Lessons from Myspace cowboys

There’s a lot to learn from this Fortune article on the “MySpace cowboys”, Tom Anderson and Chris DeWolfe. First of all you get the importance of having founders who are deeply involved. These two guys are the heart and soul of MySpace. They were the ones early on going to the music clubs and getting musicians interested in their fledgling site, and they’re the ones fighting to keep the users happy today. I’ve written before about the secret sauce behind MySpace that enabled them to obliterate Friendster, their main compeition. I said that their targeting of musicians as influencers, and their allowing users to do what they wanted to with their pages were the core reasons for their growth. This article illuminates even further. Check out this great quote concerning Friendster:

But MySpace just kept signing people up. At the same time, rival Friendster, which was once the hottest social-networking site, was stumbling badly, giving Anderson and DeWolfe a lucky break and a roadmap for what not to do. “We grew so fast and could never keep up,” admits Friendster president Kent Lindstrom. “Our page-load times were 20 to 30 seconds when MySpace’s were two or three seconds.” Secondly, Friendster management sanitized its site - much to Anderson’s delight. “They had no room for fakesters,” Anderson says. “If a dog or a city or an idea had a page, they would delete it. Could anything better have happened to us? People said, ‘I’m going to go to MySpace because I can do what I want there.’ “

Check out how Chris and Tom were deeply involved from the start, and also their thoughts on the genius of targeting musicians:

Their site launched in 2003, with Anderson and DeWolfe inviting local bands and club owners to post pages and allowing other users to become their “friends.” DeWolfe loved those early days when he and Tom had time to go to the Viper Room and other clubs to check out new music every week: “It was pretty much a great way to work.” The bands turned out to be their best marketing tool. “All these creative people became ambassadors for MySpace by using us as their de facto promotional platform,” DeWolfe says, adding, “People like to talk about music, so the bands set up a natural environment to communicate.”

It’s hard to tell how Chris and Tom made out when News Corp purchased MySpace:

DeWolfe got $2.9 million from the deal, but that’s surely conservative. The pair got millions more from their stake in MySpace Ventures - a minority owner of the site - plus handsome contracts when they joined News Corp. The company won’t discuss the matter.

If they got less than $100 million each, I would be very sad for them. The article reveals that Chris and Tom are in this for the love of it, but still, they’re responsible for building one of the most exciting internet property’s ever, and yet all the evidence points to them getting shafted because they gave away too much ownership early on. Today, there’s just no reason to give away most of your company to investors. That’s my feeling anyway.

I see a whole new trend rising, and it’s centered on emphasizing the importance of founders and their ideas and implementation. This is especially true when you consider the downward spiral of the cost of implementing a web business. With new services like Amazon’s S3 and EC2, small companies can scale like large ones and on the extreme cheap.

One could argue that the money Chris and Tom took did help MySpace become what it is today, so it’s hard to say they’ve messed things up too badly. On the other hand, in addition to giving away most of their company early on, they also sold to News Corp too soon. When you look at the fact that they could have made $900 million from a deal with Google without selling a single percent of their company, you have to feel just a little sorry for these two. Of course, we’re looking at the Google deal in hindsight; almost every pundit initially thought that News Corp payed far too much for MySpace. So it’s easy to look back and flap one’s jaws.

The point is, if you’re an entrepreneur now, you have this MySpace tale to guide you. It illustrates that a large, sticky audience is worth a hell of a lot nowadays. Ever since Google figured out how to sell contextual ads, the worth of the classic eyeball has been recalibrated in a stunningly upward direction.

Still, when you are presenting your idea to an investor, be aware that they still think their money is worth at least half of your company. I’ve even heard VCs say that if an entrepreneur seems too stuck on valuation, they immediately become “not interested” because obviously the supplicant is focused on the wrong thing. Those silly entrepreneurs aren’t supposed to realize their worth! Instead, they’re supposed to bend over and accept the VC’s valuation, and then work really hard to make their investment pay off.

Today it’s possible to take advantage of open source tools and Amazon web services to release a scalable product before ever seeking investment. So why not bootstrap, and then when you have that hit and need more money, you won’t have to bend over quite as much. And hey, if you figure out how to charge for a premium version of your service, you may never have to raise money at all.

I’m not sure how this article took a turn into a rant against VCs, because I’m not actually against VCs. There are some that recognize the rising value of the entrepreneur. There are some that give just as much as they require the entrepreneur to give. There are some that really get it. But most don’t. I’m just saying that we entrepreneurs have been handed the power football like never before. And now, we’ve just got to recognize that fact and learn to run with it on our own.