Steve Chen on how he started YouTube, scaled it, and sold it to Google

Steve Chen

How do you begin to describe the influence of YouTube? Possibly with some fast stats: that 300 videos are uploaded to YouTube every minute and over five billion videos are watched every single day. Maybe it’s also worth pointing out that recent valuations place its worth at over $100 billion dollars.

Perhaps, most telling of all is mentioning its 2006 acquisition by Google. After just two years, YouTube sold to Google for a cool $1.65 billion—a billion-dollar deal that may or may not have taken place over a Grand Slam® breakfast.

Suffice it to say, you’d be hard-pressed to find someone who doesn’t know what YouTube is or hasn’t spent time watching a video on its site. Yet, to this day, its massive scope and scale is something YouTube co-founder Steve Chen could have never imagined.

Here, Steve reflects on the early days at YouTube, how it nearly became a dating app, and how business complexities led them to their deal with Google.

The real reason why he started YouTube

Every founder has two stories behind why they founded their company: the one they can rattle off in their sleep to VCs and PR and then the real one, which is not quite as dazzling. The real story for Steve begins back in his hometown of Chicago, where he was recruited by fellow University of Illinois alum Max Levchin to work for PayPal in the Bay Area.

Steve’s first day at PayPal was when he met his eventual YouTube co-founder, Chad Hurley. Developing a close relationship over the years, they both knew they wanted to work on something together, although Steve admits, almost sheepishly, that their original idea wasn’t remotely close to what it is today.

At the time, a popular online site called “Hot or Not” allowed people to rate the attractiveness of other people. Its premise was incredibly simple—judging by your photos, you were either “hot,” or you were “not.” Steve and Chad’s original idea was to expand on that to provide people with a way to upload more robust dating content, such as videos.

In order to upload videos, every video needs to be transcoded on the backend. This level of transcoding used to require a combination of different applications, a bit of expertise, and lots of time. Steve and Chad ended up designing a platform that could transcode videos in real-time and be viewed immediately within a browser.

But before YouTube’s official launch, Steve and Chad began to have second thoughts about launching as purely a dating site. As Steve says, “Are people really going to get in front of the camera and say, ‘Hi, my name is Steve and I’m 40 years old’? I mean, all the videos would have ended up looking the same.”

Despite early indications of cold feet, YouTube still launched as a platform for dating content. Then they had a change of heart in the first week and quickly rebranded the user interface to convert its hearts into stars—which is how YouTube ultimately avoided becoming known as just another dating app.

Building the basis for survival

In his early days at PayPal, the company would routinely find itself at odds with eBay, which was trying to create its own payment service and had been shutting them down continuously. Steve’s experience finding creative ways to work around eBay prepped him for a similar environment with MySpace.

At the time, MySpace users were sending photos back and forth but they didn’t have a way to share videos. What’s more, MySpace engineers were always trying to remove flash embeds to restrict third-party video sharing. Steve notes that had their engineers not done this incorrectly, YouTube wouldn’t be around today.

It took MySpace several months to figure out how to shut down YouTube embeds before shutting it down completely in 2005. Then the two companies continued to go back and forth between shutting the service down and getting it back up. While it took some time and, as Steve recalls, sharing the customer service number at MySpace for troubled users, the companies eventually came to satisfactory terms with one another.

For Steve, YouTube was simply designed to be a complementary service for shared users to enhance their MySpace activity—not to steal them.

Throwing out the first pitch

Not many companies made it out of the crash wreckage in 2005-2006. Investors still weren’t sure about what was going to happen in the future. However, they were beginning to see some semblance of a recovery. Nonetheless, for Steve and the team at YouTube, survival meant they had to make do with small funding.

Their first pitch deck (something Steve says can still be found somewhere on the interwebs) was thrown together about 30 minutes before the meeting. Its last three slides, which illustrated the number of views, registrations, and uploads each day, were key to the presentation and became critical metrics as the company grew.

The presentation went great, and it was clear to investors that they had something special. The big question, however, was whether or not the Internet could sustain more than streaming photos and texts. Despite some uncertainty, the company secured three-and-a-half million dollars in their Series A—an amount Steve considers unreal in comparison to funding levels today.

Back then, the Internet was expensive, both for providers and servers, and every time someone watched a video, YouTube had to pay for it. Fortunately, things continued to get cheaper and cheaper until YouTube no longer faced such steep distribution costs.

Inking the right deal over pancakes

Nobody expected a platform like YouTube to come around. And with a global platform, where anyone can upload anything at any time, bigger and more complex issues often arise. Every country has different policies on what’s permissible and what’s not. For example, sexually suggestive content that is educational is generally okay across Europe, but not so much in other regions or countries. Figuring out what to leave up and where to leave it, despite its origins, can become complicated.

Background music is another complexity YouTube faces. Someone playing music in the background of their video doesn’t realize that they don’t have distribution rights to that music. But it happens all the time and when it’s viewed by a million people, it becomes problematic.

Even just looking at U.S.-based content, Steve says, large companies that own that content have to be contended with. With more and more record labels and bigger players coming into the game, it was becoming that much more complicated to navigate through—especially with a smaller legal team.

Enter: the deal with Google

The sale of YouTube took five days. They wanted it to happen quickly and because they couldn’t let people figure out what was happening beforehand, they had to rule out meeting at anyone’s offices. So, they picked a place that no one would expect: the Denny’s off highways 101 and 84.

After meeting with a few interested parties, YouTube was ultimately sold to Google in 2006. According to Steve, without the Google deal, YouTube wouldn’t have been able to make it today. They had already recruited some of the best engineers, but their well was beginning to run dry—not to mention the boost they needed to their legal team.

After the acquisition, Google and YouTube continued doing things really well, such as not focusing solely on monetization and keeping the performance metrics from their original pitch deck. They continued to track them, share them routinely throughout the company, and measure goals against them.

Looking to the future

It’s no secret that YouTube has inspired a lot of other companies. From video game players to beauty influencers, YouTube cuts out the middleman between content creators and their audience. As a result, Steve has watched the user-generated content space quickly mature.

But he never thought the platform would have the reach that it has today. Contrasting expertly produced video clips from the likes of ESPN or MTV to self-produced iPhone videos, it would have been nearly impossible to guess that the majority of views would eventually come from individually produced video content or groups of creators.

Today, YouTube is synonymous with TV. Competing against streaming services such as Hulu, Amazon, and Netflix will make it increasingly harder for companies to stand out as both a platform and a creator. In the next few years, Steve predicts that content will remain king and who gets paid more for their services will come down to who creates the most distinguishable content.

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