YouTube started in a rat infested office. The 3 founders begged strangers to post.
This video is sponsored by Shopify. YouTube is the second most visited website in the world after Google. More than 500 new videos are uploaded every single minute, and over 1 billion hours of content is watched around the world each day.
But when YouTube first started, uploading, or even watching a video online was unheard of. And, when the founders set out to change that, investors called their idea “cute” and questioned its value. Eager to prove them wrong, YouTube’s founders brushed off skepticism and continued to build the site — all while dodging threats of annihilation from the world’s biggest companies. Years before YouTube launched, the founders all worked at PayPal, a once-starry-eyed startup that made it possible to send and receive money online. They never imagined that they would one day start a company together — up until a corporate nightmare fuelled a fire inside them.
In 2002, eBay, the world’s largest online marketplace, bought out their dominating competitor PayPal for $1.5 billion after a bitter rivalry. The decision was made after PayPal’s founders, Max Levchin and Peter Thiel, realized their team was run down from working seven days a week — four years straight. Since launching, they had faced cutthroat competition from countless companies, including eBay’s payment service Billpoint, and didn’t have the resources to keep fighting. “On the emotional front, it was very difficult,” Max admitted.
“On the business front, it was probably the right thing. The team was very tired.” After the sale, it was clear to Max and Peter that eBay wanted to make PayPal their own — prompting them to leave just weeks later.
When their team found out about the acquisition, they were shocked and disappointed. Some even felt betrayed and described what came next as a nightmare: eBay began to treat them like factory workers. “The engineers’ names became anonymous,” Steve Chen, one of PayPal’s first engineers, recalled. “It was just ‘We need three and a half engineers to work for 14 days on this project.
We don't care who it is. We don't care who's sick. All we care about is that this product launches on this date, and it has to be able to monetize.’” Three years before, Steve was a 21-year-old, studying computer science at the University of Illinois. Max had also attended the same college, and was recruiting engineers for PayPal. He didn’t know many people in Silicon Valley, so he reached out to Steve after a recommendation from one of his engineers.
After interviewing Steve, Max quickly made an offer. Steve was interested but had six more months before graduating. Still, he decided it was a risk worth taking and dropped out of college to start working for PayPal immediately. His family, who had moved from Taiwan to the U.S. in hopes that he would one day achieve the American dream, warned that his decision was way too risky. “If the company fails, I can always go back to college,” Steve argued.
Three days after making his decision, Steve flew from Champaign, Illinois, to San Francisco, California, and then drove to Palo Alto, where PayPal was headquartered. Being a broke student, he couldn’t afford to rent a place and slept on the floor of his friend’s apartment. Steve had come a long way from those days. By the time eBay bought PayPal, he had worked his way up from being one of four engineers to being a manager running a team of over 20. And while they were given the opportunity to launch PayPal in China, Steve couldn’t overlook how his team was being treated — prompting him to think about what he would do differently if he ever started a company.
Eventually, Steve couldn’t help but consider striking out on his own. He started talking about company ideas with two other colleagues, Chad Hurley and Jawed Karim. Chad had started working for PayPal around the same time as Steve. But unlike him, the then 22-year-old didn’t know anyone at the company before joining.
After graduating from the University of Pennsylvania with a bachelor’s degree in fine arts, Chad discovered a WIRED article about PayPal. Intrigued and desperate for a job, he sent in his resume in hopes that there was an opening. Fortunately, Peter and Max got a hold of his resume and were impressed enough to fly him out from Philadelphia, Pennsylvania to Palo Alto for an interview. During the interview, Peter and Max asked Chad to create a logo for them to showcase his design ability.
Two days later, they offered him a job as the company’s first designer. Chad immediately accepted and prepared to move to Palo Alto. Being a struggling artist, Chad could not yet afford to rent a place and he too slept on the floor of his friend’s apartment. In fact, he was so low on cash that he didn’t have enough money for food until he got his first paycheck. Jawed joined PayPal a year after Steve and Chad. Like Steve, he was recruited by Max while studying computer science at the University of Illinois.
But had he given up in the face of a crushing rejection, he might have missed out on the opportunity. Starting from a young age, Jawed was passionate about computers and even wrote and sold his own software. However, when he applied to the University of Illinois’ computer science program, he was denied admission. “The program is full,” a letter from the college read. “You have been assigned to the ceramics engineering program.” Jawed was devastated.
He had no interest in a future career in pottery. And he had only applied to U of I because its computer science program was renowned as the best in the world. It was also where someone he looked up to, Marc Andreessen, co-founded Netscape: a popular web browser that dominated the market in the ‘90s. Keen on following Marc’s footsteps, Jawed wrote back to the college, asking if they could reconsider, promising that he would be a highly motivated, dedicated, and ambitious student. Fortunately, the college took Jawed at his word.
“Being persistent really pays off,” Jawed thought to himself. Jawed delivered on his promise to the U of I — up until his junior year. Max was looking to hire more engineers and made him an offer. But like Steve, Jawed would have to drop out of college and start working for PayPal immediately. Jawed, then 20-years-old, thought about it for two weeks until making a decision: he would accept Max’s offer and finish college when he got the chance. Jawed, Steve, and Chad ended up working together on many projects during PayPal’s early days — often 80 to 90 hours each week.
Over time, they realized they worked especially well together and started talking about what they wanted to build next. Almost every day, they’d chat about ideas while waiting for coffee at a shop called Dana Street by the office. But eventually, they stopped after Chad took off to become a design consultant and Jawed did the same to resume his studies. Meanwhile, Steve continued to work on launching PayPal in China — a massive undertaking that involved creating a new product in Chinese that complied with China’s strict regulatory requirements. After a few years, PayPal finally launched in China.
Steve was proud of himself, as well as his team’s accomplishments but felt that it was now time to move on from PayPal. He was certain that there wouldn’t be a bigger and more challenging project than launching in China. Plus, he had been unhappy at the company for a while. Fortunately, Steve didn’t have to look for a new gig for too long.
Facebook, a new social network that launched the year before, recruited him as one of their first engineers. At the time, Facebook had just gone international and had more than 6 million users. And while it was an exciting place to be, Steve still couldn’t help but think about starting his own company.
“If I don’t do it before I get married and have kids, there isn’t going to be another time that I can do it,” Steve thought to himself. “The window is closing.” Soon after, Steve decided to start meeting with Chad and Jawed again.
Like before, they talked about what each of them wanted to build next, specifically things that could be enhanced or optimized through technology. Eventually, they decided to try and create something together since they worked especially well with one another at PayPal. As the three brainstormed ideas, the topic of someone they met at Dana Street was brought up: Jim Young, the founder of Hot or Not, a site that allowed people to upload their photos and let others rate their attractiveness. While Hot or Not was built for fun, it had turned into a dating site that led to many marriages. Even more surprising was that hundreds of thousands of users were willing to pay $6 per month to use it — making Jim and his co-founder, James Hong, unexpectedly very wealthy.
Steve, Chad, and Jawed were impressed by Hot or Not. Not because of how lucrative it became but how it was one of the first times someone designed a site where anyone could upload content that others could view. “That was a new concept because up until that point, it was always the people who owned the site who would provide the content," Jawed recalled. After discussing Hot or Not, the three former colleagues talked about the possibility of creating a similar dating site where people could upload videos of themselves instead of photos.
It was the first idea that all three were excited about, and so they decided to try their luck. After coming up with the name YouTube, You representing user-generated content and Tube representing a TV, Steve and Jawed got to work on the engineering and Chad on the design. Unbeknownst to any of them, they would soon take on more than they anticipated: competing with one of the biggest and most feared companies in the world. What we can already learn from YouTube’s story is that not all entrepreneurs grow up thinking they’d one day start a company.
More often than not, they first start to think about the idea after feeling unhappy and unchallenged at their day jobs. From there, they’ll often spend countless hours thinking about what product or service they can offer and become overwhelmed by the many logistics and upfront costs. Fortunately, times have changed and there are now online resources that provide helpful information. In fact, Shopify, the sponsor of this video, runs a blog that offers free education, tips and inspiration.
Anyone can access their blog to learn about noteworthy trends, business ideas that require less logistics and upfront costs, and how exactly they can bring their idea to market. Shopify also offers an easy to use and affordable commerce platform that allows anyone to build, design and manage an online store — regardless of technical or design ability and experience. Plus, Shopify helps entrepreneurs with technical support 24/7, offering built-in marketing tools such as email campaigns and Google and Facebook ads, and analytics tools to gain insights on sales, website traffic, and customer demographics.
If you’re an aspiring entrepreneur, you can learn more about low-investment business ideas by going to shopify.com/hook2 or click the link in the description below. Tough decisions were made to start building YouTube. Jawed was pursuing a master’s in computer science at Stanford University and decided to try and balance both his studies and work. Meanwhile, Steve handed in his resignation at Facebook after working there for only a few weeks. “You’re making a huge mistake!” Matt Cohler, Facebook’s VP of product management, warned.
“You’re going to regret this for the rest of your life. Facebook is going to be huge!” Steve heard Matt out but made it clear that his decision was final and headed to Chad’s garage to start building YouTube. Soon after, Steve, Chad, and Jawed quickly realized that building a video dating site was easier said than done. At the time, it was impossible for anyone to watch several videos from a browser since the files were too large for websites to host.
In fact, watching just 50 videos that were 20 megabytes each used up 1 gigabyte of bandwidth — exceeding most website quotas. It was also difficult for most people to download and then watch videos from their computer. There were hundreds of different file formats, known as codecs, that required installing the right video player that could run on their operating system. But eventually, Steve, Chad, and Jawed realized they could leverage a new version of a web browser plugin called Flash Player 8.
Flash Player 8’s codec shrunk video files to a fraction of their original size and allowed them to be played instantly from a browser. And because it was free, 98% of computers were using the plugin. To Steve, Chad, and Jawed, it only made sense to try and find a way to allow people to upload a video of themselves to their site, transcode any possible video codec to Flash, and then allow other people with Flash’s plugin to watch the videos online.
After many trials and errors, Steve, Chad and Jawed succeeded. But soon after, they discovered a potentially huge problem. Google announced they were launching a free video hosting site called Google Video. Google Video intended to allow anyone to submit videos and choose whether others could watch them for free, or by paying for access. Though, videos had to meet certain requirements to be approved, including being uploaded in particular codecs, not infringing on any copyrights, and not violating any policies.
Steve, Chad, and Jawed feared that Google might perceive YouTube’s technology as a threat and weren’t sure if they should still launch. But after giving it more thought, the three founders decided to do it anyway and see what happens. One month later, YouTube went live. The site allowed people to upload videos of themselves and randomly picked videos to watch next. To promote the site, Steve, Chad, and Jawed pitched it to every writer that worked for WIRED. Unfortunately, none of them were interested in checking it out.
Even worse, no one was using it. Desperate for users, the three founders posted to Craigslist, asking women to upload videos of themselves for $20. Not a single person replied. Thinking videos of anything would be better than nothing, Jawed started to upload videos of airplanes and then him at the zoo.
And while he, Steve, and Chad admitted it didn’t make any sense, they noticed that soon after, people were finally uploading to the site. Though, they weren’t the kinds of videos they were expecting. People were uploading videos of their cats, dogs, vacations — pretty much anything personal. “I’m getting depressed,” Steve admitted. “There aren’t that many videos that I’d want to watch.” Chad and Jawed were just as disappointed as Steve.
But eventually, the three decided to just turn YouTube into a general video site, and once again, see what happens. When they did, no one took them seriously. A month after the decision to pivot, the new version of YouTube went live, allowing users to upload videos in any codec, receive a link to share their videos, and unlike before, select what types of videos they wanted to watch — instead of being shown randomly picked ones. Users could also embed videos on other websites, which led to a surprising phenomenon. Tons of users were coming into the site from MySpace, which was then the largest social network in the world.
The three founders quickly realized that people were uploading personal videos of themselves on YouTube and sharing them on their MySpace profiles. At the time, MySpace was one of the first social media sites where users were able to share their personal photos. Photography was becoming more widespread since digital cameras were becoming more affordable, making it not just for photographers, and more cell phones were now being built with cameras. With YouTube, they had finally found a way to share personal videos since no other site allowed them to and the videos were too large to email. A few months later, YouTube’s number of users, videos uploaded, and views per day skyrocketed from 0 to thousands — resulting in having to pay astronomic prices for more bandwidth.
At first, Youtube could only afford the costs because Steve kept charging them to his credit card and begging his bank to increase his limit. But after several more requests, the bank cut Steve off. Along with finding a way to get more bandwidth, Steve, Chad, and Jawed needed to hire more engineers.
They had managed to convince some of their PayPal colleagues to help them, but they could only do so for a short while since they weren’t being paid. Knowing that they couldn’t scale on their own, they decided that it was time to raise capital, especially since YouTube’s metrics began to double every week. But when they tried, investors quickly dismissed them — calling YouTube “cute” and questioning its value.
The three founders were taken aback but decided not to give up and look for capital elsewhere. Fortunately, their persistence paid off. An opportunity came that same month when they least expected it. One day, Jawed attended a BBQ hosted by Mike Greenfield, PayPal’s first data scientist, and bumped into Keith Rabois, PayPal’s former VP of business development. As they caught up, Keith asked Jawed what he was working on.
Jawed told Keith about YouTube and how transcoding, sharing, and embedding videos worked. Keith was so impressed that he sent a link to the site to his friend, Roelof Botha, PayPal’s former CFO and a partner at Sequoia — one of the top venture capital firms in the world that backed legendary companies like Apple. When Roelof checked out YouTube, he decided to try it out. He had been given a digital camera as a wedding gift and shot videos of his honeymoon but had never found an opportunity to share them. Naturally, he wanted to see if it was possible on YouTube. “I went on the site, uploaded the videos, got a URL, and immediately emailed them to friends and family,” Roelof recalled.
“It was an eye-opening experience.” Roelof was so impressed with YouTube that he reached out to Steve, Chad, and Jawed to arrange a meeting. He was curious to learn more about the site and gauge whether or not it was worth investing in. The three founders were overjoyed and quickly put together their first pitch deck, highlighting what problem they were solving and their solution, how they planned on generating revenue through ads, and their user and video metrics — which continued to double every week. After the meeting, Roelof was convinced that YouTube could be the leader in user-generated content, especially after discovering Google Video was targeting Hollywood content like TV shows and movies and planned on making users pay for access. Roelof quickly wrote a memo to his Sequoia partners, explaining why YouTube was worth investing in.
Collectively, they agreed to put in $3.5 million for a 30% stake and allow the team to work in their office instead of Chad’s garage. When word got out about the deal, investors began to mock Roelof and his partners. “There were so many people who were negative on the company at the time ... So many people were mocking me for making that investment, saying 'Online video had been tried and failed.' There was a lot of skepticism about the business,” Roelof explained, likely
referring to how Google Video never took off. After raising their first round of capital, Steve, Chad, and Jawed had to deal with more than just skepticism. They had to deal with one mountainous challenge after the other. As YouTube started to receive 8 million views a day, videos containing copyrighted content such as TV clips and music tracks began to surface on the site.
Soon after, MySpace lifted the ban on YouTube videos and stopped censoring any mention of the company. From then on, YouTube continued to grow and even outgrew Sequoia’s office — prompting them to move into their own in downtown San Mateo. And while it was affordable, it wasn’t an ideal space. There were exposed pipes on the ceiling, drab carpeting, curtains instead of walls, and a rodent problem.
“The place was infested with rats,” one employee recalled. “Giant rats — like the size of cats!” “The executives had to take turns removing some of the rats from the rat traps,” another employee revealed. In spite of the many hazards, employees found YouTube a fun place to work at and became very close with each other, ultimately helping YouTube take on its next challenge: a legal threat from NBC Universal, one of the largest TV networks in the world.
Many YouTube users were still not following YouTube’s guidelines and had uploaded about 500 videos containing Saturday Night Live clips to the site. When NBC found out, they demanded that YouTube remove every single one — otherwise, they would sue. Fortunately, YouTube’s team was quick to act and even built a tool that allowed any copyright owner to easily locate and flag videos that contained content infringing on their copyrighted work. The company also partnered with Audible Magic, an audio and video identification technology company.
Audible Magic's system scanned and compared videos against a database of audio and video content provided by record labels, film and TV studios and determined if they’ve been authorized to be shared on YouTube. NBC was so impressed with YouTube’s efforts that they later decided to promote their TV shows on the site. By then, YouTube had grown from receiving 8 million views a day to 35 million and raised an additional $8 million from Sequoia and Artis Capital Management.
Only one month later, YouTube started receiving more than 100 million views a day as creators began to upload a wider variety of content, including music covers, dance performances, short films, comedic skits, beauty tutorials, and vlogs. Steve, Chad, and Jawed clearly had much to celebrate, but instead, they were dealing with even more challenges. Due to YouTube’s immense growth, they had to purchase more computer equipment and broadband connections.
They also had to allocate more resources toward potential litigation since there were many disputes as to whether YouTube was a site that violated copyrights or protected by a law called the Digital Millennium Copyright Act — known as the DMCA. The DMCA shields sites from copyright infringement liability from what their users post, as long as the sites provide a way for copyright owners to report infringing content and take action to remove such content. While YouTube did both, it continued to be caught up in countless disputes with the three biggest record labels in the world: Universal Music Group, Sony Entertainment, and Warner Music Group. All three of them were constantly sending lawyers after YouTube and were even threatening to annihilate them due to videos containing unlicensed music. Eventually, YouTube’s team was stretched too thin and money was running out since they still hadn’t figured out how to generate revenue through ads. Steve, Chad, and Jawed didn’t have the resources to keep fighting and agreed that it was time to sell YouTube for the company to survive.
When word got out about the sale, a bidding war ensued. News Corp, Google, Microsoft, Yahoo, and Viacom all made offers, given YouTube was dominating the market with a 46% share. Meanwhile, MySpace only had 23%, and Google had 10%. Not wanting to become like PayPal after its sale to eBay, Steve, Chad, and Jawed carefully considered each offer. In the end, they chose Google since they were the most flexible with the deal terms and agreed to let YouTube’s current team run the company. YouTube’s engineers were also most excited to work with Google compared to other bidders.
Within a week, Google closed its deal with YouTube — purchasing the site for $1.65 billion. And immediately after, Google negotiated video and music licensing deals with several companies. At the time, all that was known about these deals was that YouTube would be allowed to broadcast certain TV shows and music videos. It was later revealed that Universal Music Group, Sony Entertainment, and Warner Music Group all quietly received small stakes in YouTube — likely to put an end to potential litigation from them. “They were the killers,” Michael Moritz, a Sequoia partner, revealed.
“Google was the savior. Nobody tells that story.” In spite of Google ’s favorable deals, Viacom decided to sue YouTube for more than $1 billion since thousands of videos of shows they owned were being uploaded to the site. In court, Viacom argued that YouTube was created to share videos of their shows, such as Comedy Central. Fortunately, YouTube retrieved proof of its plans to only become a general video site and fended off Viacom’s lawsuit. Under Google’s leadership, YouTube released a system called Content ID to prevent copyright infringement.
When a video is uploaded, Content ID scans and compares the content to a library of reference files provided by copyright owners like record labels, film, and TV studios. If the system finds a match, it will flag the video and notify the copyright owner, who can decide if the video stays up, if a portion of the video is removed, or if the video is blocked. YouTube also released its Partner Program to allow select creators to earn money from their videos based on ad revenue — allowing them to turn their hobby into a career. Not even a year later, the most successful creators were earning six-figure incomes. “It was one of the few places where you could actually earn money by creating something online without needing to set up advertising and sales departments on your own,” CNBC highlighted.
YouTube later implemented an algorithm that would show users video recommendations based on channels they were subscribed to and what they typically watched. Along with creators, the algorithm made YouTube even more successful since it helped to keep users on the site. Today, YouTube is the second largest search engine and second most visited site in the world after Google — worth hundreds of billions of dollars. With its paid memberships and new services, including YouTube Premium, YouTube TV, YouTube Music, and YouTube Kids, the site has overtaken cable TV, Amazon Prime Video, Hulu, Disney+, and is said to do the same with Netflix next. Already, YouTube users watch 1 billion hours of videos per day, while Netflix viewers watch only 400 million.
And because of YouTube’s ad revenue, the site is Google’s most profitable business and responsible for helping some creators make millions of dollars every month. As for Steve, Chad, and Jawed, all three moved on to starting and funding new companies and are known as being part of the PayPal mafia: the richest group of men in Silicon Valley.