting
with Michael Moritz, a partner at Sequoia Capital. Sequoia, one of the leading venture capital
firms in Silicon Valley, had been discussing the possibility of investing in Yahoo!.
Michael Moritz leaned forward in his chair. As he looked across the conference table at
Jerry and Dave, he laid out Sequoia’s offer to fund Yahoo!:
As you know, we have been working together on this for some time
now. We have done a lot of hard work and research to come up with a fair value
for Yahoo!, and we have decided on a $4 million valuation. We at Sequoia
Capital are prepared to offer you $1 million in venture funding in exchange for a
25% share in your company. We think that with our help, you have a real
chance to make Yahoo! something special. Our first order of business will be to
help you assemble a complete management team, after which we should be able
to really start helping you to develop and manage your site’s vast amount of
content.
Right now, the biggest risk that you guys run is not making a decision.
You have to make a decision, because if you don’t someone else is going to run
you over. You might get run over by Netscape. You might get run over by
AOL. You might get run over by one of these other venture-backed startups. It
is imperative that you make a decision now if you are going to survive. To help
you make a decision, I am going to give you a deadline… tomorrow. If you
don’t want to do business with Sequoia, that’s OK. I’ll be disappointed, but
This case was prepared by Michael K. Chang and Matthew Garman, graduate students at Stanford University’s
School of Engineering, and Thomas J. Kosnik, Consulting Professor, Stanford School of Engineering, as the basis for
class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Some
facts have been disguised. Dialogue between case actors has been reconstructed from multiple sources based on their
recollection of past events, and is not intended as a verbatim quotation at the time of the meeting.
Copyright © 1998 by Stanford University. To order copies or request permission to reproduce materials, call
1-650-723-2973, or email Professor Tom Kosnik, Director of Case Development, Stanford Technology
Ventures Program, at kosnik@stanford.edu. No part of this publication may be reproduced, stored in a
retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic,
mechanical, photocopying, recording, or otherwise—without the permission of The Stanford Technology
Ventures Program.
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Yahoo! 1995: First-Round Financing
that’s OK. But you are going to have to call me by 10 a.m. tomorrow morning to
tell me yes or no.1
Yang and Filo gazed around the Sequoia conference room and noticed the many posters
of companies such as Cisco, Oracle and Apple that were hung from the walls – all success stories
from past Sequoia investments. They wondered if Yahoo!’s poster would someday join that
group. The two were excited at the possibilities; however they still had some decisions to make.
There were several other financing options available, and they were still not sure if they wanted
to accept Sequoia’s funding. Yang responded,
That sounds like a pretty fair offer, Mike. Let us talk this over tonight,
and we will get back to you by tomorrow after we weigh all of our options.
However you have to realize that we’re still grad students, and we don’t even
usually wake up by 10 a.m., so can you give us until noon?
Yahoo!
Yahoo! was an Internet site that provided a hierarchically organized list of links to sites
on the World Wide Web. It offered a way for the general public to easily navigate and explore
the Web. Users could click through multiple topic and category headings until they found a list
of direct links to Web sites related to their interest. In addition, Yahoo! offered a central place
where people could go to just to see what was out there. This made it easy for people with little
previous exposure to the Web to start searching through Yahoo!’s lists of links, often just to see if
they could find something of interest. In a little over a year since its inception, it had become one
of the most heavily visited sites on the Web.
But Yang and Filo believed Yahoo! had the potential to be much more that a way for Web
surfers to find what they were looking for. In 1995, John Taysom, a marketing vice president of
marketing of Reuters, a London-based provider of news and financial data, called Jerry Yang to
explore the idea of a Yahoo!-Reuters partnership. It seemed to Taysom that affiliating with
Yahoo! could help Reuters to build a distribution network on the Web.
“…The first thing Jerry said to me,” Taysom remembers, “was ‘if you
hadn’t called me, I would have called you.’” Jerry got the news feed vision. He
had been thinking about it for months. He further surprised Taysom by
informing him that as far as he was concerned, Yahoo! was “not just a directory
but a media property.”2
Yang further believed that:
“Primarily we’re a brand. We’re trying to promote the brand and build
the product so that it has reliability, pizzazz, and credibility. The focus of the
business deals we are doing right now is not on revenues but on our brand”3
1 Moritz, Michael, personal interview, November 10, 1998.
2 Reid, Rob, (1997) Architects of the Web, John Wiley and Sons, New York, NY (p. 253).
3 Yang, Jerry (1995) interview in Red Herring, (October), (online back issue, p.9)
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Yahoo! 1995: First-Round Financing
STVP-1998-005
Dave and Jerry at Stanford
David Filo, a native of Moss Bluff, LA, attended Tulane University’s undergraduate
program in Computer Engineering. In 1988, Filo finished his undergraduate work and enrolled
in Stanford’s master’s program in electrical engineering. Completing his master’s degree, he
opted to stay at Stanford and try for his Ph.D. in electrical engineering. Extremely competent in
the technical arena, Filo had been described by many as a quiet and reserved individual.
Jerry Yang was a Taiwanese native who moved to California at the age of 10. Yang was
raised by his widowed mother and grew up in San Jose with his younger brother, Ken. Yang
was a member of the Stanford class of 1990 and completed both his bachelor’s and master’s
degrees in electrical engineering. Yang also opted to stay at Stanford for a Ph.D. in electrical
engineering. Also technically competent, Yang was considered much more outgoing than Filo.
Yang and Filo met each other in the electrical engineering department at Stanford; Filo
was Yang’s Teaching Assistant for one of his classes. They also both worked in the same design
automation software research group. They became close friends while teaching at the Stanford
campus in Kyoto, Japan. Upon returning to the Stanford campus, they moved into adjacent
cubicles in the same trailer to conduct their graduate research. They both enjoyed working
together, as their individual personalities perfectly complemented each other, forming a unique
combination.
Their office was not much to look at, but it served as a place for them to work on their
research as well as a place from which they could run their web site. “The launching pad (for
Yahoo) was an oxygen-depleted, double-wide trailer, stocked by the university with computer
workstations and by the students with life’s necessities… that prompted a friend to call the scene
’a cockroach’s picture of Christmas’.”4 Michael Moritz remembered his early visits to Jerry and
Dave’s cube:
“With the shades drawn tight, the Sun servers generating a ferocious
amount of heat, the answering machine going on and off every couple of
minutes, golf clubs stashed against the walls, pizza cartons on the floor, and
unwashed clothes strewn around… it was every mother’s idea of the bedroom
she wished her sons never had.”5
Mosaic and the World Wide Web
In 1993, the University of Illinois-Urbana Champagne’s National Center for
Supercomputing Applications (NCSA) revolutionized the growth and popularity of the World
Wide Web by introducing a Web browser they had developed called Mosaic. Mosaic made the
Web “an ideal distribution vehicle for all kinds of information in the professional and academic
circles in which it was known.”6 It provided an easy to use graphical interface that allowed users
4 Stross, Randall E. (1998), “How Yahoo! Won the Search War,” Fortune,
http://www.pathfinder.com.fortune/1998/980302/yah.html., (p.
5 Reid, Rob, (1997) Architects of the Web, John Wiley and Sons, New York, NY (p. 254).
6 Reid, Rob, (1997) Architects of the Web, John Wiley and Sons, New York, NY (p. 11).
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Yahoo! 1995: First-Round Financing
to travel from site to site, simply by clicking on specified links. This led to the widespread
practice of surfing the web, as people spent hours trying to find new and interesting sites. This
easy-to-use browser for navigating the Internet was estimated to have 2 million users worldwide
in just over one year.
Creating Jerry’s Guide to the World Wide Web
With Mosaic’s introduction in late 1993, Filo and Yang, along with thousands of other
students, began devoting large amounts of time to surfing the Web and exploring the vast
content available. As they discovered interesting sites, they made bookmarks of the sites. The
Mosaic Web browser had an option to store a bookmark list of your favorite sites. This feature
allowed users to return directly to a page that they had visited, without having to navigate
through several different links. As the popularity of the Web quickly increased, so did the total
number of sites created, which in turn led to an increase in the number of interesting sites that
Filo and Yang wanted to bookmark. Eventually their personal list of favorite Web sites grew
large and unwieldy, due to the fact that the earliest versions of Mosaic were unable to sort
bookmarks in any convenient manner.
To address this problem, Filo and Yang wrote software using Tcl/TK and Perl scripts
that allowed them to group their bookmarks into subject areas. They named their list of sites
“Jerry’s Guide to the World Wide Web” and developed a Web interface for their list. People
from all over the world started sending Jerry and Dave e-mail, saying how much they
appreciated the effort. Yang explained: “We just wanted to avoid doing our dissertations.”7
The two set out to cover the entire Web. They tried to visit and categorize at least 1,000
sites a day. When a subject category grew too large, subcategories were created, and then subsubcategories. The hierarchy made it easy for even novices to find websites quickly. “Jerry’s
Guide” was a labor of love–lots of labor, since no software program could evaluate and
categorize sites. Filo persuaded Yang to resist the engineer’s first impulse to try to automate the
process. “No technology could beat human filtering,” Filo argued.8
Though engineers, Yang and Filo had a great sense of what real people wanted. Consider
their choice of name. Jerry hated “Jerry’s Guide,” so he and Filo opted for “Yahoo!,” a memorable
parody of the tech community’s obsession with acronyms (this one stood for “Yet Another
Hierarchical Officious Oracle”). Why the exclamation point? Said Yang: “Pure marketing hype.”9
7 Stross, Randall E. (1988), “How Yahoo! Won the Search War,” Fortune,
http://www.pathfinder.com.fortune/1998/980302/yah.html., (p. 2)
8 Stross, Randall E. (1998), “How Yahoo! Won the Search War,” Fortune,
http://www.pathfinder.com.fortune/1998/980302/yah.html., (p.3)
9 Stross, Randall E. (1998), “How Yahoo! Won the Search War,” Fortune,
http://www.pathfinder.com.fortune/1998/980302/yah.html., (p.3)
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Yahoo! 1995: First-Round Financing
STVP-1998-005
Yahoo!’s Growing Popularity
At first, Yahoo! was only accessible by the two engineering students. Eventually, they
created a Web interface that allowed other people access to their guide. As knowledge of
Yahoo!’s existence spread by word of mouth and e-mail, more people began using their site, and
Yahoo!’s network resource requirements increased exponentially. Stanford provided them with
sufficient bandwidth to the Internet, but bottlenecks came from limitations in the number of
TCP/IP connections that could be made to the two students’ workstations.10 Additionally, the
time required to maintain the site was becoming unmanageable, as Yang and Filo found
themselves continually updating their Web site with new links. Classes and research fell behind
as Yang and Filo devoted more and more time to their ever-expanding hobby.
Competing Services
A number of businesses already existed in the Internet search space. While none offered
the same service that Yahoo! did, these companies could definitely provide potential competition
to any new business that Yahoo! would start. Among the competitors were Architext, soon to be
renamed Excite, Webcrawler at the University of Washington, Lycos at Carnegie Mellon, the
World Wide Web Worm, and Infoseek, founded by Steven Kirsh. AOL and Microsoft in 1995
represented larger competitors who could enter the market either by building their own
capability or acquiring one of the other startups.
Yahoo!’s human-crafted hierarchical approach to organizing the information for intuitive
searches was a key component of its value proposition. Rob Reid, a Venture Capitalist with 21st
Century Internet Venture Partners, explained how this made Yahoo! unique among Internet
search providers.
“The Yahoo! hierarchy is a handcrafted tool in that all of its…categories
were designated by people, not computers. The sites that they link to are
likewise deliberately chosen, not assigned by software algorithms. In this,
Yahoo! is a very labor intensive product. But it is also a guide with human
discretion and judgment built into it – and this can at times make it almost
uncannily effective….
This is the essence of Yahoo!’s uniqueness and (let’s say it) genius. It
isn’t especially interesting to point to information that many people are known
to find interesting. TV Guide does this. So do phone books, and countless Web
sites that cater to well-defined interest groups…. But Yahoo! is able to build
intuitive paths that might be singularly, or even temporarily important to the
people seeking it. And it does this in a way that no other service has truly
replicated.”11
10 Holt, Mark and Marc Sacoolas (1995), “Chief Yahoos: David Filo and Jerry Yang”, Mark & Marc
Interviews, May, http://www.sun.com/950523/yahoostory.html.
11 Reid, Rob, (1997) Architects of the Web, John Wiley and Sons, New York, NY (p. 243-244).
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Yahoo! 1995: First-Round Financing
However, if Yahoo!, as a business, was to survive and flourish in the face of increasingly
well-funded competition, it would quickly need to find some outside capital.
Leaving Stanford and Starting the Business
Yang and Filo had been in Silicon Valley long enough to realize that what they really
wanted to do was to start their own business. They split much of their free time between their
Internet hobby, and sitting around thinking up possible business ideas.
“A considerable period of time passed before it occurred to them that the most
promising idea was sitting under their noses, and some of the credit for their eventual
illumination belongs to their Ph.D. adviser, Giovanni De Micheli. Toward the end of 1994, De
Micheli noted that inquiries to Yahoo were rising at an alarming rate. In a single month, the
number of hits jumped from thousands to hundreds of thousands daily. With their workstations
maxed out, and the university’s computer system beginning to feel the load, De Micheli told
them that they would have to move their hobby off campus if they wanted to keep it going.”12
By fall of 1994, the two received over 2 million hits a day on their site. It was then that
Jerry and Dave commenced the search for outside backing to help them continue to build up
Yahoo!, but with only modest hopes. Yang thought they might be able to bootstrap a workable
system, using personal savings to buy a computer and negotiating the use of a network and a
Web server in return for thank-you banners. Unexpected overtures from AOL and Netscape
caused them to raise their sights, although both companies wanted to turn Filo and Yang into
employees.
If they were going to abandon their academic careers (as they soon did, six months shy of
their doctorates), they reasoned that they should hold out for some control. Filo and Yang had
three main potential options to explore: 1) sell Yahoo! outright; 2) partner with a corporate
sponsor; 3) start an independent business using venture capital financing.
The Search for Funding
Looking to receive funding and create a credible business out of Yahoo!, Filo and Yang
began preliminary discussions with potential partners in October 1994. One of the first people
who contacted them was John Taysom, a Vice-President of Marketing at Reuters, the Londonbased media service. Taysom was interested in integrating Reuters’ news service into Yahoo!’s
Web pages. Yahoo! would gain the advantage of being able to provide news services from a
well-known source, while Reuters would be able to begin developing its own presence on the
Internet. Unfortunately, since Yahoo! did not generate revenues, it was in a poor negotiating
position. Talks between the two were cordial, but they also progressed very slowly.
Yahoo! also talked to Randy Adams, founder of the Internet Shopping Network (ISN), a
company that styled itself as “the first online retailer in the world.” ISN, funded by Draper
12 Lardner, James (1998), “Yahoo! Rising,” U.S. News, May 18,
http://www.usnews.com.usnews/issue/80518/18yaho.html., (p. 3).
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Yahoo! 1995: First-Round Financing
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Fisher Jurvetson, was one of the first venture funded Internet companies. It had recently been
purchased by the Home Shopping Network, in order to expand its possible exposure. ISN was
interested in being a host site for Yahoo!, offering them the chance to finally generate some
revenue. However, there were also definite possible disadvantages that came from being
associated with a shopping network.
Another company that approached Yahoo! was Netscape Communications Corporation.
Founded in April 1994 by Jim Clark, who also founded Silicon Graphics, and Marc Andressen,
who created the NCSA Mosaic browser with a team of other UIUC students and staff, Netscape
was a hot private company developing an improved browser based on the old Mosaic
technology. Andressen contacted Yang and Filo over e-mail and, in Yang’s words said, “Well, I
heard you guys were looking for some space. Why don’t you come on into the Netscape
network? We’ll host you for free and …
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