How to Kill a Great Idea! Net media darling Friendster should have become a billion-dollar company. Whathappened? Founder Jonathan Abrams who invented social networking tells us all.By:

Max Chafkin, Inc.com, Published June 2007

Jonathan Abrams created the first online social network and enlisted Silicon Valleys bestand brightest to run it. Yet Friendster flamed out spectacularly. What went wrong?It's not easy being the brains behind one of the biggest disappointments in Internethistory. Sure, there are those who describe you as a visionary, but in the same breaththey'll deride you as a lousy businessman. Bloggers attack you, call you "a real asshole"and "a very lucky idiot savant." Former investors badmouth you. Other entrepreneurscopy your ideas without giving you credit.

The New York Times

makes reference to your "ballooning ego" and the local Fox affiliate can't even get your name right.Jonathan Abrams--founder of Friendster, the first online social network, and a pioneer of one of today's hottest trends on the Web--tries his best not to think about these things.And with two new companies, he has plenty to distract him. Last September he openedSlide, a stylish basement lounge in downtown San Francisco. And in March, he launcheda new bid to make it big on the Web--Socializr, a website that lets users invite people to parties and other events.And yet the story of how Friendster, once the hottest start-up in America, became the buttof a business joke continues to preoccupy him. And no wonder. By the rules of SiliconValley, Friendster--a bold idea backed by experienced investors and the best managersmoney could buy--was destined for greatness. Instead, it failed spectacularly. "I did whatyou're always told to do as a young entrepreneur," Abrams says. "I brought onexperienced investors to help Friendster fulfill its potential. But the all-star team was thecurse of death."If he had invented something as mundane as a brilliant customer relations managementapplication, no one would know Jonathan Abrams's name. But as the creator of the firstonline social network, Abrams promised something truly exciting: to change the way people communicated with one another. As

Fortune

put it in October 2003, "There may be a new kind of Internet emerging--one more about connecting people to people than people to websites." In the months following its launch earlier that year, Friendster garnered millions of devotees, who used its name as both a verb and a noun. By the endof 2003, the company Abrams founded in his San Francisco apartment had raised $13million from the same investors who'd backed Amazon (NASDAQ:AMZN), Yahoo(NASDAQ:YHOO), and eBay (NASDAQ:EBAY) and had appeared in scores of major magazines and newspapers. Friendster was a company the world could understand, participate in, and dream on. It was the next big thing.

Friendster is among the few start-ups that changed the world--but not as its founder hadhoped. During March 2007, one out of every five Americans visited MySpace.com, acopycat site that was built in 2003 by Intermix and sold to News Corp. (NYSE:NWS)two years later for half a billion dollars. Those MySpace visitors listened to music,scoped out crushes, made plans with friends, decided that Stephen Colbert was cool--andin the process altered the way we think about and use the Internet. Meanwhile, Friendster fell to 13th place among social networks in the U.S. and saw its market share decline to0.3 percent.In the business and technology media, the fall of Friendster has been widely portrayed asan isolated management failure--with Abrams shouldering most of the blame. Indeed,Friendster now has the dubious honor of being the focus of a Harvard Business Schoolcase study on how not to manage a tech company. It ran out of money last year and wasrecapitalized at a valuation of $3 million, effectively making it a subsidiary of Kleiner Perkins Caufield & Byers, one of its VC investors. The recap stripped Abrams of his board seat and almost all of his equity. The founder, now an outsider, retains roughly 4 percent of the company, which has since received more venture capital but has yet to turna profit. Most observers agree that while Friendster might still swing a modest sale, a bigacquisition or an IPO is out of the question. "Everyone saw this as a no-brainer, as 'Howcould they screw it up?'" says Russell Siegelman, a general partner at Kleiner Perkins anda current board member at Friendster. "But not all the deals we do work."Statements like that are just one more thing that gets under Abrams's skin. He's a pricklysort, with lots of opinions and little reluctance to share them. However, until I trackedhim down at his bar last October, he had been uncharacteristically reticent aboutFriendster. But over the course of several hours (and during interviews in the months thatfollowed), Abrams laid out a narrative that is decidedly different from the one put forth by the Silicon Valley VCs, bloggers, and journalists. He argues that Friendster fizzled notonly because it fell victim to mismanagement, but because he embraced a system that isdesigned to create far more failures than successes. Friendster, he believes, was notsimply a singular failure, but a systematic one. And he's determined that things bedifferent with his new Web venture, Socializr. "In the old days, entrepreneurs would bootstrap and figure things out over the first few years," he says. "The VCs come in tooearly these days."Abrams is not the only one who feels this way. "The basic venture capital system isstructured so that there are built-in conflicts of interest between the VC and theentrepreneur," says Joel Spolsky, founder of Fog Creek, a New York City softwarecompany, and writer of the popular blog Joel on Software. It's a point that even someinvestors are willing to concede. "Most VC firms have adopted a model where they make20 investments and have two hits," says Peter Rip, a partner with San Francisco-basedCrosslink Capital, which has backed such companies as Good Technology and TiVo(NASDAQ:TIVO). The traditional VC model works fine for investors, since the returnsfrom one Google (NASDAQ:GOOG) far outweigh the losses from nine Friendsters. It'sfine for the VCs themselves, who reap healthy management fees regardless of the

outcome. And it's fine for the network of professional managers who bounce from start-up to start-up, earning well wherever they go.But it isn't much good for an entrepreneur who has a promising idea--and who would prefer odds that are better than 20 to 2. Spolsky believes that working with a VC imposesa level of risk that someone prepared to invest his life--not to mention his life savings--ina single enterprise simply should not tolerate. "An entrepreneur would rather have a 100 percent chance of owning an $80 million company than a 10 percent chance of having a$800 million one," he says.Friendster never felt like a long shot to Abrams, who seemed to understand Silicon Valleyas well as just about anyone. He came to Netscape in 1996 as a software engineer, havingworked several years for Canadian telecom giant Nortel (NYSE:NT). He spent a year anda half at Netscape, writing code for the Navigator Web browser and immersing himself inthe culture of the time and place, becoming a regular at meetings of the Silicon ValleyAssociation of Startup Entrepreneurs and the Software Development Forum.Abrams left Netscape in 1998, and nine months later started HotLinks, an early foray intowhat is now called "social search." Abrams's idea--to organize webpages based on users'favorite sites--was prescient and would eventually appear in the form of successfulventures like Digg and Del.icio.us. Over the course of a year and a half, HotLinksattracted 500,000 registered users, but it ran out of money in the wake of the technologycollapse. In the spring of 2001, HotLinks merged with a British software company, andAbrams left to work for another start-up.As he suffered through the dot-com bust, Abrams began mulling a new idea: softwarethat would somehow integrate one's online and offline identities. "The way peopleinteracted online was either anonymous or through aliases or handles," he says. "I wantedto bring that real-life context that you had offline online--so instead of Cyberdude307, Iwould be Jonathan." Abrams was also mindful of Gary Kremen's Match.com, which eightyears after its founding was finally coming into its own. Now part of IAC, the site was booking $76 million a year in revenue--roughly one-quarter of the $300 million onlinedating industry in 2002. Abrams saw that the cultural perception of online dating hadchanged. "All of a sudden, people who I would not think of as strange and desperate--normal people--were talking about using Match.com," he says.Friendster crystallized in the summer of 2002 while Abrams was walking with a friend ina Santa Clara park. They were chatting about the online-offline problem and out poppedthe idea: Each person would have a standardized homepage, à la Match.com. But insteadof simply advertising their interests and good looks, users could link their profiles tothose of their friends, creating a network of connections that would mirror those thatexisted in the real world. His friend liked the idea, and Abrams started work immediately.Three months later, he had a prototype, which he posted on the fallow server of a friend'sfailed dot-com. He sent invitations to about 20 of his closest friends, unsure of whatwould happen next. "The least likely thing in my mind was starting another company," hesays. "I wasn't sure what I was going to do."