I Spoke to the REAL Inventor of Facebook. (The Social Network Explained)
Okay, we are now focusing on one of the newest members of Harvard's class of 2006. Mark Zuckerberg originally launched the Facebook.com from his dorm at Harvard College on the 4th of February 2004. He and his friend Eduardo Saverin had invested a thousand dollars each into the project, and it turned out to be money well spent. Within a month, more than half the Harvard undergraduates had registered. One month later, Facebook expanded to Columbia, Stanford, and Yale. Then, in June 2004, as Facebook hit a hundred thousand users, the company moved to Palo Alto, receiving their first investment from PayPal co-founder Peter Thiel. By the end of 2004, Facebook had one million users. But six years later, the company had 500 million users. Finally, on the 18th of May 2012, the company went public at $38 per share, rocketing Mark Zuckerberg's net worth to $19 billion.
Now, that is a massive success story, but as you guys might know from the movie "The Social Network," there's one major problem: Facebook wasn't Mark Zuckerberg's idea. In fact, he infamously stole the idea from somebody else. Well, I tracked down that somebody else, and this is his side of the story.
"Harvard Connection was an idea that I'd come up with. We didn't need an actual programmer." The trio reached out to Zuckerberg when Divya Narendra asked him to build Harvard Connection. "Did you say yes?" "I said I'd help." We actually had two programmers who worked on the site prior to Mark for almost a year, and the first version of Facebook I built in two weeks. In that period, he looked at our source code; he looked at our execution strategy. There were no written agreements with Mark, and that is why you should be nice to people.
The IM suggests Zuckerberg was deliberately misleading the Winklevoss twins. "The idea that you would get screwed by, you know, that aid—we have all started lifelong friendships here. Oh, your only friend, you set me up." It's pretty safe to say there's more to come on the ConnectU-Facebook litigation process.
If you saw the 2010 movie "The Social Network," you'll be very familiar with these two guys, Cameron and Tyler Winklevoss, twins that went to Harvard that eventually went on to row in the 2008 Summer Olympics. Now, the movie likes to dramatize the battle between these two and Mark Zuckerberg. But interestingly, the idea for Facebook actually started with a man called Divya Narendra, whose character played by Max Minghella unfortunately got a lot less screen time than the Winklevoss twins.
Originally, Divya came up with an idea to create an online platform then called Harvard Connection that would allow Harvard attendees to easily connect with one another over the internet. "The light bulb moment was the realization that you could create, you know, an online network where you vetted membership by parsing for the harvard.edu email address. It was like one of these moments—like, wow, like this doesn't exist. Seems like a no-brainer; someone's gonna do it—like, I might as well be the one who does it."
"I had a roommate at the time, not a roommate; we were part of the same friend group. He had an internship lined up at Google. Automatically, I knew that the guy could code, so I called on him. He was super excited; he said, ‘Yes, this is great; I want to help you out.’ Soon after, I spoke to him about it. I reached out to my roommates, the Winklevoss brothers. Their father was a serial entrepreneur, and they got it right away. So, the three of us, and Sanjay, this programmer, were kind of like, ‘Okay, let's build this out.’ So, with the team of four, Harvard Connection was born."
As Divya described, the idea was to create an online social platform where people specifically from Harvard University could create an account, update their profile, add friends, and send messages to their peers. "You might say, ‘Well, hang on, that isn't Facebook; Facebook is way more than that.’ But you have to remember that when Facebook launched, it wasn't more than that. The first version of Facebook did exactly those things and was only available at Harvard."
So Divya, Cameron, Tyler, and Sanjay—they had a plan, something that hadn't been done before, and now it was full steam ahead. Well, so they thought. As time went by, Sanjay wasn't able to fully commit to the effort, you know, and as he got closer to kind of taking that full-time opportunity with Google, he just kind of lost interest.
"I can understand, because at that time, nobody was doing this. So, it's not like it was cool to go do a startup. But because there wasn't really a VC environment around college, I just went to programmers I knew, and it was just really about sharing equity in an idea. We didn't have capital to go pay people, and so we went through a number of programmers. The last programmer that we went to, after the previous three had sort of shirked their responsibilities a little bit, you know, focused more on school, was Mark Zuckerberg."
One day, Cameron and I visited Mark in his dorm and just kind of walked him through what we were trying to do and sort of invited him into this partnership. In November 2003, the Winklevoss twins, along with Divya, approached Mark Zuckerberg to finish off what the previous Harvard Connection programmers had worked on. They met in the dining hall of Harvard's Kirkland House, where they explained to Mark what they were working on, the plan to expand to other schools after launch, the confidential nature of the project, and the importance of getting there first.
At this point, Mark agreed to join the project and became a partner in Harvard Connection. On November 30th, Mark Zuckerberg emailed Cameron Winklevoss, saying, "I wrote over all the stuff he sent, and it seems like it shouldn't take too long to implement, so we can talk about that after I get all the basic functionality up tomorrow night."
The next day, Zuckerberg sent another email to the Harvard Connection team: "I put together one of the two registration pages, so I have everything working on my system now. I'll keep you posted as I patch stuff up, and it starts to become completely functional." It seemed like the project was really nearing completion, but unfortunately, that's about where the good times end, and things start to get a little bit ridiculous.
On December 4th, Zuckerberg wrote, "Sorry I was unreachable tonight; I just got about three of your missed calls. I was working on a problem set." Another six days passed before Mark writes, "This week has been pretty busy thus far, so I haven't gotten a chance to do much work on the site or even think about it really, so it's probably best to postpone our meeting until we have more to discuss. I'm also really busy tomorrow, so I don't think I'd be able to meet then anyway."
Another week later: "Sorry I've not been reachable for the past few days; I've basically been in the lab the whole time working on a CS problem set, which I'm still not finished with." Fast forward to January 8th, 2004, Zuckerberg emailed to say he was "completely swamped with work that week, but he'd made some changes, and they seemed to be working great." Then, on January the 14th, he met with the Harvard Connection team, where he told Divya, Cameron, and Tyler that he would continue to work on the project.
But then the killer blow: just a few weeks later, on February 4th, 2004, Mark Zuckerberg launched his new revolutionary website called the Facebook.com. Four months later, after first bringing Mark on board, kind of giving him the keys to our servers to go write the code to finish what these other developers had started, I opened the Crimson and I hear about the Facebook.com. You know, immediately I knew this was a knockoff, right? Like, I knew like this is definitely, you know, this is our idea. I mean, maybe there were certain nuances that were different, but even like the format of the page itself looked like Harvard Connection.
So we were feeling when you saw that, yeah? I mean, it was total shock and just kind of, you know, shock and betrayal. Despite agreeing to complete Harvard Connection with Narendra and the Winklevoss twins, Mark Zuckerberg launched the Facebook.com to resounding success. Within a month, more than half the undergraduates at Harvard had signed up. But it kept growing. By June of 2004, just four months later, Facebook had a hundred thousand users.
Sure, it's impressive, but it's also plagiarism, and being on a university campus, Divya, Cameron, and Tyler started pursuing that plagiarism route by meeting with then President of Harvard, Larry Summers. "That was actually one of the more disappointing elements of the experience was just the interaction with Larry Summers, which was in the movie. If you remember, there was a, yeah, um, the movie missed the fact that I was also at the meeting, and I can tell you, Summers just did not care. Yeah, he was like, ‘Oh, disappointing.’ Very disappointing."
"Because there is a student handbook at Harvard where, you know, the handbook does highlight like kind of just treating other students with a certain degree of due care. Like, there is a section on that, like, you know, for example, like, plagiarism is taken very seriously. Yeah, in college, like, you get kicked out of school if it's doing this stuff like that, right? So it was just interesting to see how when maybe some of the fairness principles behind something like plagiarism get applied to a, let's say, a non-academic business project, that that they sort of just go away. You know, like, that's not really taken seriously at all, so it's just very, very interesting. I think kind of sobering and disappointing."
So with Summers telling the trio to resolve their issue in the courts, that's exactly what they had to do. In 2004, they filed a lawsuit against Facebook, alleging that Mark Zuckerberg had breached an oral contract to develop Harvard Connection, now called ConnectU, and use their source code and idea to create the Facebook.com. But it wasn't an easy process. Ultimately, the lawsuit took nearly four years to resolve. However, finally, in February of 2008, Divya, Cameron, and Tyler settled for reportedly $20 million in cash as well as 1.25 million Facebook shares, which was, in total, a $65 million settlement.
But that wasn't the end of the Facebook drama. In fact, just when everybody thought all was said and done, Cameron, Tyler, and Divya learned that they had just been screwed a second time. Joining me now are two of the men at the center of one of those lawsuits, Cameron and Tyler Winklevoss. They had already reached a reportedly $65 million settlement with Facebook, but they are trying to reopen this case. In May 2010, it was first reported that ConnectU was looking into Facebook over potential securities fraud on the value of the stock that was a part of the settlement and wanted to get the settlement undone.
The reason for this was that at the time Facebook supposedly based the value of the shares included in the settlement on a $15 billion company valuation that Microsoft put on Facebook in 2007 when they bought some of Facebook's preferred shares for the common stock. However, which were the shares included in the settlement, Facebook internally valued those shares at roughly 75% less than the preferreds. "When you signed the settlement, that's reportedly $65 million, Facebook told you the shares that you were given were worth more than four times what they internally valued them to be. Why did your lawyers catch this?"
"Well, Facebook being a private company as it is right now, they're the only ones who have their own internal valuations, and so all that information is in their possession and only their possession. So we're trying to get out of an agreement that was in bad faith. It's incumbent upon them; it's their duty obligation if they're going to trade their securities to disclose those. They did not disclose those."
Now, what this meant is that by using the valuation of the preferred shares instead of Divya, Cameron, and Tyler receiving a $65 million settlement, they're really only receiving $31 million. "We settled with Facebook in 2008, in February 2008. In October 2008, going into 2009, equity markets collapsed—the S&P fell 40%. So actually, privately held companies were crushed. There was a website where you could see how privately held companies' shares were trading like in the private markets, right? Facebook was trading at low single-digit levels at that time.
So right, we had reached a settlement thinking we had achieved a certain value, you know, that our shares were worth a certain amount, and then, you know, given what was happening macro, whatever that value was was rapidly shrinking."
Beyond that, it was also at this time that the trio learned that there was also actual evidence that Mark Zuckerberg intended to screw them over right from the start. Mark Zuckerberg was conveniently keeping these instant messages under wraps for the duration of their lawsuit. For four years of litigation, they deep-sixed and suppressed all of the radioactive evidence, such as IMs showing that Mark intended to defraud us premeditated. He even thought the sites were identical and wondered whether they would counteract each other. So they sat on these for four years; we never saw these documents.
Dodgy as... Unfortunately for Divya, Cameron, and Tyler, the $65 million settlement was never corrected. While $65 million is still a lot of money, think about it like this: By 2010, if their settlement had been adjusted, it would have been worth $466 million. Instead, in 2010, it was worth just a quarter of that amount. But one of the things I took out of talking to Divya was that even though he and his close friends got royally screwed by Mark and by Facebook, he's actually been able to move on and, dare I say it, he can actually respect what Mark has been able to turn Facebook into.
"You have to put yourself in the mindset of an undergraduate student where you're used to, like, you know, if you think about like what your mental framework is as a student, it's like eating burritos and wearing the same pair of jeans to class every day. And the idea that you would get screwed by, you know, at that age is a little bit out of left field; at least I thought it was. And again, that's where it gets to like just not having enough experience and just maybe from a personality standpoint being a trusting person, you know? And I think, yeah, that probably like on the one hand, that bit us. On the other hand, whatever happened in that, you know, year-long period, you know, that in that window of time somehow resulted in what became a massive business outcome."
"In terms of, you know, if you look at where Facebook is today and just to think back where it started, I mean, it's pretty incredible how many people have been impacted by that business." How does that sit with you today, knowing all that transpired and knowing that all those years ago, it's kind of, that was your idea? How does that sit with you now? I mean, this is what, about 20 years ago?
"Yeah, I'm a pretty forward-looking guy, so I don't spend too much time dwelling on the past. I mean, I think there's some key takeaways. Some of those takeaways are kind of business learnings, but I think more importantly, the learnings really had more to do with like how you assess people in your inner circle, you know, or in your business circle. And, you know, like how do you get comfortable with people so that you avoid needing to rely on legal recourse to fix situations that have gone awry?"
Interestingly, since then, I've never had any problems of that vein that were, you know, due to, you know, a misplacement of trust. "Right," which is like a very fundamental lesson. "Just trying to read between the lines a little bit when you meet somebody, you know, who's a poser, who's kind of like the real deal, who you know—like really trying to think that through, having that kind of situational awareness, I think is one of the most important takeaways from my experience."
Honestly, that is probably the most valuable bit of information Divya taught me from that whole interview. You can really hear it in his voice too; he really has been able to stay rational even after being totally screwed by Mark Zuckerberg. This circles back to the mentality of a good value investor, right? In the interview, he discussed how he was considering selling his Facebook shares after he received them in 2008, just as the world was blowing up.
But ultimately, he was able to stay rational and decided the smarter thing to do was just put the past behind him and hold the stock, a rational investment decision, which has definitely paid off in the long run. So anyway, guys, that is Divya's story, the man that thought up the idea for Facebook.
I should say as well, these days Divya runs his own company called SumZero, which is kind of like a social platform for professional investors. So lots of big-name investors will write in-depth reports on different businesses and post them on SumZero. Anyway, if you're interested in checking it out, I'll leave that information down in the description.
This video is definitely not sponsored by SumZero by any means, but you know, maybe just as a way of saying thanks for coming onto the channel, maybe you wanted to head over there and check out what he's up to now. Anyway, guys, that'll just about do us for today. I hope you really enjoyed. Of course, leave a like on the video if you did enjoy it, and I'll see you guys in the next video.
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