Google: The Origin of Search

All right David last episode we are doing in our studios before radio city. Oh, that's right. How do you feel? We're about to go from like the stage of one Very very small audience of one to the very very big stage where if we make a mistake No one will notice yeah, and we just re-record it and it's like it never happened We should try that at radio city just feel like ah strike that all right. Let's take that again Yeah, hey, this is authentically acquired you guys. This is how we do it. You can look at the inside Probably not though. All right. Let's do it. Let's do it True Is it you is it you? Is it you who got the truth now? Is it you is it you is it you sit me down? Say it straight another story on the way Welcome to the summer 2025 season of acquired the podcast about great companies and the stories and playbooks behind them I'm Ben Gilbert. I'm David Rosenthal and we are your hosts Artificial intelligence is the story of our time. It is definitively the next trillion dollar technology wave after PCs The internet and mobile and to understand AI You have to understand the company most responsible for its technical foundation and the wave that came before it Google this episode begins our Multi-part Google saga finally as I'm sure many of you out there are saying right now Google has been the front door to the entire internet for 25 years now a quarter century But it wasn't always this way. No, it was not back in 1998 when Google was founded there were a dozen other search engines that already existed and there were a variety of Different business models most of which were not very interesting. Yeah, none of which were very interesting Yes, so today we will try to answer the question Why did Google work and once it did How did it go from clever technology and nice product to the single greatest business of all time? I'm not being facetious listeners Google and I should say alphabet today generates more net income or profit than any other US company more than Apple Microsoft exon mobile jp morgan chase Berkshire Hathaway. This is a cash Gusher. It is a super high gross margin B in a giant market and C according to the US government as of today They are a monopoly in that market with 90% market share That is three enormous numbers Together to create that most profitable company in the US stat that I threw out earlier Well, I'm glad we don't need to get to the government and all that until much much Later in our series, but yeah, this is the creation of the most beautiful business of all time and Google's market position has been seemingly unassailable at least until really this year until the AI war is really heated up So of course it was that clean user experience that everyone talks about with just a search box on the homepage And the focus on the users and the high quality fast search that spread virally through word of mouth But good product is far from the only reason that Google became dominant So today we'll tell the story of why Well, Google was nowhere near the first search engine. It was the last Well, you know Microsoft may take a little issue with that with being but only a little Few percentage points are she a percentage points of issue Well listeners if you want to know every time an episode drops check out our email list It is also the only place where we will share a hint at what our next episode will be share corrections updates little tidbits We learned from previous episodes. That's acquired.fm slash email after this episode join the slack to talk about this with us and the whole acquired community acquired.fm slash slack And if you want more acquired between each episode check out acq2 Our interview show where we talk with founders and CEOs building businesses and areas we've covered on the show The most recent was with Jesse Cole from the Savannah bananas David that was the most fun. I've ever had recording Basically any podcast episode. It was bananas. It was awesome. Yes So with that this show is not investment advice david and I may have investments in the companies we discuss in this show is for informational and entertainment purposes only David Rosenthal one is the first time any human being searched for anything ever I have no idea that's a great question. Not that far back. Where do we start? Yeah, well, you know what we should ask Google But to do that we need to tell the story of Google and that story starts in March of 1973 in Lansing, Michigan where Larry page is born as the second child and second son to Carl and Gloria page And Larry of course grows up in Lansing because his dad Carl page senior is a professor of computer science in nearby east Lansing at Michigan State University Now before my dad who went to MSU and his MSU alum gets too excited here I regret to inform him my dad and you bend it Carl got his PhD from Michigan. I'm sorry about that and Would send his son there as well Yeah, yeah, both of his sons and unfortunately Larry's mom also went to Michigan Also got a CS degree there and also teaches programming as a programming instructor at MSU Yeah, pretty Michigan heavy pretty Michigan heavy, but pretty amazing childhood in you know the early mid 70s here for Larry and his older brother I mean, maybe not unique. I'm sure there were a few other households in America in the world that grew up with both of their parents steeped in computers as computer science professors But really pretty unique incredibly unique are you kidding me Larry page grew up with two computer science academics Parents in the 70s which would have meant that his parents would have needed to start in the 50s very very few households like right at the same time As the PC era is coming online and Microsoft to just have that be Your air your daily existence growing up as a kid like how incredible is that amazing So even more so for future Google to come for the 1979 to 1980 academic year when Larry is six and seven years old His dad does a sabbatical year at Stanford so the whole family goes out and lives in Palo Alto and Stanford and early Silicon Valley there makes a big impression on young Larry And then he continues to kind of be influenced by this because you know I mentioned his older brother Carl junior who's nine years older than him Carl goes to Michigan majors in CS just like Larry would And then when he graduates He goes out to the west coast actually to the Pacific Northwest and he works fairly early at Microsoft and then Mentor graphics down in Oregon Carl junior would ultimately Also come down to Silicon Valley and play a little role in this story as we will see in a little bit But back to Larry here part of the reason I say all this and I want to include Sergei too And what I'm about to say even though we haven't introduced him yet in the story I think there's this perception today that Larry and Sergei were these like bumbling academic guys who weren't really business-minded and Google was a research project and this all sort of happened by accident that they built the best business of all time like Absolutely freaking not We wanted to spell that notion right now One of the things we heard over and over again talking to people in research is how hugely ambitious the two of them were Not just for the products they were building but for Google for the business Larry's a different generation and a very different personality than Mark Zuckerberg But you should think about his ambition and his desire to build a Huge world-changing company at the same level as him Yes, to your point google did not happen by accident or another reasonable comparison the generation before Bill Gates I think they publicly Larry and Sergei don't get the Same sort of ethos that those two get but the same fire was there Larry would say later This is a quote from him probably when I was 12 I knew I was going to start a company eventually I wanted to make the world better and in order to do that you need to do more than just invent things And he would say another time later You need to use business and entrepreneurship to make these things real It's not enough just to invent them Yeah, and he's alluding to two things there One is companies are the vehicles by which you bring ideas to the masses and two is in a capitalist society A company is the vehicle that can accumulate profits Which then you can reinvest to build something of your great scale and ambition Yes, and Larry got this all along and circulated too Okay, so as we all know Larry goes to Michigan undergrad He graduates in 1995 and then he goes off to Stanford to get his PhD in computer science where Has a fateful meeting with his business partner friend soulmate Sergei Brenn? And isn't the way this all went down that Larry was visiting and Sergei was already in the program I think Sergei was leading some kind of tour to try to sell Larry on joining the program and Larry is even though he's like the new guy there. He's like Challenging Sergei at every little corner. He's bringing up wouldn't a better system be this and they're talking about Cities and transportation and civic design and they're almost sort of like bickering back and forth in this verbal sparring of whose smarter even though they just met That's sort of like the story that I read and I don't know what are you and I read probably six or seven books between us on the history of Google Yeah, many many versions of this story out there As I was doing the research I talked to one of our good friends Anna Patterson who was been in the Google orbit for a very long time She was an early employee Left started a company Google required was a VP of engineering there for a long time She told me another little bit of this story that has never I think before been told publicly who well turns out Anna was a postdoc at Stanford at this time And she's the one who organized this new students weekend. So she organized Larry and Sergei meeting and she told me that the first night of the weekend So like the first event the first time that they actually met was at drinks at the British bankers club in Menlo Park at this sort of magical friendship bickering back and forth But you know real partnership was started there and it was already going that night So Larry and Sergei they end up shutting the bar down that night and another Famous local Stanford alum picks up the tab for the group. Oh Can you guess who that person was? Uh, I don't know. Lay it on me. Charles Schwab. No way. Yep Abale lived locally the area went to the British bankers club all the time and he'd do this He'd just see Stanford students there and be like, all right. I got you guys. That's awesome So Charles Schwab funded the first date of Larry and Sergei. Yeah Amazing and Charles Schwab accounts would go on to hold billions and billions of dollars worth of Google stock because of that Fun amazing, but yes, I think the spirit of all these stories is true. It was a instant electric Friendship partnership between the two of them and that would carry on Forever. I mean they shared an office at Google. I don't think we've really covered Founders before that were true partners in the way that Larry and Sergei are like Rinds me a little bit of you and me on a very different scale. Yes. On a very different scale But that's interesting equal co-founders. I'm racking my brain Maybe Bill Gates and Paul Allen, but even then it became very clear very quickly Bill Gates is the guy Yeah, that was reflected in their equity ownership Exactly. I'm sure we've covered other companies where they were equal equity ownership amongst founders But where it was a real true partnership one plus one equaled like a hundred Fascinating. Yeah, maybe jensen Curtis and Chris and Nvidia But over time, you know, it kind of became jensen Yeah, you're right. This is sort of unique for us to be covering true Founder partners that made it decades together. I mean even Warren and Charlie Charlie was never full-time at Berkshire Hathaway. Right. It certainly owned way less The closest I can think of is maybe capital cities with Tom Murphy and Dan Burke Hmm It's really interesting. Okay, so Sergei. What's his story? Sergei was also born in 1973 a few months later in August in some place Even colder than Michigan Moscow Which of course then was part of the Soviet Union and Sergei's family was Jewish Soviet Union was not exactly a great time and place to be Jewish or you know Probably to really be anything there his family lived in a three-room apartment in Moscow in What I assume was state allocated housing they shared it with his paternal grandmother But his dad was a extremely talented mathematician And so when Sergei's four years old his dad attends an international mathematics conference This is like 1977 1978 and realizes oh, I got to get my family to the west We got to get out of here So it takes some two years to be able to immigrate out of the Soviet Union But they eventually come to the US his dad becomes a math professor at the University of Maryland His mom becomes a researcher at NASA's Goddard Space Flight Center Okay, so Larry's parents are both computer science professors Sergei's dad is a math professor and his mom works for NASA. Yes The pool is small of people with backgrounds like that in the 80s. Yes As you would imagine sirgei's very precocious. He graduates high school at age 16 Goes to the University of Maryland gets his under grad degree in both math and computer science in three years Graduates at age 19 and then of course gets into Stanford for his PhD Do you know what he did in the summer before coming to Stanford? Oh, I have no idea He interned at Wolfram research. No way Steven Wolfram shot out to front of the show Steven. I know. I know it developers of Mathematica that Wolfram Alpha I guess eventually another search engine So yes, Sergei Every bit Larry's intellectual equal Every bit his sparring partner Maybe a little more zany too more of a love for rollerblading than Larry. Let's put it that way Yes And frankly it kind of pencils now that you're starting to get the picture of these two over time You know in the far future closer to today Sergei is the one doing stuff like Google Glass and Skydiving videos The zany parts of Google are sort of Sergei's DNA and the really honed products And products that make the business work are a little bit more of Larry's DNA But to be honest, there's incredible overlap everywhere between the two of them. Yeah, okay So fall in 1995 Larry arrives at Stanford. Sergei is already there Terry Winigrad is his PhD advisor and Larry and Sergei are already building this great friendship Larry that academic year presents a dissertation topic to Terry to his advisor in collaboration with Sergei And the idea they have is this worldwide web thing Seems to be becoming a thing. You know here were 1995 Were what a year after Netscape was started a couple years after mosaic. I have a stat for you on this era on the internet Oh, yeah, wait on me This is from John Batel's book The Search which is excellent from 1993 to 1996 The web grew from 130 sites to more than 600,000 And if you compute that rate of growth over that four-year period it is 723 percent growth year over year for four years That is exponential. Yeah, this is the version of the Jeff Bezos realization where it's like I got to leave D. Sean I got to build Amazon like nothing like this has ever happened before right The internet is a phenomenon like no other and if it keeps going I mean it's amazing for something to grow 700 percent You're over year at all But it happens but for that to keep happening year over year over year for half a decade That is worth quitting your job dropping everything changing your whole life. Yep And just a couple years before Two other PhD students at Stanford had started this thing called Yahoo And so I think perhaps inspired by what Yahoo was doing Larry Proposes that they're gonna work on this idea of a system that will allow People to make annotations and notes directly on websites instead of in a centralized directory like Yahoo It's got who was human hand curated commentary on the director of websites and so the idea is like oh this could be decentralized Annotation system where anybody can say what's interesting about a website. Oh This funny I thought I knew the whole history of Google but I somehow missed this so Terry Larry's advisor is like Okay, you know, I like the Problem space shall we say of the web for you know your dissertation here Larry but Why don't you go refine this idea a little more and come back to me? So Larry goes off and of course he's collaborating with Sergei on this and as they think about it They realize that actually there's sort of a fundamental flaw in what they were planning for this annotation system Which is that for a big site like say the New York Times or something It's just gonna get overrun with Hundreds thousands millions of users commenting and you need a way to Separate the wheat from the chaff so to speak of the comments You need to be able to have the good ones rise to the top you need a a way to rank them you might say That's so Larry has a quote here. It wasn't that we intended to build a search engine We built a ranking system to deal with annotations We wanted to annotate the web build a system so that after you'd viewed a page You could click and see what smart comments other people had about it But how do you decide who gets to annotate a big site like Yahoo? We needed to figure out how to choose which annotations people should look at which meant we needed to figure out Which other sites contained comments that we should classify as authoritative Hence pay drink Yes, we should say page is ironic that the things that were being ranked were web pages because the actual page and page rank is named for Larry page not for the pages They would rank right exactly so Larry goes back to Terry and he's like okay this ranking idea this seems like a really Interesting computer science problem the annotation thing seems messy. Why don't you just focus on rankings? So Larry goes back and ultimately has the breakthrough leap. Oh We should play rankings to web pages themselves Larry says wow the big problem here is not annotation We should use it not for ranking annotations, but for ranking searches Ding ding ding ding ding and thus at least the germ of the idea for page rank as we all know it today is born So essentially just the mechanics of what the idea is is try to rank websites Based on how authoritative they are based on how credible they are And this is something that has been done somewhere before the web very close to home for all these Stanford folks academia of course. Yes. How important is a research paper? Well that depends how many other people cited the research paper and in particular not just how many raw number of other papers Citer research paper how many important papers cite your research paper if you're in an important journal What did those papers say and this becomes the inspiration for how they're going to do the ranking of web pages and this was actually a research field before the web The study of academic citations. There's already sort of a body of work around how to do this well Oh, interesting. I didn't know that actually. I mean it makes sense It's kind of like how Hollywood loves making movies about Hollywood academia loves doing papers about papers. Yeah So there are some examples to look at of how might one use references or citations to wait importance right So we're almost all the way there to the huge leap that would become page rank and then backrabbit ultimately google But there's still one missing piece. They've got the theory of how to do this but What's a citation on the web? Well, they realize it's a link hyperlink is the exact same model as an academic citation and Not only is it the same as a citation? It's even better because there's this metadata embedded within the link Which is the anchor text any time you click a link you know anybody who's creating a link Can make anchor text for it. I feel like Write whatever they want and then just today command K on your keyboard and then you can make that text into a link Well, that's pretty easy to identify as metadata on an html page And so you get not only a citation of the link But a few words of what the author of that link thought about it Yes, when someone is linking to you they often do a better job of Describing your website than you do on the page yourself Anybody that's just sort of looking at your website to try to figure out what's this about the actual words on your website tend not to do as good a job as everyone who links to you in aggregate What words did they use to describe your website? So this whole thing is a genius idea And We're going to talk about all the work that they had to do to implement it It basically works right away The notion of hey, what is the output if we try to create a system that ranks all websites For authoritativeness based on how many other reputable websites are linking to it And then later on we can use the anchor text But right now just this ranking system it spits out a list that's sorted exactly as you would hope It is the most as a authoritative websites first and all the crap all the way at the bottom Yep So Terri's like yeah do this for your dissertation like great. Let's do this project reputation on the web That's going to be valuable So there's one more thing to making this brilliant page rank idea work Which is a little problem which is that the way the web is architected Any given web page only shows outgoing links There's no way to query a page and say oh who links to me You can only query a page and say who do you link to right? It's kind of like It's easy for me to answer the question Who's in my phone book in my phone today? It's hard for me to answer the question Who's phone books am I in exactly and so the only way you could figure that out Is if you somehow went and got a copy of everybody's phone book And then could back trace all the links Well, that's what they do Google could not have been built at any other time in history Yes, because the web was actually small enough that you could go suck it all up there exactly It was small enough that as a research project It was not totally insane pretty insane Little bit insane. It's so pretty insane to say oh, I'm gonna go Crawl the entire internet Make a copy of every web page out there store it in something which we'll get to And then trace back all the links and then reverse compute all the links to answer that one seemingly simple question of what web pages link to me If you had tried to undertake this as a brand new project Even just a year or a couple years later it would have been impossible Because the web would have already gotten so big that to just start denovo And create a Index copy like this like a full copy even one year later would have been 10s of millions of dollars And within a couple years would have been hundreds of millions of dollars. Yep prohibitively Expensive so we're in what 96 97 here. Yep. We're in 96 kind of the back half of that first academic year of Larry at Stanford Great So with Terry's encouraging Larry and Sergei go forth to undertake this ambitious project They set up a page on the Stanford internet. They decide that they're going to call the project Backrub Since it uses back links for ranking web pages so they spin up Backrub.stanford.edu And Larry writes the first Implementation of page rank and the crawler to go do this He writes it in Java and it's like super buggy and Basically doesn't work So they ask one of their friends there at Stanford guy named Scott Hassan to help them He's got a better coder than Larry and Sergei is so he codes it up in Python and it actually Sort of works now Scott Not an employee of Google never would become an employee of Google because it's not a company yet It's a research project right and they hadn't even come up with a name Google I mean nothing about this it's not a search engine exactly So if you go to that Project homepage and you can find cast versions of this on the internet or images I think there's even a recreation of it out there Yes with the really weird black and white picture of a back rub with the red text over it Yeah, I think that picture actually was on back Or if that's Stanford daddy to you it looks like somebody's back Certainly didn't search Google images for it. I know that Yeah exactly exactly So the text on the page says back rub is a quote-unquote web crawler which is designed to traverse the web Currently, we are developing techniques to improve web search engines So yeah, Ben they're not thinking of back rub as a search engine yet They're thinking of back rub is just a implementation of a crawler and the page rank algorithm Oh, that's interesting, but they have the insight that this method of ranking If it turns out to be better could contribute to better search engines Yep, because again even though Larry really wants to start a company He's thinking he's gonna get his PhD and they go forth here Kind of like Mark Zuckerberg got years into Facebook before realizing oh, this is my company So Larry and Sergey are building back rub here and I mentioned Scott Hassan their friend who helps coded up in Python doesn't end up joining Google. Well, what happened to Scott Scott leaves while all this is going on And starts a company Because it's 1996 1997 you're here in Silicon Valley right the bubble is inflating like what do you do you go start a company? Your obligation to go take it smash this pinata. So Scott leaves starts a company called e-groups That company a couple years later ends up getting acquired by Yahoo becomes Yahoo groups for about $400 million Do you know who co-founded e-groups with Scott? Oh man, you're stumping me today. No Larry's older brother Carl page. Oh, that's this company. Yes. Wow So here we are. We've got Larry and Sergey doing this research project to improve search engines Meanwhile their buddy who helped code that and Larry's older brother They just went they started a company and then they raised money Sequoia and Mike Meritz would end up funding e-groups And then they sell it for $400 million to the leading web company at the time That seems like a good idea. Yeah, Larry and Sergey start thinking. Oh Wait, maybe we should do something commercial around this. This seems like it would have value So that leads them in the spring of 1997 before school is out To start Shopping this back-rub technology around to the other existing search engines at the time They're not yet thinking that this could be a company. They're thinking we're gonna sell this technology To another search engine. They're gonna pay us a lot of money for it We'll go come help implement it and then we'll go back and finish our PhDs Because they effectively have it working at this point even though it's not You know hardened they have a crawler that has run on a small number of websites They have a very modest index that has been created It's not all efficient and everything but they sort of have the proof of hey look this ranking is actually a good ranking of how authoritative these websites are But other than some demo proof of concepts they haven't yet built the consumer version of hey you can go query This thing and anybody can use it right So they're shopping it around that spring that summer they get a bunch of meetings and meet with infos e like us all the existing search engines And we should say there was a large list of other search engines portals internet properties Search engine like things. Yes, that existed and had traffic I mean archie gofer altavista hotpot ink to me likeos Yahoo excite infos e Let's go on and on and on yes So the closest they get that spring and summer is with excite the story is amazing So supposedly this is according to in the plex steven levy's book great book that we used this a source for the episode They end up getting a meeting with Vinod Kosoah Legendary founder of son microsystems by this point in time He's one of the top bcs in the valley. He's a cleaner perkins alongside John door the two of them are running the firm And finode is on the board of excite and so somehow Larry and Sergei and I think they bring scatalog get a meeting with finode and they hammer out a deal That excite is going to license this back rub search technology from the two of them for about a million dollars Part of that's in cash part of that's an excite stock and Larry and Sergei are gonna come Worth get excite that summer implement Back rub for their search, you know basically make excite into Google and then they're gonna leave and they're gonna go back to Stanford in the fall and they get so far that they run a test a side by side test of excites search results the original You know algorithm and then the back rub algorithm and the legend goes That they're demoing this test Too excites CEO has like a final step to finalizing this deal and The results are so relevant with back rub, you know, you get exactly what you search for exactly what you want It's right there. You click you go to it and the usual excite searches bad You have to like click around you go forward you come back you spend a lot of time on the site And the CEO is like Why on earth? Would we move to your algorithm? I want people to stay on my site. I make money when people stay on my site I don't want them to leave my site you guys are crazy get out of here. I'm killing the whole deal It is amazing that as early as 1996 7 this time period this Very important conflict of interest is teased out. This is basically why Google beat Yahoo I mean, there's a lot more to it, but the portals all had this mentality of we want to Build more and more and keep people on our site in our ecosystem continue to look at our banner ads and Google from This point basically forever was how quickly can we deliver someone something relevant so they can leave Google And I've had a good experience finding what they really wanted Now all this is laughable and hide and see but made total sense at the time because What was the business paradigm for all these sites? What was the model? It was banner ads. It was cpm Cost per thousand views you wanted page views and impressions on your site And here what back rub is doing is they're going to knee cap your page views right they're going to dramatically reduce the number of page views and allocate them to other properties on the web so they can leave your property This deal was never going to happen with excited or anybody else because it broke the business model right It was not strategic for them. It was a conflict of interest to implement this type of better ranking better search faster technology So back to the lab right no deal. Yeah exactly That fall 1997 Larry and Sergei go back to school all these Get rich quick deals have fallen apart nobody wants back rub And Larry's just like well Affit all right. This is how I believe search should work We're going to build this thing ourselves here at Stanford Quote from him we couldn't get anyone interested in buying back rub We did get offers but they weren't for much money So we said whatever we went back to Stanford to work on it some more These companies weren't going to focus on search. They were becoming portals IE they wanted eyeballs page views they didn't understand search and they weren't technology people Yeah, and I mean when he says we talked to others they tried to sell page rank to Yahoo for $1 million and were rejected and there's going to be Chapters of this story that you can mark by the different times that Yahoo Disgust buying Google and didn't but this is the very first they showed the tech to InfoSeek Also didn't happen InfoSeek was bought by Disney and later shut down They showed the tech to Lycos they were shopping it all around town So they get back to campus and they're like all right We're gonna build a real search engine ourselves first order of business The name Back rub You probably not gonna fly yeah describes the technical underpinnings, but doesn't really describe the searching Yep, so they're casting about trying to find the right name to encapsulate what they're doing This sort of new good form of search and the story is that Larry's dorm made suggest the term Google. Oh wait. Do you know the name before this? Oh, no, do I know something you don't? Oh, this is great Oh go for it. The name is what box? What box what box The rolls right off the tongue, you know, it's a box that you type stuff into You're just sort of a question, but they decided that that sounded too close to a porn site So they decided not to go with it. Well, hey, I guess if Facebook can be a product name and a couple of you Maybe we could all be what boxing things I mean we are all what's that thing so to be fair Yeah, it wasn't that crazy. It wasn't that crazy, but yes what box out Next name how did Google come about Larry's dorm made suggest that they might want to use the Term Google G-O-O-G-O-L Which is the mathematical term for one followed by a hundred zeros Ten to the one hundredth power yes And the legend is that Larry loves the name Sergei likes it they go to register The domain name and Larry miss spells it and thought that Google was spelled G-O-O-G-L Miss spells really I thought G-O-O-G-O-L dot com was taken Oh, maybe that's it. Maybe that's a like anything here. You know there's a lot of legends floating around yes But the miss spelling is actually great because you kind of should spell it the way That other people are most likely to spell it right exactly so this is before You've got the Google did you mean in the search box. Yes, spelling was important So Sergei designs the homepage and makes the first logo using the open source drawing program GIMP You use GIMP back in the go and you can tell it is drawn using GIMP A lot of people probably can think of the earliest Google logo you've ever seen Even the real nerds out there like oh, yeah, I know about that one that was real colorful before the drop shadow thing There's even one before that that's like Completely illegible and this is the the one that we're talking about but it was rainbow colored Yes, it was willing to do it in the show notes in on social media. It's fun to look at yep But basically that homepage design of All the colorful logo in a search box That was it then That's it today 97 onward so with that 97 98 academic years when they're building back rub into Google by Spring quarter of that year Google Google calm is doing 10,000 queries a day This has started to spread virally first on the Stanford campus and then Other academic universities and communities out there get wind of what they're doing and then it Start spreading into Silicon Valley and it's like bringing the Stanford network to its knees with all the traffic that is happening on Google.com Out of Stanford so at one point they actually did bring down the Stanford network This is how fast it all happened. It's all during this academic calendar where They're Taking back rub they're working in a search box. So there's now a keyword that we're ranking things for not just arbitrarily ranking them That keyword relies heavily on the anchor text descriptions. There's sort of these two early key innovations There's waiting results based on backlinks and there's description from anchor text and It really did just kind of work the technical underpinnings are extremely difficult They're having to do things like Steel computers from other research projects. Do you know about the loading doc stuff David? Oh, yeah There's his famous stories of other researchers that have ordered computers But they actually aren't going to start the project for a few months So Larry and Sergei would go grab them off the loading doc spin them up use them for Google Just for a few months until they need to go and hand them over for the other research projects David to your point they bring down the Stanford network because there's so much traffic There's so much demand for something that is just clearly a better way of ranking websites than what everybody else was doing You know everyone else is basically just using Keywords on pages and saying well what pages exist out there with the word dog and if they have a whole bunch of instances of dog Then that's going to be the top of your results for dog no matter how authoritative they are and so obviously that's a problem So this is just a better way to do search And they're really starting to stop up Stanford's network bandwidth at one point They're using about half the bandwidth of the entire university to be serving out Google.com pages And David to your point it's not a heavy website I mean it's a white page with an image a search box and then when you go to the results page There's no images and so if they're consuming an incredible amount of bandwidth For something is so asset light people are using the crap out of this thing Yep, so here we are End of the 1998 academic year. It's clear This is going to be a company this has to be a company Stanford's about to Tip over if it stays as a project anymore Stanford has been very kind to say we're gonna keep housing all the infrastructure for this thing But at some point this needs to be a company so that you can get it off of our network and fund it on your own And nobody should shed a tear for Stanford here because this part of the tech transfer to spin it out Of the university they end up getting like one percent of the company or something like that Stanford did very very well for their largest here Yes So laryne Sergei go to a professor in the CS department at Stanford named Dave Sheridan And Dave had started an ethernet company called granite systems with anti-bectal shine from sun While also staying as a professor at Stanford at the same time He was a founder of granite systems and its date as a professor Cisco had just acquired granite for 220 million and so laryne Sergei like oh okay Dave he's one of our professors he knows how to do this stuff and He's like well, why don't you talk to Andy about how we could spin this out and make it into a company So Dave emails Andy that evening and he replies right away. He's like sure I'm kind of busy tomorrow, but How about we meet at your house at 8 a.m. In the morning. I'll come by on my way to the office And thus begins the story of Google's legendary Seed financing around and the crazy cast of characters involved in it All right listeners. This is a great time to think one of our favorite companies here at acquired Sentry that's scntry like someone standing guard Yes Sentry helps developers debug errors and latency issues pretty much any software problem And fix them before users get mad as their homepage puts it they are considered not bad by over four million software developers Today we are talking about the way sentry works with another company in the acquired universe and thropic Anthropic used to have some older infrastructure monitoring in place But at their massive scale and complexity they instead adopted sentry to help them fix issues faster Yep crashes can be a massive problem in AI if you're running a huge compute job like training a model and One node fails it can affect hundreds or thousands of servers Sentry helped them detect bad hardware so they could quickly reject it before causing a cascading problem Sentry also enabled them to debug massive issues in hours instead of days So they could get back to their training runs and today Anthropic relies on century to track exceptions assign errors and analyze failures in real time across all of the primary languages Used by anthropics research teams including Python Rust and C++ According to the anthropic team Sentry gives our developers one place that will have all the information they need to debug an issue and Speaking of AI sentry now has an AI debugger called sear Sear is an AI agent that taps into all the issue context from century and your code base to not just guess But root cause gnarly issues and propose merge ready fixes specific to your application We're pumped to be working with century. They have an incredible customer list including not only anthropic But cursor for cell linear and more if you want to fix your broken code fast like over 150,000 other organizations that use century from indie hobbyists to some of the biggest companies in the world You can check out century.io slash acquired. That's scntri.io slash acquired and just tell them the bed and David sent you Yes, and they're offering two months free to all acquired listeners. Yes Thank you sentry All right, David the Google seed round Yes, here we go So 8 a.m. the next morning Larry and Sergei roused themselves out of bed over on the stator campus head on over to downtown palo auto at Dave's house And Andy drives up. He's like all right. I'm in a hurry show me what you got The demo Google for him Andy loves it. He's like great. I'm in $100,000 and Larry and Sergei like what but what we weren't talking about raising money We just wanted some advice to start a company and he's like great. I'll go get the check from my car He writes a check to Larry and Sergei made out to google ink for $100,000 Basically just throws it at them hops in his car and takes off Google ink does not exist yet This is actually true. This actually happened And he's like you guys figure this out. That's your problem. Not mine. I'm good for the money No investment documents no valuation Just here's $100,000. I assume I will get something for my investment. Yep exactly And this was the forcing function for Google ink to get founded So Larry and Sergei need to be able to like spin up a entity have that own the intellectual property from Stanford and Set up a bank account for that entity such that they can deposit this check before it expires It takes a a couple months to get all this done. Yes, which depending on who you ask is either very good or very bad Because in the intervening months Dave himself decides to throw in another $100,000 to the funding here and Larry and Sergei meet a former net scape guy named Ram Shriram Who started advising them on starting this company spinning things out and long time acquired listeners will recognize this name from our Amazon episode Oh, yes, Ram had left net scape and joined a startup called jungly that amazon.com then acquired and so Ram had a little bit of liquidity He throws in for $250,000 into the round And he's like hey do you guys want to meet Jeff? Jeff Bezos Who at this point it's kind of interesting you think about amazon and google as kind of equally old companies Jeff is sort of the elder statesman of the internet his company was started in 94. This is 98 Amazon just went public the year before. I mean, it's kind of crazy that at this point in time It was little larga and sargay's grad students meeting public CEO Jeff Bezos. Yeah, yeah It's almost like when you're Six month old baby is hanging out with a 14 month old. You're like, oh my god. They're so different But like they're gonna be classmates in a couple years. They're basically the same age exactly So rom range is a meeting and the next time the Jeff is in silicon valley They all meet at rom's house and similar to anti-pectoral shim Jeff's like great Ram, what are you in for two 50? I'm in for two 52 And so all in they end up raising a million dollars at a 10 million dollar post money valuation And yes Jeff Bezos Does a quarter of google's Seed round it's so crazy You know we knew about this in the past because we talked about on the Amazon episode But whenever I heard someone reference Jeff Bezos was an angel investor in google I only thought well, yeah, but you look at any of these startup cap tables and there's 50 founder friends in addition to the Main VC of that's not surprising at all, but Jeff is a quarter of the money in the seed round. Yeah What a four investors is that right? That's right. You have dandy, Dave, Rob and Jeff Jeff has never said whether he sold any of his google shares along the way But by my math if he didn't That stake is worth about 20 billion dollars today and even if he did sell at IPO He turned that 250k into something like 200 million at IPO right right right Nice returns in Amazon stock was probably in the dumpster when google went public so you know could he use the money Anyway Google is now an official company They've got a million dollars in cash from their crazy seed round It seems like they might burn through that kind of fast because of their business model of trying to store the entire internet on Their servers But you know you got a million bucks you're no longer a Stanford project your spun out You got investors. What's next? Well first office space So famously they go find space in a menlo park garage A house owned by one Susan wajiski who was a manager at Intel and soon would become herself an early google employee and then eventually CEO of youtube. Yeah exactly But besides office space It's time to put your product out into the world and I think it's worth drilling in here What was the state of search in 1998 when google becomes a company? Yeah, I think it's worth saying a little bit more about two other players to set the context The first is altivista Folks who are old enough might remember Altivista Pre-google was like pretty good. It was pretty good Altivista has a fascinating history. This is wild I didn't know this until doing a research for this episode. Do you know where altivista came from? I do But most people don't deck digital equipment corporation deck digital equipment corporations Western research laboratory, which was their palo alto Research lab their equivalent of Bell Labs, but deck every the company we talked all about in our Microsoft series where Dave Cutler came from Here wrote windows nt legendary legendary company right hardcore enterprise big hardware Yep computing company the mini computer company duty Faulkner wrote epic on a deck mini computer Yeah, this is where altivista came from and the big insight that they had was You can go crawl the web to build the index in parallel So before altivista all the other web crawlers out there that were building search engines They were just like single threaded processes you go crawl one page and then you go crawl another page And then you go crawl another page and the internet was small enough back then that people didn't really think to do it any other way Because remember it's all growing so fast Oh fascinating and it's a super parallelized process. Why not? Oh in this big sense because deck hardware would be pretty well suited for this They've got a big enterprise appliance that they need applications for Exactly This is why it was a research project at deck It was a way to show off the power of their latest enterprise class servers that they were hawking So if you think about what are the competitive vectors of search what makes one search engine better than others It's not just the ranking today people think of a page rank and google and the innovation and the ranking and the relevancy that was the most important thing There are actually two other vectors that are critical. Yep. One is speed how fast are you going to return the results Which we take for granted today, but not too long before google's founding Search was a thing where you'd kick off a query and then go do something else and wait for it to come back Right, it was like AI today. You're doing deep research. She's just like okay great send the query You know go get some blood to come back so funny exactly we'll get more into speed in a minute But the other attribute that's super important is the index how Big is the index of pages that you're searching across and before altivista and parallelization of crawling All the indexes of all the other search engines were super small Maybe a million pages was like the biggest so you could have the best search engine in the world But if you're only getting a small percentage of the actual sites out there that it's searching It's not going to be that useful and the funny thing about this period of time too is Very rarely where people actually updating their index So when something would say like a million pages crawl that was cumulative and they just kept adding new sites to it and assuming you weren't doing many updates Right right right. Oh bad. How times have changed so when altivista spins out of deck and launches as a Commercial company and entity in and of itself It's big claim to fame is its index It has 16 million pages in its index versus the competitors altivista still kind of sucked at relevancy and speed So the information retrieval algorithms that altivista and others were using was highly based on how many times a given query word appeared on the page So if you wanted to rank highly for dog food you just spam dog food and invisible text all over your page Or even not invisible right you just want to make the dog foodiest dog food page on the web Exactly and the other thing that you know, I guess altivista was probably fine at this but not good Speed and that was a particular problem. I mean altivista had great hardware from deck and really expensive hardware too That's the made and thing to underscore here is that yeah, they're doing this cool parallelization thing Which leads to a bigger index But if they had to be their own company is an extremely expensive company to run to have all that deck hardware for search Which we should say doesn't have a great business model yet the business model is just banner ads low price Not very targeted that would all come later and so the whole search market Why would anyone take it seriously because to date it doesn't feel like there's a good business there and to do a really good job at it It would be very expensive to run yes It is funny as you can imagine the powers that be at deck are pushing really hard on Can we sell more of these boxes? Do they really want to be the ones developing the best search engine or really what they want is for other people to be developing stuff like this See it as a proof of concept and then start their own companies to buy more and more deck hardware Yes exactly been search as a industry was not interesting one because the economic upside was capped and to also people love directories and portals and Yahoo like Yahoo was the big player not all to Vista or excite or like us or infoseaker and at these others So Yahoo was the site that was taking off like wildfire they'd gone public in 1996 at a billion dollar market cap by 1998 when google.com is launching as a company Yahoo's a 20 billion dollar public stock This is the juggernaut and what was so great about Yahoo like yes It was started by Jerry Yang and David Filo you know to other Stanford PhDs But it wasn't technology driven it started as Dave and Jerry's guide to the internet. Yes It didn't start as they're like academic research Well Yahoo was was exactly that it was a hand curated Guide directory to the internet. It was kind of like the yellow pages with even better annotations To why you would want to look at a particular given site and that's what people thought like oh Technology search engines will never be able to replace Human curation and human thought about what the most interesting sites of the web are Hell this is why Larry's original idea was this annotation idea was humans who were gonna rank things and For the size that the web was at the time Yahoo was correct Yes, when you have a small number of total websites curating them is interesting But when you have 10,000 times more websites and 10,000 times more niches that people are interested in directory is not going to be an efficient way to surface what people are looking for If you believed that the internet was gonna get as big as it did search became a more interesting front door But for this period of time directory was an amazing front door to the internet. Yeah Now here we are in 1998 the internet is already big enough that yes, it's clear There are a lot more interesting web pages out there So Yahoo has search to address that exactly so the model was hybrid All these portals and Yahoo included went hybrid of when you search on Yahoo The results you get at the top of the page are their hand curated directory driven results And then they backfill with a search engine And so they would partner with these search engines to provide backfill results And people thought that this was the ideal solution So interesting it is the epitome of Kind of just good enough technology was so different than Google Google wants to be the very best technology Solution for a problem the most elegant and I think the Yahoo solution was very Yeah, yeah search just has to be good enough The curation is sort of the thing that matters were a media company having enough human editors to cover all the big categories But the businesses showing banner ads they may or may not be relevant to whatever page you happen to be looking at right now And we're effectively a media company that has searched just in case Yes Okay, so that's what's going on at Yahoo and all the portals The opinion of Larry and Sergei Is a we don't want to do a home page like that We don't want to clutter it up our whole point is to help people find what they want Which of course raises the question well, what's the business then Because if you're not keeping people on site to see your banner ads the only moment that you really have is On the search box page and on the search results page and they were extremely against Well really ads generally they didn't think it was good for users But they were just against especially banner ads and there's this sort of scary thing Which doesn't seem scary now because we know how it played out But just imagine trying to evaluate this company. It's growing like wildfire Everyone's using it. There's one known business model for this entire sector It's not a great one, but it is known and these guys are dead set against using But on the other hand Let me pitch it to you a different way These guys are building the front door to the internet which was just growing 700% year over year So isn't that going to be really valuable? Yes, but we don't know how yet But the problem is actually even more dire than what you're saying As usage is growing they need more infrastructure But they're not making any money Right And for each piece of this you need more infrastructure You need the crawler to go and crawl the whole web and store You know not entire web pages but little pieces of web pages that you can Reference from your index you need the index itself You need to serve the web pages up for when people are doing the searches There's a bunch of components of this infrastructure that all need to scale and they all need to scale differently Yep, which brings us to really what is the second Big reason Why Google worked so well and became the Google we all know today One is accurate relevant fast search results and pay drank and everything we've been covering To though is the infrastructure to actually make this whole thing work and scale efficiently. Yes So right after they raised the angel round Larry and Sergei go out and they recruit just like Unbelievably top tier engineers and computer scientists to come rewrite the code and work on this infrastructure problem So pretty quickly they get Erz Holzer and then Jeff Dean who are just these absolute legends They are both still at Google today Erz is now a fellow but he ran all of Google's infrastructure from 1999 until 2023 Before joining he done his PhD at Stanford and he was a professor at UCSB He'd also Written the primary Java virtual machine that son used as like the official Java virtual machine Oh wow And Larry and Sergei recruit him out of academia to come join his employee number eight and his initial job title was search engine mechanic Because quote everything was broken So that's Erz and he builds all this incredible infrastructure Jeff Dean who they also recruit around the same time from the senior engineer at deck. Yes. Yes And Jeff is basically like Google's Dave Cutler so today Jeff runs AI at Google He also implemented the first version of ad words build ad sense Re-wrote the core search pipeline five times Co-invented and implemented big table map reduced tensor flow and Gemini He actually keeps his resume up to date online. We'll link to it in the show that's incredible We're bearing a little bit of a lead here We we spoke with Jeff to prep for this episode and I watched a handful of talks. He's given Delightful human and God what a great engineer just Generational talent, but this is like that early nucleus of engineers The Google recruited it's amazing that they attracted them because Prospects were not good that all of this would work in scale And it was only because of these guys that it did well, and here's the crazy thing later There's an easy point to make which is Google got to hoover up all the best talent because they were a Solid business after the dot com crash But this in 98 99 we're in the go-go times the dot com bubble hadn't burst yet And larian sargay managed to recruit this talent. I think this is like a History turns out a knife point or like a maker break the company thing the fact that they were able to get these guys In a hot talent market really speaks to larian sargay's vision the excitement around the idea how novel their approach was everything Yep, and part of the reason why This talent was attracted to Google sure some of it was like oh the products really good and people are using it And so that makes the company interesting The other part of it though is that the technical challenges and the architecture coming out of Stanford Was super unique and novel this was a really really interesting thing to work on and why was that So the google index That they needed to build and operate on for the search engine for page rank to work Was so much bigger than any other index out there google needed like The entire page to compute all the rankings and find the links find the backlinks They needed to architect google With this huge distributed computing system So the index was so big that it wouldn't fit on A single machine or a single server no matter how big or how expensive So what they do to store the index and to operate on it with this distributed file system is they break the giant index Into tons and tons and tons of little chunks they're called of Individual 64 megabyte files small files tractable files And they get stored on lots and lots of different discs and lots of different machines and lots of different servers and ultimately Different data centers all over the world And then there's a separate server that keeps a master mapping of all the chunks like where the chunks physically are And so when a query comes in and needs to operate on the index data The master server just returns only the chunks that it needs not the whole index And that makes the whole thing possible So basically that one server you're talking about can kind of just say up all the chunks are here on all these different machines That are distributed throughout my data center Just look at those chunks And that way it can kind of just pull and in a parallel way pull from all those different Chunks concurrently Yep, and I think that's even abstracted like from a compute perspective They see the master map they feel like they have access to the whole file But then what's actually getting returned to them to operate on is only just the chunk data that they need Hmm So Google was sort of forced to do distributed computing because their index file was too large to store on any one machine No matter how big or fancy it could be Yep, I think that's right which sort of enables the whole thing in the first place and is technically extremely interesting But now the physical infrastructure side right because you have all these chunks and they can live anywhere and Larian Sarge already had to grab commodity hardware, you know hard drives and motherboards directly back at Stanford Well, Erz comes in and he's like well, we can just keep going with this Let's keep using cheap commodity components and hardware and yeah They'll suck and they'll fail a lot and things will burn out, but that's okay Because we've got this distributed file system. We'll just replicate everything like three or five times Right, and we can cleverly design software to account for the fact that we have commodity hardware commodity RAM These systems that were not Assembled with the notion of being enterprise grade We can sort of design Google with the idea to Take into account the fact that the hardware is not enterprise grade and that means we can get cheaper hardware And run in a distributed computing way and frankly, I think this makes it interesting to a lot of engineers who kind of want to work on hard problems How do I design a system when I can't count on a whole bunch of stuff from the underlying hardware that I would get to count on if it was a fancy deck server So I read the Industry average server hardware failure rate at the time was around like three to four percent per year Google's hardware failure was over 10 percent But the whole system was designed that it didn't matter. It was all just replicated super interesting So this keeps scaling up and up and up over the years with Google Pretty quickly maybe even while Google is still a private company They technically become the world's largest computer manufacturer. Oh wow because they're not buying fully baked servers They're just buying components and assembling them into the sea of components proto data center in their data center and then data centers And the early data centers they're never really putting them in PC housing right? Yes, so these early, you know, quote-unquote machines. They're building. They're not even putting PC cases on them They just mount the motherboards directly on corkboard and then they put like the RAM in there and they put hard drives in there And then they just stuff them in their data center racks The photos of these early Google quote-unquote server racks are crazy because The way that their agreements worked in the co-located data center facility is they would lease by square footage Not by energy consumed not by number of machine by square footage And so when you give a computer scientist a constraint, they will optimize for it and the goal is how much Of Google can I power in this square footage and the way that you optimize around that is Well, incredible density of hardware So we're not putting cases on these computers. We're putting corkboards in and imagine just a sheet of cork Which is an insulator so you know that these electrical components that you don't want to Conduct between each other or not going to conduct between each other and you just stuff a server rack full of corkboards with All this commodity hardware sort of strewn about it and it looks unbelievably messy It's extremely economical and then you just kind of handle it all in software and the net of this is that Google can scale Period but also can scale way more cheaply as search traffic rises and as the index keeps growing and getting bigger Then anyone else out there on the market. So once the business model kicks in This is why Google search has like a 87% gross margin on it. Yep. There's this incredible story of Google's first data center was a co-location data center facility kind of a shared Physical space in Santa Clara called Exodus and the data center cage the space that Google had allocated was right next to The cage for ink to me, which was a competing search engine out there that we'll talk about in a minute and Google folks talk about you the ink to me cage had all these gleaming sun machines and lots of space and lots of airflow and all this incredible cable management And then you had this like Frankenstein Google thing next to it And to your point then they were only paying by square footage. They weren't paying for power So they were sucking up all the power of the data center And I heard a story that they actually at one point May or may not have stolen a power circuit from the Ink to me cage next story Barrowed borrowed borrowed borrowed yes So one fun illustration of what does it mean to be on commodity hardware versus enterprise grade hardware Jeff Dean shared a fun story with us that on enterprise grade hardware you would have something in ram Which is called a parody bit and in consumer grade hardware you don't and what is a parody bit a parody bit adds one extra bit to memory that is Basically for error checking It looks at the rest of the data in the bite and if it's even It'll set the parody bit to one and if it's odd and it'll set the parody bit to zero The con of this is now you need an extra bit so that makes the overall machine more expensive because you're losing One eighth of the ram to this parody checking But the benefit is you know that nothing ever got corrupted because the likelihood that one of your bits got flipped And it also flipped your parody bit is very low because you can kind of check and see wait It's supposed to be an odd number according to the parody bit, but it's an even number So you know likely something went wrong and when I say something went wrong This is from like random radiation that is just flying around the universe and any given time goes wrong all the time Well because Google is using this commodity hardware They then have to do these crazy things in software and build all these layers themselves To say we're running on crap hardware We don't know for sure That the value and memory is correct Can we have a second way of verifying that it's correct? So it's that sort of I don't know cool software engineering But also another layer of systems that you have to build when you're on commodity hardware So the net of these constraints and the incredible technical team Google has is that they design Everything from the ground up the computing systems the file systems the data centers the racks the hardware everything And they build stuff like gfs the Google file system MapReduce Yahoo would eventually feel like they needed to copy MapReduce to be competitive and they would open source that as Hadoop so field of Apache Hadoop That is a Yahoo copy of Google's mapReduce Yep, of course shepherded and stewarded mostly by people outside of Yahoo eventually, but that's where it came from Yep, and then ultimately because Google is building their own hardware Racks data centers and they can do it cheaply They put data centers all over the world and then that means they can deliver search results and add results Instantly to users all over the globe Yeah, so this speed really starts to become a bragging point for Google where whenever you do a query It'll show you how long the query took it's usually like a quarter second And they used to brag about the index size now they say I'm returning a cajillion results to you But this was a really big flex for a long time is we searched a huge index billions of pages We found a huge number of results and we did it really fast And we're going to show all those numbers to you because A where engineers who are awesome, but B We know it's the best stats that anyone out there could report to you Yep, it's a stake in the ground So all this grows out of the constraints of like they don't have any money First it's damper to them and this little angel around they raised They don't have a way to generate any money and yeah, they don't have any way to generate any money So we cannot overstate how important Google's infrastructure innovations were All this comes out of these constraints that Google the company has But none of this would have mattered if they didn't figure out the business model All right listeners now is a great time to thank a new friend of the show that we are very excited about Sierra Yes, we are thrilled to be working with Brett Clay and the entire team over there So why are we excited about Sierra? Well one of the things that we've learned from making acquired over the years is that a great company is often defined by its customer experience Yep, but being great is hard talking to customers is expensive and while websites and apps are great They're also kind of slow and clunky and your customers have to learn them. They don't learn you Sierra changes all that they build customer-facing AI agents that can do an insane range of things like finding the perfect home or picking TV shows or originating mortgages shipping us so far returning shoes authenticating patients for health care ordering credit cards saving subscribers from cancelling and on and on in just two years since founding They've become the leading conversational AI platform with hundreds of incredible companies like ADT Clear minted ramp redfin rocket mortgage safe light Serious XM and Wayfair all trusting Sierra for their customer experiences Sierra was built to be powerful enough for fortune 500 companies including heavily regulated industries like health care and financial services But it really works great for any business including yours with Sierra You can build your AI agent once and deploy it everywhere within weeks on the phone and chat SMS WhatsApp email All in over 30 languages You can even publish it to chat GPT and with their unique and insanely aligned outcomes-based pricing model You only pay for the value that Sierra delivers Increase customer satisfaction and resolution rates lower costs and higher revenue Sierra enables the great companies of the world to show up at their best consistently every minute of every day And in fact, we think so highly of Sierra that day the night even invested in the company to find out how you can build better More human customer experiences with AI visit Sierra.ai slash acquired and tell them that Ben and David sent you All right, David. So going from having no business to the greatest business model humankind has ever discovered Not exactly a straight line, huh? Yeah, no not at all So how does it all start so early 1999 even despite the incredible infrastructure work and being able to scale cheaply Google still run it out of money from the angel around and They hire a recent Stanford undergrad named Salar Kamengar who joins Google as employee number nine and And like many Stanford students at the time he started using the search product while he was an undergrad It was blown away and he's like I got to go work for this company He basically bangs down Google's door tries to get hired finally to like okay. Okay. Come on And so the first thing that Larry and Serge give to him to do is kind of you might argue the most important thing in the company They're like well, we're running out of money So we need to go raise venture capital We don't want to write the business plan in the pitch deck you write the business plan in the pitch deck So Salar goes off and the writes the pitch deck for the Google series a Collaboration with Larry and Serge and they come up with a three Pronged business model that they're gonna present to VCs three ways that they're gonna make revenue and it's hand-wavy as hell Yes, all right, so number one the biggest revenue driver projected going for you the main Google business innovative new business model that they're gonna pursue here They are gonna sell Google search technology Enterprises So that companies can use the same amazing consumer Google search technology to search their own documents and intranets Hahaha This is the business plan for Google for the series a you know what this kind of feels like to me it feels like they're saying Google calm is so precious and amazing and special we don't want to risk it by having to make money on it So can we make money doing something else with our technology? Yes, that will fund What we really want to do which is Google calm now? It's pretty funny to talk about this now in retrospect They did have a couple reasons why they thought this might work Number one was all the way back at Stanford Backrobin and Google had actually been used for this use case you could use Google to search internal Stanford intranet stop and people did there's like a great experience for Stanford students also Before the series a somehow Larry and Serge had managed to actually sell one of these deals to the company red hat That's right. That was their first revenue right was red hat. Yeah, that open source Linux company. They sold This enterprise search deal to red hat for $20,000. They're like, oh great. There's a market here So that was gonna be the main Business driver and then there were gonna be two other business lines two in the company one was gonna be Well, sure, okay vcs You know you make us will sell ads CPM banner ads the same way everybody else does we're not gonna like it, but we'll put it in the business plan And it seems like they didn't think through it any more than that because I couldn't find anything about is that gonna appear on the search results page Is that gonna appear on google.com next to the search box? It seems like it was never real enough to actually have a plan for it and Indeed the series a pitch deck and business plan like was intentionally vague I think part of the reason Larry and Serge were like okay seller new guy you go do this is like They didn't actually want to tell vcs that much. Yeah, so that was number two and then number three Was that they were gonna license Google organic search results to portals and directories as essentially OEM search to backfill results like we were talking about with Yahoo other search engines were doing this ink to me had gotten started at this point in time ink to me was the next door Debra at the data center exodus and Santa Clara and they built a sizable business selling white labeled organic search results to other portals exactly this was ink to me's whole business is They just sold organic search results white labeled other portals, but there's five big customers and 50 total customers out there for this business Yep, so this is the business plan. This is the pitch deck. They go out Remember we're in spring 1999 here So even though this is a little hair brained. It's still the dot com bubble money is still flowing There's a great Michael Moritz quote in Stephen Levy's book talking about this particular moment in time He says nobody's feet were on the ground It's a very certain Michael way of putting things deliciously Michael quote. Yes, and Google's got all this usage and engagement and growth numbers Hey internet companies trade on eyeballs. So of course. This is gonna be a hot deal famously Cliner and Sequoia and up splitting the deal And Michael Moritz and John door the two most legendary VCs in the world. They team up They join forces they split the deal and they both join the board of Google at the series a Which is unheard of the fact that Larry and Sergei were able to say You both only get 12 and a half percent of this company and you have to do it together They both must have really really really wanted to do the deal That is true and I love that even today even you Have that opinion we heard from folks in the research that This really was like a Google PR masterstroke to see this narrative. Oh Well, they held a press conference in person with both Sir Michael and John door there It's the first Google press conference Larry and Sergei are there in Google branded shirts. Yes, they made a big deal about this The reality is Sequoia and Cliner split tons of deals. This was not the first one It may have been the first one that Michael and John Split together But like they have been on boards together before maybe they don't one round or the other and Sequoia and Cliner split deals all the time But hey, it was the dot com era and everybody needed a PR strategy and that one worked well Fascinating But the point is this was a hot deal There's all sorts of stories out there about other investors coming into the round or trying to get in or trying to get in later Yeah, I think in the middle of negotiations They got another term sheet at a hundred and fifty million dollar valuation instead of a hundred But I think there was sort of already pot committed to Sequoia and Cliner Perkins And I actually don't know who the hundred and fifty came from but I do know it was someone who romps three rom set up the meeting with Interesting and remember Larry's older brother Had co-founded e-groups which Maritz had funded at this point So like they knew they wanted to go with Sequoia and Cliner. That was the goal all along. Yep Regardless the round gets done 25 million dollar total raise at a one hundred million dollar Post money valuation A hundred million dollar valuation was genuinely wild for the time Yeah, even in the heyday of the dot com craziness for a series a at a hundred post That was newsworthy So funny thinking about this today. I know today. It's so quick. It's so quick The comp in today's world is imagining reading a headline that a series a after a company just had a few angel investors got done at a multi-billion dollar valuation That's kind of the way it would have felt in tech at the time. Yes totally But despite that and despite all the hype around the series a There's still kind of an urgent imperative to make revenue. Yes There's 25 million in the bank now But you've got the season involved and the playbook back in the dot com days was Invest in the company get quick revenue go public. Yep. So there's a fire lit under Google to figure out the business model Right around the same time as the series a happens Larry and Sergei meet a guy from net scape named omid cordistani and the first time they meet I think omid is thinking about it in the context of oh I'm wearing my net scape hat I'll evaluate is there some partnership here and I think he quickly gets the sense maybe but Net scape just got bought by a well It's getting a lot less fun here and omid was the VP of sales in biz dev at net scape Yes, so he's very familiar with building an internet based business and what these google guys are doing is very interesting Yeah, and of course Larry and Sergei as the great recruiters that they are like hey, why don't you come right here? So omid joins google essentially is chief revenue officer and he's tasked with Okay, take this business plan take these three areas and make them a reality and we should say too omid is an awesome guy We talked to him in research. Yep So he goes out and of course the first the innovative business model that they pitched the vcs You know number one the enterprise search business model he goes out and starts trying to sell it But as you might imagine especially at the time There wasn't a lot of a customer pull shall we say for this yes So for the first six plus months of the company kind of the rest of 1999 After the venture funding Things are not looking good on the revenue front David do you remember this is way back in acquired history What Doug Leoni told us in February of 2020 when we were recording our episode with him yes Yes, I know exactly what you're gonna say I got some more flavor on it. Oh you give the quote okay So the quote is from Sir Michael Maritz He comes to Doug and they're running Sequoia capital together at the time He says Doug We've never paid so much for so little Uh That's the lore I got a little more behind the scenes flavor on the quote Apparently it was not Sir Michael who said it first he might have just been repeating it back apparently was it John doer It was Vinode oh in the Clienter partnership. That's what I heard oh This is like the hot potato of quotes nobody wants to actually take credit for this either way though The sentiment is right you can understand why Clienter and Sequoia would feel this way They kind of have egg on their faces They just paid a hundred million dollar post For a series a company with no revenue The revenue is not materializing We're now into the year 2000 the bubble is starting to burst and Google still basically has no business. Yeah No business But growing market share Fervent loving fandom among the people using it providing real value to people There's got to be something here. Yes Exactly so the revenue imperative is becoming Well imperative more of an imperative shall we say and oh me just mark guy He's like I'm not gonna just keep banging my head against enterprises here like we're gonna pursue the other two business lines that are Obviously, you know who knows how big they'll be but at least we'll make some money So set up just regular ads same ways everybody else does it So omid goes and hires Tim Armstrong in New York to set up an ad sales force and Google does start selling ads At the top of search result pages. What are these ads look like David? So importantly Larry and Sergei insisted that Okay, if we have to have ads on here They need to be text only we can't serve Images and banner ads like everybody else does because that'll slow down the page. Yes It's like they always talk about it for taste which is true But yes, it's a performance thing. Yes, it's a page performance thing So there's these great stories about Tim in New York and Omeen ad sales force that they're building up at Google They're going to ad agencies. They're going to advertisers directly. They're trying to sell these ads and like um No images just text trust us. It's gonna work Not very exciting to these Madison Avenue guys How are they paying for them right now still CPM so you buy a keyword And then your promise that you're gonna be an ad that appears on the page Whenever that keyword is searched and you're gonna pay Per thousand impressions of that keyword. Is that right? Yes, okay Not self-serve no web tools for this. This is like negotiated over the phone and then they manually hand enter it into Google That when this keyword is searched You need to display a text ad for this person and track how many times you display it because we then need to invoice them For how many times the page loads yes Not even on the phone that would be really Technologically advanced for Madison Avenue at the time All ad insertions were done by facts At this time so Google had to install facts machines at a tech court is to take these insertion orders for These ads that they were selling awesome Now what was the pitch though to Madison Avenue about why this would work intent baby exactly So the very first project that Jeff Dean did when he came over from deck Is Larry and Sergei and Erz told oh all right the vcs say we got a sell ads Go figure out the tech to serve ads on google.com But don't do anything to degrade search or user experience And so Jeff works with merissa mayor who just joined from Stanford undergrad and they're like okay like Fine, this is gonna have to just be text What can we do as a test to see if we can engineer something that'll work with text ads We could scale run against a bunch of queries Well, what about amazon affiliate links We know a guy at amazon we know a guy at amazon Who happens to own a good chunk of this company So google goes and signs up as an amazon affiliate which how crazy is this the google business model Was validated like doing customer development, you know, I start up idea validation Using amazon affiliates as the mechanism. Yes Jeff Dean Codes it up so that dynamically as users are searching if there's a query that is related at all to Any book in the amazon library catalog Google will dynamically generate a text ad say go buy this book at amazon In certain amazon affiliate link and drive traffic over to amazon and the amazing thing is of course it actually works Now Whatever the amazon affiliate commission, you know, if it's 4% or 5% of the revenue of a $10 book Obviously is not going to change google's fortune in the amount of money that they'll generate from this But it's a test It's a test and it's proof that they can then take to advertisers We can capture intent and we can send Highly monetizing traffic to you based on the keywords that you're buying And so if you think about the funnel steps, there's the impression of an ad Hey, they saw the ad then to there's the click they click through the page then three there's the on page conversion It would be one thing to just test click through rate which would have Shown a great result here because click through rates on search ads are higher than ads that are just randomly around the internet because Someone is intending to buy something they have high intent That's a great place to show an ad the click through rates going to be higher But what they also know because it was an amazon affiliate links is they know the down funnel number two They know conversion is actually higher from this traffic because We got to know how many books on amazon were sold from the number of impressions that we served so they can say This intent-based ad system has high click through rate and high conversion Yeah, they're just text ads, but you're gonna like the numbers. This is ultimately a math problem. Yeah it was an absolutely brilliant Test and bootstrap of the first step of the Google ad model. Yep So that's sort of gen one of the Google ads business and they get it set up It's going it's making some money They're winning some clients a medicine avenue like good great The more interesting piece for the next year year and a half is the OEM search portal deals And there's some big deals to come net scape Yahoo AOL this is white labeling google search to be the search powering other places Search activity that has tons of traffic Which oh by the way is also going to train huge portions of the internet to use google search Yes, it is and specifically what were the portal deals at this period of time before google had a real functioning paid search business What a portal deal represented was just letting a portal use google search to power their organic search and in exchange Just getting paid a fee for that. Yep. It was the ink to me business model It was exactly that we're selling our search results for you to use on a third party page And it's effectively like a b2b supplier. They're a vendor to a portal more or less Yes, it turns out though that we're still in the era of the internet where portals are pretty big Tana traffic and they're not just any old vendor. They're a vendor that at the bottom of every page says powered by google Yes So pretty quickly after omid joins from net scape back in 1999 He goes back to his old colleagues at net scape slash aol and gets essentially like a proof of concept Deal done with them and that's for google to backfill Organic search results on net scape's own directory service that they just launched to compete with Yahoo So it's interesting We always think about net scape the browser But this was presumably like the net scape homepage whenever you opened up You know, it would go to net scape.com or something and there'd be all these net scape services there available one of which was search Yep, and I presume having been acquired by aol this was now more of a strategic priority for net scape because this is aol I was like all business model at this point besides the you know monthly dial-up fees Right worth remembering aol way way bigger at this point tens of millions of people using aol Way fewer Going through net scape.com to deliver traffic to this google search This is sort of the small part of the organization. They're working with right now. Yep exactly But relative to how small google actually is at this point in time it's huge still big enough that when they flip the switch And google on net scape goes live with google powering you know organic search results There's so much traffic that it blows out google's infrastructure. Well It comes close basically. They're watching the analytics like a hawk Omed gets an urgent call from Sergei saying the traffic is about to tip over and this is potentially company killing because this is their Big strategic priority If they prove that they're untrustworthy to net scape and can't deliver Then how are they going to keep net scapes business let alone get any other portal deals or be able to go sell to enterprises that they're thinking They're going to do at this point in time right so they cannot tip over and so they have this pretty Tough decision to make but actually it's not even a decision at all. This is obvious We are shutting off google.com for today And we are going to prioritize all traffic from net scape for our servers until we can stand up more machines Yeah, just think about this for a minute think about everything that google is today Never goes down University available basically everywhere in the world on every device It's freaking google in 1999 They shut google down so that they could serve net scapes users. Yes I mean look the revenue is very material coming from this and the reputational impact is very material like I said It sounds like a hard decision. It's actually not decision at all It also ends up being the right strategic decision Because of what you mentioned a minute ago of the powered by google logo at the bottom Sure, you shut off google.com for a day and your own google users Don't like that but you're training millions of new google users who are going to see powered by google at the bottom And they got trained. I mean so the net scape deal brought in three million total searchers per day And at first google sitting there begging these early portals Hey, please put powered by google on and really trying to get that inserted in the deal Later on google got so well known for having quality fast search results on a big index that It was a value proposition to show your users. Oh our search is powered by google It becomes the intel inside of search. Yes. It's the ingredient brand That's exactly right. So now they've got some distribution millions of users But still very little revenue in June 2009. Yep. So over the next year or so Obviously, they're working on the other business models too But omid keeps signing up, you know some smaller portals some international portals on the success of the net scape deal Getting more of these OEM portal deals for google And then they start working on the big Yahoo Yes Okay listeners now is a great time to tell you about a new friend of the show. 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SCIM What about our box RBAC and you're thinking I have no idea what these acronyms even mean let alone how to implement them So here's the thing these are not nice to have these are deal blockers without sso without skim without our block without audit logs You simply cannot close enterprise deals period, but none of these features make your core product better They don't make your beer taste better to use our favorite analogy here on acquired So if you're building like a design tool spending six months building sammol authentication doesn't make your design tool more powerful So this is where work OS comes in they've built stripe 4 enterprise features work OS turns enterprise authentication requirements into drop-in APIs abstracting away as much unnecessary complexity as possible So instead of your team spending months reading sammol specs you can implement enterprise sso in minutes work OS handles user provisioning permissions audit logs all the checkbox items that enterprise IT requires So whether you are a seed stage company trying to land your first enterprise customer or already big and expanding globally Work OS is the fastest path to becoming enterprise ready Just visit work os.com or just message their slack support They have real engineers in there who answer questions fast and when you get in touch just tell them that and David send you All right, David. So how did Google get big in June of 2000 They sign a deal with Yahoo Right as the whole world is falling apart the dot com bubble is bursting the peak of the NASDAQ was March 2000 in June of 2000 Google signs the deal with Yahoo that they are going to take over All organic search result back fills on Yahoo dot com with the powered by Google branding And Yahoo is going to invest $10 million in Google as part of this deal who What a deal This totally saves Google between the revenue that they got from Yahoo for this and the $10 million investment It keeps the company going through the next couple years of the dot com winter until they figure out the ad words business model Yep So traffic doubled to 14 million searchers per day on day one of this deal June of 2000. We're now a year later than the net scape deal So started to get a material portion of web traffic here with 14 million searchers per day Yep And the next year in 2001 the first full year of this Yahoo portal search deal Yahoo pays Google $7.2 million for organic search results So it's material and again to underscore Between the $10 million investment this revenue the other portal deals net scape others and then others that they're able to get on the back of Yahoo This revenue really bridges the company through the dot com winter That's such a good point and something that's often pretty overlooked that there was no potential for Google to raise more money here the venture capital gravy train was over and so We're sitting here saying oh, they really need to make money and when are they going to turn the revenue switch on and We're sort of like hand-rearing over here. We're only two years into the company's life Think about startups today. You don't have expectations of profitability. Yeah Exactly within a couple years of founding But Google's got a very expensive business to run between the people and the infrastructure And there's no more ability to finance it. So revenue really was the only option So in the midst of all of this as Yahoo's coming online The board is also pushing Larry and Sergei to hire a CEO Yes, so as part of the series a process John door had Very begrudgingly extracted a promise from Larry and Sergei to hire a quote-unquote professional CEO Larry with CEO For the series a and and CEO for the next couple years after the series. I They really didn't want to do it. They were dragging their feet It took 16 months to find a CEO I don't think that was entirely because it was hard to find someone I think some of that was let's see how long we can get away without one. Yes my favorite story from the whole Google CEO hiring process was Sort of the standard playbook here that John and Mike and Sequoian Kleiner would run with founders when Convinceing them to hire a CEO is take them around the valley take them on the tour have them The CEOs of the great companies in the valley at the public companies and say look see what a great CEO can do for your business So they do this with Larry and Sergei go around they meet everybody in the valley. They're unimpressed They don't like any of them and finally after months of this they come back and they tell Kleiner and Sequoia all right There's one person that we met in this whole process Who we think meets our bar who we would be willing Come in and hire as our CEO here at Google. Oh god. Who is it? Steve jobs Really yes. Yes. Yes. Yes, because wasn't he like an idol of theirs Yeah, well, and he had just come back to Apple from next Whether they really meant it or not. I'm sure if Steve had been willing to come B CEO They probably would have said yes of course, but I think it was more like a Hey, a little thumbing their nose at the VCs You know our we're keeping our buyer high it's Steve jobs are nothing wow So great also deeply ironic given what was to come between Apple and Google 10 years later Yeah, but that is for the next episode so Anyway, it was a pretty contentious process Through all of it, you know 16 17 18 months in Finally Eric Schmidt emerges as probably the only viable candidate out there and I think Eric was Acceptable to both sides both because he was an actual engineer and had been its son. He was CEO of novell He was a business person too. He'd been a CEO but a CEO of public company Ed, you know famously he hit the vent diagram of everything He also went to Burning Man as did Larry and Sergey Right, and so Eric joins in March of 2001 And again, I think Larry and Sergey were still kind of resentful in the process I think it did come to work pretty well and They and Larry especially realized hey, there's parts of being a CEO especially as we're getting bigger that like I don't really like and Eric can do those things I don't really want to run a finance org. I can have Eric do those things and it ended up working Really well at a critical moment for the company where they needed revenue They needed to build a business and they needed to scale Yeah, and the three of them kind of ran the company together. I think they had a daily standing meeting So it wasn't like there was a CEO That took over and put the founders out to pasture it was CEO and then Larry was president of products and Sergey was president of technology But really it was like there are three people running this company together Yep, and a trusted relationship between three people is just more manpower than two people Yeah, and the organization at this point was so we haven't talked about Googleiness yet Yeah, I was talking about Googleiness uniquely That there would have been organ rejection if Eric tried to take a heavier hand. I mean he really Kind of came in with a lens toward learning and understanding There was somebody who decided very early in his 10-year maybe you know his first day to move into his office with him Because there wasn't enough space anywhere else and so he was like camped out like an engineer at Google It had an office mate for many months with an engineer and you know, it's sort of this Googleiness it was a little bit of like an acid test for him Yeah, right, but this giant world view let's solve big problems together. Can we think bigger No matter how crazy the solution if it sounds like a good idea. It's worth running down Googleiness is kind of utopian In a way that makes all other companies look almost like an evil empire It feels like a university in a lot of ways. Yeah, that was the culture there And they wanted the mentality of a campus too where they want inexperienced people who don't know what they don't know So they try and novel approaches to problems they collaborate more than they otherwise would have yeah But who are really high horse power? Yeah, everyone there was ludicrously high IQ from the very beginning But I think that sort of collaborative utopian thing went along with the IQ The phrase that I heard a lot in the research from talking to folks who were early Google was a healthy disregard for the impossible Yeah, it's like the modus operandi there And it's this culture that comes up with a mission statement to organize the world's information and make it universally accessible and useful I mean this was in 1999 in their very first press release after the financing that has been the mission statement It's also amazing How much that mission statement scaled Yes, I was going to save this for way later in analysis, but Organize the world's information Not too broad not too narrow and many ways altruistic to attract the right type of talent that you want But also one that lends itself to tremendous monetization If you're going to organize the world's information and you have a bunch of smart people You are going to be able to create a money printing machine Based on organizing the world's information They actually have a great quote in their IPO perspective We believe that the most effective and ultimately the most profitable way to accomplish our mission is to put the needs of our users first So there's this almost like trifecta of wonderfully altruistic sounding mission a that B lends itself to this incredible monetization model C as long as we're Putting the needs of our users first Yep, and I think Eric really bought into this because It was a risk even though he joined Google in 2001 and a lot of these portal deals were already underway the Yahoo portal deal had already happened It wasn't clear that Google was going to be like a smash hit home run I think it was clear that it was going to survive and they had enough revenue and they could be profitable But we're talking about somebody who's the CEO of a public company Novel and taking a risk to come back to a private company that yes had a lot of usage But hey startups are out of favor now And I think it was really him making a bet too of like no, this is what I want. I'm going to buy into this Yep, totally agree All right, so what was Eric walking into here with Google and call it spring of 2001 We're now through getting the Yahoo portal deal done Basically stabilize the ship Save the company Google is going to survive the dot com crash between the 10 million dollar investment from Yahoo Plus the revenue from that portal deal Eric hasn't started yet But Larry and Sergey now turn their attention back to ads And they're really not happy like the current state of play with ads even though it's working to a certain extent and advertisers are happy There are a bunch of problems with it One It's all still hand sold on Madison Avenue So like the market of the pool of potential advertisers Is nowhere near as big as the pool of potential searchers and intent that's happening on Google right They can't really scale this business and so it would require getting an enormous amount of spend from each of the small number of customers They already have yep, and then scale to another reason it's not going to scale well Is that it's all sold by hand so as you scale the business and you scale the number of advertisers You're going to need to scale the number of people you need to sell by hand like that sucks Then you end up looking just like Yahoo. Yep, so that's on the scaling side Then on the Experience side the user experience side There's no notion of ad quality here Google as a value proposition to its users is we give you the highest quality most efficient Best Search results possible we help your needs the best And the ads aren't really lining up with that. There's no way to they're made out that they're good yes Exactly, so that's a problem and then for Google's just flat out leaving money on the table They're giving advertisers this great product of hey, we have intent of people searching for these keywords But Google's just getting paid on a straight CPM basis for what they're selling They're not participating in the economic value and they're pricing a little bit kind of finger in the air on what the price And he'd given keywords should be exactly So now follow 2000 like okay Let's address this yes So all four of those issues are things that Google's going to address in this next evolution of adwords But there's a whole part of the world that heavily inspired Adwords v2 Yeah, Adwords v2 you might say is Google's Instagram stories moment. Yes There was an innovator in the space called overture or it's original name go to dot com We should tell you that story now So go to Bill gross started the company out of his startup incubator ideal lab And he did it with quite a bit of flair coming to the world from the Ted conference in February of 1998 So same time as Google's about to launch right and at the time existing search engines as you'll remember how to problem This is the same exact problem that Larry and Sarge recognized quality was going down in the old world Keyword matching algorithms were fine. There was no one gaming the algorithms There wasn't a lot of real commercial activity yet and search engines weren't well understood yet And so the old paid go search for dogs and the Most relevant website is probably the one that says dogs the most that still kind of worked. Yeah So now you're starting to get in 1998 all this stuff like keyword stuffing white text on a white background People getting porn sites to appear in search results no matter what you're searching for hijacking traffic all that sort of stuff So bill had this very radical idea the best search results should be determined by the free market with dollars Whoever is willing to pay the most is probably the very best search result for your given query And spammers who aren't relevant to your search can't afford to pay because there's not going to be super high conversion But super legitimate businesses that would actually solve the pain point that you're searching for could Just like how yellow pages in the phone book had paid inclusion as a philosophy That would lead to only the most relevant listings for any given category Right and at the time this was like a completely crazy idea But when you think about it, it actually does make sense if I have a product or service That can solve the need you're expressing for through your your intent in the search I should be willing to pay more than anybody else to meet your needs absolutely It's just a different way of solving ranking and relevance than Larry did Larry and Sergei sort of figured it out on the organic side and Bill sort of figured it out on the paid side so Bill went so far as to uh Go to didn't actually develop any organic search technology on their own. They relied it was all paid Yes only on paid listings and if you kept scrolling They actually did show organic results, but they would license them from ink to me and others David like you were saying as a backfill All right, so the net of all this on the Ted stage Bill gets wildly criticized for this Some people even booed the idea when he was on stage at Ted But crazily Bill's idea was basically right and it had a ton of ideas that would become a part of Google that we'll talk about here in a minute So here's how it worked when you searched go to would show you a list of the paid results exactly in order of who paid the most With no fanciness at all beyond that And they would show you the price that someone was willing to pay for your click So Right there on the page you could see 21 cents 23 cents 24 cents. Yeah, it was fully transparent. Yes So insight number one paid ads on keywords auctioned off to the highest bidder showing up first insight number two and again, this is way back in 98 Was that this whole cost per thousand impressions thing was wrong and that eventually he thought the whole world was gonna move Beyond this to a cost per click or pay per click pricing and so he thought why not just do it today And so go to advertisers only had to pay when a user actually clicked And the origin of this is since Bill had a bunch of companies at ideal lab He could uniquely feel this pain point He sort of hated the fact that he was getting billed for all these impressions at his companies when he just wanted to pay for the actual clicks I mean, this is how advertising works throughout all of human history to this point You know, there's that famous John Wannermaker quote of half the money I spend on advertising is wasted The problems I just don't know which half This new model of performance based advertising wasn't possible until the internet when you could track clicks and conversions But now all of a sudden as an advertiser you don't have to worry anymore about what's wasted right you know It's all performing and the nuance is cpm actually works fine in brand building situations But on conversion you actually care about the click so basically with cost per click You're getting free exposure Every time your ad shows up but nobody clicks on it But in a high intent environment you're not trying to get exposure You're trying to actually capture the clicks So it's kind of reasonable the way that it shook out that a lot of brand based advertising is still cpm based But on search engines it totally should be cpc So how did it go? Well, it worked insanely well out of the gate go to did a hundred million in revenue in one year Ha ha ha Way more than google yes This is a good business model they have found by the way This is also self serve There is a website where you as an advertiser can log in and place a bid There is an auction that happens you know a real-time auction where the person with the highest bid again place through the website Is on the very top does this sound familiar to anyone who's used google's advertising tools So the hundred million happened in year one by mid 1999 they had eight thousand advertisers Compare that against what ad words had when they launched in October of 2000 Which was three hundred and fifty advertisers in the beta program to your comment about scale David This can just scale to so many more advertisers Go to goes public within a year. Yeah, this crazy. Hey, you're probably sitting there thinking like how are they not the dominant player So One thing that did not happen was patents They did not patent the idea of the auction or of paper click And I got the chance to talk to bill when we were prepping for this episode He's very direct about all this very reflective also a brilliant guy He just thought they were obvious. He just thought this is the way it should be done Of course, it should be build per click of course. There should be an auction and the highest bidder Is the one that that wins So the nuts and the bolts of it are that Right before going public the lawyers flagged. Hey, you really should patent some of this But they were just outside the window of what was patentable because he shared them more than a year ago Onstage at Ted so the ideas were no longer eligible The Ted conference that's amazing There's some really interesting background to all this too you would think of course bill was right this stuff is obvious Why had nobody tried this until 1998 Somebody actually had tried this earlier There was a search engine called open text that did try paid search results in 1996 But the internet was still enough of sort of a utopian Community like small enough and sort of an outgrowth of academia that I mean people booed Bill gross and go to on stage at Ted in 1998 in 1996 when open text tried to do this It was like they got kneecapped right away. Heresy. Yeah. Yeah, it was heresy and Because that happened everybody else had a hangover from it of like oh, that's like a third rail You can't touch that internet users will never tolerate paid search right so it's funny Maybe they wouldn't have gotten the patents anyway since open text was doing it before But that was the ethos of that early web is how dare you litter or organic results with your paid inclusion Putting these ads front and center look originally Larry and Sergey were thinking this too right? Yeah The great irony is all this criticism. We're gonna flash forward for a second when google does launch ad words v2 There's a side bar with a separate color It looks super different the word sponsored is very clear You are very aware that you're looking at like a whole separate pain over there That's the paid icky world relative to my beautiful clean google search organic results Anyone who's used google in the last few years knows the world basically ended up exactly the way bill grows envisioned It's one column of results the first few are sponsored In google's case they label them even less than bill was labeling them at go to and then it's followed by the organic results after that So what was once criticized as absolutely heretical has come to become basically the dominant model of search and search monetization today Yep, but the interesting thing is the timing was not right in the mid 90s right for this yes By the time the bubble was sort of fully inflated the internet had become commercial enough that Hey, it was okay for build a try this and then He and go to an overture set the example of like oh, oh this is how you're gonna monetize Search this is really how you're gonna monetize the internet And then google can look and see oh, maybe we should do that too Yes So a couple of quick things overture did file some smaller patents on the self-serve tools Google did eventually end up owing them $360 million for infringing But these big ideas cpc auction those are now out there given to the world for free So within the next two years They realize that they can take this paid search model They have and bring it to portals too. So just like google started doing organic portal deals Go to starts doing paid portal deals This goes so well they become a b2b company they rebrand this is when they switch from go to to overture They start powering the ads for dog pile meta search Then they get to the big boys with aol and msn and eventually they get Yahoo Yahoo alone was a hundred million dollar deal You know google's playing over here in like Fun pennies on the ground land where they're please so give me some money for the organic results And meanwhile overture has it figured out these paid results. We are doing massive massive white label I'm sure deals once they get to Yahoo Some huge percentage of Yahoo's Overall company revenue Becomes paid search ads powered by overture right? Yes. I think it's like 75% So let's just flash all the way forward to this Yahoo ends up buying overture for 1.6 billion there's a little bit of a bidding war back and forth with Microsoft But that's the final price Yahoo basically says we have to own this thing. I mean it is Our revenue and Yahoo market cap had gotten Decimated when the bubble popped so this was a large portion of Yahoo's market cap that they spent for overture Yep, but what choice did they have they were over a barrel It was the majority of their revenue was coming from this vendor who was revsuring with them Yep Okay, so David to end the overture story before we go over to What did Google learn from all this and start implementing Some fun trivia Did you know that go to tried to acquire Google? Hmm. I did that to that. So here's how it went down. I asked Bill about this Bill thought it was a match made in heaven. So Google's got the best way to bring relevant organic search with pay drink Really amazing for informational non-commercial searches and go to has this amazing paid system for the commercial searches You should totally have one system that marries informational queries and commercial queries together It's got the two best ways to surface relevant things to you one paid one organic and Larry and Serge Before they raised the Sequoia and Kleiner around Came to bill and said what about 200 million Wow Bill thinks Actually seems fine. This seems fair. You guys are really on to something They were had a chance of getting acquired for 2x the valuation of that extreme fundraise right wow Was overture already public at this point? Yes, so then bill goes to the rest of the overture board And overture at the time is worth two billion dollars and the board their conclusion is basically How could we give up 10% of our Very important valuable revenue generating company to this little company with zero revenue Ha Be a delutive transaction And so no deal well There's almost zero chance that Google becomes Google if that deal had happened so yeah Exactly, that's the thing with these like what would have happened otherwise acquisitions. Yeah, that's amazing Well, okay, so back to fall of 2000 when Larry and Sergei and Google can now finally focus on improving their ads product Yeah, I think we heard this from folks in the research What's they saw how well The go to an overture model was working? I think Larry and Sergei were kicking themselves of like We should have just done this from the beginning like why did we waste time Doing this the other way and like yeah, it's gonna take a lot of technology to build this out and like yeah We're gonna have to focus on it, but it's obviously the better business Obviously, Larry and Sergei geniuses from their childhood through their undergrad research projects The way that they conceptualize the original page rank algorithm everything truly geniuses But the second superpower on top of that is it doesn't always need to be their idea They're very good at hearing the best idea Whether it's from outside of Google or someone else inside Google and adopting that and making that the thing that they run with So October 2000 they put seller on the project to improve ad words The first obvious thing that they need to do is they need to build a self-serve system As long as Google's still taking manual orders for ads They're not gonna be able to implement any of the technology to build people per click or anything like that or let in smaller advertisers and expand the pool Exactly, which clearly overture had shown there was a market for this they had 8,000 advertisers against Google's you know couple hundred Yes, that they were selling by hand Famously by the way Tim Draper was looking to invest in overture and eventually did lead their round and to test it out He actually opened up his computer and he bid on the keyword VC when they were pitching him That's amazing That's the like historical proof that I have that overture had self-serve and then he got out bid It was like one penny two penny and then he he started a bidding war over the term VC Oh, that's such a great story. I love it Okay, so obviously they need self-serve. That's the first thing to work on but Salar and Larry behind the scenes too are clearly thinking like okay, how do we do this in a Googley way Yes, we're gonna borrow a lot from overture, but I think they had a Spidey sense already that like hey that wasn't Google lead or so pure over here But also that it wasn't quite right that overture had gotten like Three quarters of the way there on cracking the business model Yep, and so the thing that Salar and the team really start noodling on is We've got this beautiful algorithm in page rank that can deliver Highly relevant organic results Is there a way that we could incorporate something like that into our ad system as well and ensure ad quality like yes the paid System in it in and of itself goes a long way towards ensuring ad quality Ben as you were talking about earlier But there's there's still potential for abuse here. Yep. What can we do to really make sure that these things are good Well, okay, if we're an online self-serve system. We're measuring clicks We're gonna ultimately switch to paper click We could track those click-through rates and what if we made that a signal To the ranking of how we show the ads I mean, it's not just like fully pay to play where if you pay the most you get placed at the top But actually we incorporate as part of our ad ranking System How effective your ads are at click-through rate that might solve the problem Such is the birth of ad rank you've got page rank that uses all the clever things we talked about earlier with Number of people linking to you and how authoritative those sources are for the organic results to make sure that the most relevant results are being surface to you Now we have a way over in the paid side of the house with ad rank to take all the great stuff that we just talked about with overture the self-serve model the auction the cost per click-based System and we add in Click-through rate and we feed it back into the algorithm creating ad rank which is really The main two things going into where is your ad going to be positioned in the ranking It's both how much you're willing to bid and it's how often our users actually clicking through so they know that it's The right ad to be showing at that right moment click-through rates are a proxy for relevance yes and By the way as a really nice Side benefit of that if your formula for placing ads is a combination Of the price that an advertiser is willing to play per click And the click-through rate of the ad Well, that's actually the mathematically optimal formula for maximizing your own revenue as Google Hmm That's interesting highest price paying per click And then the highest likelihood to click that is the ad that you should show to maximize your own revenue It's basically an expected value calculation exactly. Oh, that's funny But it's also perfect for advertisers because it means that if you're a better advertiser for that keyword Then you actually get to pay a lower price if people are more natural to click through to your service and transact on your product You get the privilege of bidding lower prices and still winning the auction all incentives are aligned for the user Oh, and for the user because then it means that the user is Only ever seeing products that are the most relevant Yep So it's funny how all of this gets rolled out. It's fall 2000. They start working on this the first version they launch includes self-serve and includes ad quality but it doesn't yet include CPC or the auction Which is funny. It's sort of like they did the hardest technical stuff First interesting so this first rev in the fall 2000 Attracts a ton of advertisers. You've now opened the floodgates to the long tail of advertisers And you've introduced this Click-through rate element this ad quality element, you know ad rank to how ads are going to get served Advertises pretty quickly figure out They're still paying on a cpm Basis not on a per click basis They figure out that they can game the system by clicking on their own ads So Because that'll boost the click-through rate and then their ads will get shown that's so funny And they're not paying per click so they're not costing themselves money when they're clicking on the ads It's actually an efficient use of impressions to use them internally to boost click-through rate exactly So it becomes like for a set of months the greatest arbitrage in the history of the internet was to click on your own ads That's so funny Oh and Google but it proves that like okay, this is gonna work So then they fully borrow after that we're now into 2001 They borrow the rest of the model from over-chair with the cost per click payment basis and the auction model now Interestingly, they do one up over-chair on the auction model they go to the second price auction this is such a genius mechanic There's like eight genius mechanics we've talked about so far in the episode, but this one really sings If you're the winner of an auction They make it so you never have to pay anything more than one penny Above second place. So let's say i bid 20 cents you bid 30 cents and then some other guy bids 50 cents Well that other guy is gonna win, but he's only gonna have to pay 31 cents and you might say Well, that's silly for Google like they're leaving money on the table But what Google is thinking is with a much longer lens and saying well we'd rather have our advertisers a trust us And feel like we're not gouging and be Not feel like they have to constantly like check and fiddle and look to see who the other bidders are And if they want to adjust their price it's actually a long-term value maximizing thing to do Even though in the short run of course you're leaving pennies on the table each click. It's a version of Ben you have this theory that you and i've been talking about that every Greek company has like a stored potential energy Of value maximization that it doesn't fully maximize like Costco is that the extreme example of this, but Google has this too That's a great point. Yeah, the second price auction is Storing potential energy in a way. So there's a fun story around this As you can imagine This is a little hard to explain to advertisers when they roll it out like how this works Why it's gonna be good for them etc They used to just write one check and send a fax and that check bought them a big batch of impressions And now you have this confusing morass right so there's a fun little story about How to educate advertisers around how this model works All of this the sort of full version of abwards that we know today had launched at the very beginning of 2002 And Cheryl Samberg had joined the company right around that same time too and she was working on ads You know part of her job is to sort of Pitch to advertisers what this new model is and explain it to them She's banging her head against the wall. It's so hard to do and so she calls up her mentor Larry Summers who had previously been the US Treasury Secretary and Cheryl had been his chief of staff there She's like Larry Having a hard time Explaining this to advertisers you know how this model works the second-price auction. It's weird and Larry's like oh This is what's called a victory second bid auction There's a lot of economic literature about this This is the optimal way to do auctions and this is actually how the federal reserve sells its treasury bonds You should just tell advertisers that So she does it you know, I don't think it sinks in right away, but eventually advertisers get the message It's funny. I do know This was very painful for Google to do to transition all their advertisers over to this new model They actually called it project sunset where they had to sunset them off the old model Bring them on to the new pricing even though it's better for everyone's miserable along the way I have a funny coda for you to the whole overture thing great go for it so I think it is correct that Google and particularly sell our lead to charge on the Insight that click-through rate is really important and factoring it back in is relevant Overture did also figure it out earlier The problem was that after the team implemented it advertisers as you would imagine no longer knew how much to bid and Overture's whole thing was we have this transparent thing on the page where we show the prices And whenever you load up a page now the prices were out of order And you're like well, what am I supposed to get to bid they get the top spot And also like it makes it plain and clear you guys are supposed to be transparent now You're this like confusing black box Overture did not take the pain of transitioning Over to this new model and they just abandoned it and said uh We're not going to mess with this click-through rate thing Which ended up being crucially important to the model This also highlights something that we would be remiss not to say as well The technical infrastructure to dynamically execute second-bid auctions Every single time a user is making a search query was Incredible especially at Google scale in 2001 with the technology available then yes Yeah, I totally believe that Overture did try to implement it had the same idea and also that overture had really good technology too like I think that is true But again back to Google's infrastructure and the commodity hardware and the scaling out data centers and the distributed file system and distributed computing To really scale this you needed special infrastructure that only they had So okay, we're talking about the pain of transitioning the Google add model and ultimately the whole business Over to this new beautiful Edwards model and how hard that was to put some numbers on it So in 2001 the year that the Yahoo deal saved the company Google for the year ultimately did 86 million dollars in revenue that year and 10 million dollars in profit so Turned profitable in 2001 like great numbers by any metric for a startup and especially in the middle of the dot com winter but Almost all of that revenue was the combination of these portal deals and The old ad system that was in place So project sunset and transitioning over to the new ad system Put a large portion of that revenue at risk. Oh, yeah It was not necessarily an easy decision. I mean it wasn't easy decision because like the performance was so clearly better And like eventually economic incentives would kick it but It was still a little Tenuous there in Google land for a while The other thing that's happening at this exact same time is Eric Schmidt arrives and discovers that 50% of Google Searches are outside the US, but they have no international Ad sales There's no international business So he almost jokingly tells Omeid just go get on a plane Go to the airport Monday morning and I'll call you and tell you what market to where to buy a ticket to And we'll just kind of go from there or just pick a country and we'll you know figure it out They kind of build basically these little startup teams in a bunch of different geographies that kind of act as their own company Selling Google ads on the new system, but it basically works. You're one Because Omeid spent the whole year on the plane 18% of revenue is now international 2002 accrued to 22% 2003 accrued to 29% today. It's half of Google's business And they even had a business in China for a long time until famously they got into a fight with China that started in When was that 2002 and three or four something like that? Yeah, eventually Google finally just withdrew and rather than said Results in 2010 But basically everywhere that is not China starting in 2001 with Schmidt being like we need an international business. They grew themselves a just fine international business Yep, yep, yep So 2002 is this year of transition to adwords for the company so spoiler alert It worked In 2002 the company did $140 million of revenue so up like you know, whatever that is 5 6x from the 86 they did the year before while transitioning All of that revenue to the new model and when I say all of that revenue I really do mean all of it because a lot of that 86 million remember was the the portal partnership deals By midway through 2002 Google's realizing that paid search and adwords is working so well We should stop having portals pay us for organic search We should start paying them To do paid search on Their sites and share the ad revenue and that leads to the landmark summer 2002 Deal with aol. Oh yes All right listeners now is a great time to thank one of our favorite companies and one that has become essential To how we make acquired and Thropic and their newest flagship model Claude Opus 4.6 Which we have been making heavy use of here at acquired HQ I actually just Least some space for the new acquired studio here in Seattle When the landlord sent over a pretty simple lease. I thought oh, this is totally something I can review myself I looked at it But then I also thought okay, I could use a sanity check So I uploaded it to Claude and asked if there was anything that I should be mindful of or in consistencies or Anything I should push back on and Claude actually found three things that I totally missed on my own review It's amazing you told me about that. I've actually been using a lot here for writing show notes I end up with so much detail in my like 50 60 70 page script documents That I'm like way too close to the material and I need to fresh set of eyes for what the big points are as I write up The show notes for each episode and I used it for something similar too when we were preparing for our Super Bowl Innovation Summit I had Claude go back through our old NFL episode and search the web for what numbers had actually changed since then Then go through it with me and figure out if that changed any of our older conclusions Yeah as an anthropic puts it Claude is the AI for minds that don't stop at good enough It's the collaborator that actually understands your entire workflow and thinks with you Whether you're debugging code at midnight or strategizing your next business move Claude extends your thinking to tackle the problems that matter to you So whether you are shipping the next great product or tackling problems that need deep thinking Claude Opus 4.6 thinks through complexity with you not for you. It's your intelligent thinking partner So if you're ready to tackle bigger problems get started with Claude today at Claude.ai slash acquired to try Claude with 50% off pro for three months And if you want to explore their enterprise offerings just tell them that Ben and David sent you Okay, so the a well deal and one context setting thing just to see how fast Google's world changed in 2002 with the new adward system it going phenomenally well as recently as late 2001 Just months before There's a dinner with Kerry Semmel who's the CEO of of Yahoo kind of big media executive guy comes in takes over is the big media CEO And he sits down with the founders and he says So guys, I think where your biggest customer right like us paying you for those organic results in the portal deal And they say yep, and he says that's like less than $10 million that we're paying you So you don't have a business do you The business can't be that big if where your biggest customer at less than $10 million and everyone's all excited about you And they're like uh We're excited about some of the things they have in the works and they're clearly Thinking about this new adward system that they're going to launch on the spot. He offers to buy Google for a billion dollars Wow even knowing you aren't doing much revenue and this is at a time Google was so secretive pre IPO I mean no one knew other people in the business Terry Semmel sits down. He didn't have a real sense of their revenue He just knew that he was the biggest customer So I think this kind of illustrates just what a insane 12 months it was to go from being in that position To the numbers that you just shared on what is it 5x revenue in a year? Yep, they more than 5x revenue from 2001 to 2002 from that 86 million to 440 million in revenue All right, so they're feeling real good about this And so they decide To go to aol The big source of traffic. I mean aol has 34 million users at this point It's funny imagining This recently aol was still a big and important company But if they could figure out how to be the search results provider and more importantly the ad provider for aol That is a potentially company making event Yes, I mean hell 2002 I was probably just transitioning from using aol as my way to access the internet As a senior in high school I think we had maybe just gotten broadband like that year maybe the year before Funny how sometimes things feel like a lifetime ago and sometimes they feel like just yesterday Right, right? So yeah, okay, summer 2002 The transition to the new abwards model is blowing the doors off Google goes to aol Which by the way Yahoo sees this and they come back and say how about 3 billion I had heard about that 3 billion Google comes back and says how about 5 billion And of course no deal gets done and this would be the last time that they seriously try to acquire the company Yeah, but then Yahoo would buy overture But as I pointed out a minute ago when Yahoo bought overture for 1.6 billion dollars That was a huge portion of Yahoo's market cap if they'd actually done the 5 billion dollar Price that the Google founders floated at them it would have been reverse takeover It would have been Google taking over Yahoo. Oh, that's a good point In fact Google throwing out 5 million is almost a farce. It's like how about we buy you? It's like it's a counteroffer Yeah, we'll buy you So funny So this aol deal The current state of things is that the 34 million aol users their search experience is powered by ink to me On the organic side since 1999 so the last three years and overture for the last two years It's sort of a bakeoff of do we want those two or do we want just one to take over all of it since Google seems to have kind of the whole package now Google wins the deal Here's the shape of the deal and then we can kind of talk about the philosophy behind it, but it's worth knowing the bullet points Advertisers will all sign up with Google Hmm clean they use Google's UI So Google can sign them up or aol can say hey advertiser I know we have a longstanding relationship you can buy ads on our properties other than search But for search here's the URL you go to to place your order with Google Okay, go through the rest of the deal points, but this is huge that is huge Google will then share back 85 cents on the dollar to aol for all of that revenue aol wants two things in exchange for turning over their entire business in the search advertising world to Google One is we want word coverage So what they end up getting granted is the option to buy 7.4 million shares of Google at $3 per share so a total of a $22 million investment Think it that is part of the deal two is a 100 million dollar revenue guarantee Yep We want to make sure that hey, even if this whole thing falls apart, you're going to pay us at least a hundred million dollars And hopefully more if these ads perform well and we're getting 85 percent So here's a crazy thing google doesn't have a hundred million dollars When they're negotiating this deal in May of 2002 It's like just starting to work. Yeah, so syriga brin has a quote. He says we could have gone bankrupt This is quite literally google betting the company And the way to kind of think about it is financial leverage They took on a fixed dollar denominated obligation with that revenue guarantee to aol So if there's upside to google it would have been a huge huge win But if there's downside In their business of serving Yeah, if they couldn't make it work on a or right they obviously have very high confidence that it would But if something happens and they're like oh shoot we actually Can't sell these things at the rates that we thought it would have gone from like oh shucks bummer to now that we've signed this deal We're bankrupt. Yeah, this was a really really contentious decision And I think it ultimately came down to Larry and Sergei pushing for this You are absolutely right. There's a great quote in cana let us book about this where omid says you're betting the company if you do that And Larry page responds we should be able to monetize the pages if not we deserve to go out of business Well, it's great. So yeah, those are the deal terms but that first one of advertisers are going to use google system This is why it's worth betting the company This is when google discovered what we talked about on our meta episode when Bosnian to Bosworth the CTO Had the insight that more ads equals better ads and then argue to Zuck and Cheryl like no, we need to show more ads in feeds and then they'll get better The more ad inventory you have in your system if you're serving them dynamically based on a ranking and targeting them You want to have as much inventory as possible to give you as many candidates To choose the best ad to serve and so onboarding all of aol search ad inventory into google system Was hugely strategically valuable. Yeah, it's a market liquidity thing. Yes, exactly basically the more Volume you have in your market the more deeply traded the market the more likely you are to have an ad that has perfect product market fit with the query Yes, if you have a thin pool of advertisers and several folks I talked to at google made this point to me that If google had come out of the gates With the ad words business model in all of its glory that it ultimately became It would have been very hard to bootstrap from a cold start Because you would have had this inventory problem You wouldn't have been able to deliver the magical high quality ad experience because you would have had a very thin inventory of advertisers You almost had to bootstrap it up How they did and then onboard this other supply into the marketplace to get deeply liquidity It's funny. Yeah, I just want to pause for one second when you say magical There's nothing magical about search ads, but I think you're right that they're like the least offensive They're the most likely to be what I'm looking for without giving me any delight whatsoever Sorry, I meant magical from an economics. Yes It is the most magical economic transaction I think ever known demand right I mean for an advertiser You are reaching the exact right person at the exact right time when they have the most intent possible To find your service it is actually a pretty magical Economic lever Well to your point at the beginning of the episode that google with this business model Makes more profits than any other company. Yeah, there go Tonologically, it's the most magical business model ever discovered Right So the ink to me comment on this they commented to the Wall Street Journal on a well's decision They'll learn over time that google takes your users. It doesn't help you build your property Which wasn't wrong. I mean how many people use any portal today versus how many people use google directly today So how did this actually go they made this huge bet they put a hundred million dollars on the line You better be really really sure that you can come through when you're betting your company Uh, it worked. It worked AOL made 35 million dollars in 2002 the first half year of the deal alone and then in 2003 made 200 million dollars Wow Yeah, blow through the guarantee. Yes Absolutely this made google a major player in the paid listings market almost overnight And they weren't at all before overture dominated this market before So this is a absolute bet the company move that couldn't have gone better And they were taking all that inventory effectively from overture who was aOL's partner before this that's exactly right This is also where Cheryl Sandberg really makes her mark She joined David as you mentioned sometime in the last year right around when Eric Schmidt joined or right after that And she was looking for the right job to do she sort of poking around the company I think she's a business unit manager or something like that But google didn't really have business units And so oh meed sits down with her and says you're looking for a big job right and she says yes And he said we have this huge aOL deal that we just signed We have a ton of new advertisers and a bunch of categories that we have no idea how to service We need like an army of people to handle these thousands of new advertisers And they have to be smart and they have to be adaptable because we have no systems built for this yet And then over time They're going to have to figure out how to scale themselves so that we're not constantly hiring more people They need to feed ideas into our technology organizations to make it so that we get more leverage Off of the people that we hire and she basically hired all these great people built out the entire adward sales function to service this monster aOL deal That was what she did at Google before going and becoming COO a Facebook We'll talk about that on the next Google episode here. Yes This also I think as Google's digesting the steel and realizing the huge strategic value of it This really I think gives them license to then go Play offense on traffic acquisition everywhere like basically the light bulb now goes off of If we can have Google search paid an organic Be part of the user experience Anywhere on the internet we should do everything possible to do that because it will build our liquidity pool and our business And we will just monetize the internet. Oh boy Will it ever David you want to do distribution? Do you want to go there right now? Oh, yeah, let's go there All right, I've been chomping at the bit So we're going to talk about all the crazy stuff they did for distribution But before that it's worth a discussion of the business model of search And we've been talking about it all episode But there's a very particular unique characteristic That once you realize it it completely changes How you should think about distribution So search is a winner take all market and not just because It's large and consumer facing and the torsional across industries There's something more to it than that a second layer So they've got all the traditional economies of scale that you would expect If you make a thousand of a widget you get cheaper pricing than if you make ten of that widget So just like everyone else they amortize the fixed costs of their infrastructure and their employees And they have a better infrastructure model as we were talking about earlier etc etc Exactly But there's this crazy thing that happens with Google where at scale Not only do their cost decrease On a unit basis their revenue actually increases per unit So here's what I mean by that when you have more bidders on every keyword You have better price discovery in that little market and the winning bid is a higher price Then it would be if they had less bidders This is another reason why you want a deeper market liquidity pool Yes The second thing too is you have bidders on keywords that are less common So let's say you've just got the hundred biggest advertisers in the world You only get to monetize some of your searches But if you've got a big long tail of advertisers or just a lot of advertisers Then you get to advertise more of your searches So it's more likely than any given search results in revenue So Having marketplace liquidity means you always generate the most revenue per search Versus other smaller search engines So it's not just that unit costs go down It's that as they scale their revenue Persearch actually goes up due to the auction system Yeah There's a third statement that you need to add to you know Boss's insight from the Facebook days of more ads equals better ads It's more ads equals better ads equals Better business Absolutely I mean it is crazy that there's this You make more money per search the bigger you scale Yeah In this auction based marketplace system It's increasing returns to scale Exactly So then keep following the logic tree So because each searches worth more Well each user is worth more over their lifetime Which means you can pay more Than other search engines can to acquire a new user And once you realize this and you get a little bit ahead Which this is where Google is right now in history In that 2002 era a little bit ahead You can start pressing your advantage And once you start doing that It's really hard for anyone to catch up So the cycle is get distribution And we haven't yet talked about how but somehow We've talked about it a little bit in the portal deals Which drives volume of searches More searches drives keyword bids Keyword bids drive up price in auctions The price creates more revenue for Google More revenue for Google means they can pay more for distribution The virtuous cycle obviously goes on So the obvious lesson Do not just sit back and let organic growth do its thing Even though they've got great organic growth And the best brand in the world that in here in 2001-2002 You want to be aggressive and gobble up this market as fast as you can Because someone else is going to have this insight too So then the tactics what do you do? 1. Pay massive revenue share to your distribution partners In some cases up to 100% of the revenues generated We'll talk about who the distribution partners are in a second But even earlier we heard with that AOL deal They were willing to give AOL 85% That's a huge split Yep Yes So with some partners they were incredibly aggressive They were like we're going to give you all the revenue for a while Just to get you on Yes, exactly If Google monetizes each search the most Then their rev share to distributors Are going to be better than anyone else Let's say they give away the same percentage as other people Oh we're only given away 70% Well that's more than someone else's 70% So you know press that advantage go 100% Who I even heard one example where they gave more than 100% Where they can realize like the payback on this is just so This property is so valuable to get this distribution Yes Eventually it just doesn't make economic sense for a competitor to match your pricing They literally will run out of money to try to spend the way that you can spend Because your monetization per user is so high So realizing this is kind of a secret weapon This is also where being private was nice Some of the other search engines were public by this point And so they were reporting very consistent metrics that they wanted to Continue reporting Google could irrationally do things like Yeah, we're going to overpay for distribution in this case And they could potentially risk having a worse quarter Ultimately, Google discovered this property And they had a belief that no one else had Which is search is going to be really really big Not like a billion dollars big or ten billion dollars big Search is currently half a trillion dollar annual revenue market This is a market worth betting everything on And they had the stomach to invest very very very heavily Where others kind of thought like Jesus the final payoff can actually be worth investing into this market And Google thought it's literally worth any amount of money That we could invest in this especially in being first and being biggest So we've been talking so far about distribution deals In terms of these you know search deals with portals Tell us about some of the other Crazy stuff they end up doing Because once you realize this the game just becomes Get users and advertisers at all costs That's exactly right So currently people need to know how to type in google.com That sucks It would be really nice if you could get users Without having to like hear that from a friend And load up a web page to start searching And like hopefully you book market You don't own a browser So how do you get a Google search box To actually appear in the browser Instead of on google.com Which by the way Microsoft owns the browser right now And if there's anybody you need to be afraid about figuring out this secret It's Microsoft and Microsoft definitely did figure out this secret And just to be a little more specific on that Google was already going and starting to pull away from the rest of the market So it would have taken a boatload of money To try and compete with Google even a year or two into this Which almost no one except Microsoft has And then spoiler alert for part two Who would a few years later Try to spend a boatload of money with Google Microsoft Yes Okay, so Microsoft Scott internet explorer Google doesn't have a browser What do you do? It's December of 2000 We are not talking chrome territory here Google toolbar baby Google toolbar Man when this came up in the research It was like the biggest blast from the past of both Man, I love that thing Man, I had not thought about that in about 15 years And a holy crap Everybody thought this was just this gift that Google the benevolent Google gods bestowed upon the internet ecosystem No way it was a hugely strategic business model Peace for them. So here's how it worked They shipped it super early in December of 2000 This is like two and a half years after the company was founded Before they've figured out adwords v2 They had just launched adwords v1 So it's both the sort of offense we're talking about here Of go be aggressive get users but also defense Google's paranoid about Microsoft entering and using internet explorer as a weapon If Microsoft owns the browser they can Direct the traffic wherever they want So once toolbar is installed by a user And maybe we should for younger people explain what toolbars are What Google toolbars yeah what toolbars It was a plug-in the equivalent of a browser extension That would basically create a bar Underneath your bookmarks bar or I don't know bookmarks bars were even a thing yet Kind of where the bookmark bar is yeah at the top of the window yes And it had a little google search box in it among some other functionality And you could just search right from the toolbar without having to go to the website right now It is every modern browser you just search from the bar at the top of the browser There used to be two different things There was a url bar and first that's all there was And then eventually they put in a search field inspired by the google toolbar So here's the economics on how it all works Once google toolbar was installed a user averaged seven times the number of searches Obviously which makes them seven times more valuable Which means you could pay a lot of money to get someone to install it Yes, so how did they pay money to get users to install the google toolbar Because they weren't paying users the average annual revenue generated by a google user was two dollars But with toolbar it was ten plus dollars Even if you're being conservative So that difference that somewhere of you know eight bucks a user call it is your budget to play with And estimates are that google ended up spending on average way less than this for a google toolbar install But you can understand the amount of lift that they get from a google toolbar when you understand wow It's worth eight dollars more per user In this year and by the way average revenue per user arpu is skyrocketing It's growing very quickly. So this eight dollars is just this year's gonna become $20 $50 $100. Yeah, so google just paid everyone that they possibly could to bundle google toolbar with their Installer of an application This includes a doby you downloading an adobe app Hey, congratulations. You have google toolbar. You don't know it, but google just paid adobe a bunch of money Real networks Same thing Windsip same thing they were hyper aggressive. It just to be really clear about what's happening here When users are downloading Programs what apps used to be called to run on their computers Google is paying the maker of that program to include effectively a frozen horse payload of the google toolbar Which will then become a Trojan horse that lives in your internet browser in internet explorer And google will make a lot more money from you So the most horrible way to describe this is that it's adware. It's spyware. It's a Trojan But users loved it. I'd love the google toolbar totally, but the technique itself are you gonna get into pop-up blocking? No, lay it on me. Oh well, so as they were building the toolbar and thinking about like okay Users are gonna love this because users love google and being able to access search, you know That's value prop in and of itself for this thing But pop-up ads were a problem on the internet at this point in time and One of the most popular plugins for web browsers were pop-up blockers And so google decided well, hell why don't we make the google toolbar also a pop-up blocker Just one more incentive to install it and become a sticky google user. Yes genius They even did a deal with Dell directly to make sure that when new PCs shipped with windows They shipped with google toolbar pre-installed on internet explorer amazing They famously did a deal to become the default search engine in Firefox just as it was becoming popular Which served as Mozilla's main revenue source for decades And this is a great one that'll be real close to home david you remember the google earth acquisition. Oh Yes, I do classic acquired episode So google's an ad-base business they buy earth there's conversation in google. How do we put ads inside google earth Well, instead of doing that they realized that google earth is going viral people are downloading this thing like crazy Because it's really cool to just play with a globe on your original google earth was a program that ran on your computer It wasn't like baked into google maps the web app yet and google maps was like very lame compared to google earth They did very different functions maps was clearly for driving directions earth was oh my god I can zoom in on my house and I can it's all 3d it's super cool They just bundled google toolbar with the installs of google earth and then it more than paid for itself We don't need to do it way more than paid for itself. Yeah, it's crazy. No need to put ads in google earth It's so crazy in the mid-2000s arpu would eventually grow $10 $20 $30 and always a google toolbar user was Stickier than a non-tool bar user and so they just had more and more and more budget to play with Inocquiring users and not to spoil too much But obviously this still plays out all the way to the much debated apple safari deal today And the tens of billions of dollars that google still pays to apple in traffic acquisition costs Yeah So the takeaway here is yes, they had the best product. Yes, it was fast. And yes, it was the best technically competent Yes, they had this amazing culture But everyone kind of forgets about the fact that they were so aggressive in distribution deals They didn't just let people magically find their way to google. Yeah And it was also strategic as I've been talking to people over the last month About making this episode talking to friends think about how to position it up in like This first google episode feels like When we made the Costco episode It's the same beautiful ballet where every piece of The google business model Works together and reinforces the other pieces and in concert it creates The best business model of all time. Yep And it's funny toolbar happened to be the one that worked But it wasn't the only thing they tried they tried so many desktop applications They even had one called google desktop that would search your desktop And then incorporate those results privately into your web search It's a little Google enterprise search applications. Yes reincarnated is google desktop But that's basically the strategy for all these applications and clients is how do we make you a more sticky google user So do you know the final chapter of this story of in 2004 A new pm is hired by google they come in and they take over this applications Client team that includes google toolbar That pm is soon darpachai That's right And that is all we will talk about for soon darp on this episode But obviously he will come into play much more in the future What it really highlights how important Google toolbar was and how secretive the company was about this really being like this strategic linchpin of what they were doing Yeah, or a strategic linchpin So there's one more Business building story to tell here before we get to the IPO and the end of this episode And it's another version of this sort of extension of the google business model And that is AdSense which is google's kind of second big business line after ad words on search pages Yep, and it's another Brilliant insight of how to extend the strategic google business model before adSense Google was limited to making money when a search happened That was the atomic unit of the google business model was a search query Which actually doesn't happen that often It's a really valuable thing what it happens because it's high intent But most of the time someone loads up a page It's a website that is not google.com Right, you're consuming content on the internet much more often for a higher share of time Then you are running queries and searches and queries and searches have high intent So they're really really valuable But there's all this other time and content on the internet that google can't monetize But because of everything that they built for page rank and organic search An understanding what's on a page and then serving the page as search results And then also for the ad system for You know, ad targeting and ad quality and predicting click through rate They realize that Well actually we don't really need a query to happen to serve effective ads against what a user is consuming What if we essentially run a version of the same algorithms on static pages on publishers web pages and then reverse serve the keywords that we would have served for a search query That would have landed on that page It's absolutely brilliant It's a little bit different because they're matching the ads to content instead of to intent It's sort of try to fit in with the content around it But you know if you're consuming content You likely have some future intent around that content Or maybe even loose intent right now Yep And we've got this existing pool of advertisers in our system and their ads and their ads in the system We could literally just run the same ads We could run the same ads on web pages So in February of 2003 they have this idea And Google is still massively inventory constrained for serving ads There's way more demand from advertisers to be serving their ads against queries Than there are query supply in the system so to speak Which is why the auction works if you had way more searches than everybody would just be bidding You know one and two cents on everything all the time and winning Right right right You always want to be supply constrained as a business So legendary Google engineer Jeff D and Builds ad sense in six weeks The whole system of course he does They're great stories you know they launch it first on Google groups And then they want to test it on true third-party websites to see how this works And as they're testing it what they decide to do is oh will just buy display ad space On these other publishers and rather than running display ads We'll serve it however they need to serve it But we'll effectively serve a display ad that is just a window into the text ads of adwords ads that we're serving onto that page I remember seeing these for the longest time when you publisher enabled Google ad sense You'd get like what looked like search results Just like three across in a banner exactly That's what ad sense was in the beginning and their Favorite website for testing this was the website house stuff works.com Because all of the pages on house stuff works it turned out were like High intent highly commercializable adwords pages for adwords queries Like if you reverse engineered the ad search queries that would have run adwords against them They were great pages So Susan Wadeski came in as the product manager for this into the process And it becomes another big business for Google much lower margin than their own first party adwords business But adds hundreds of millions of dollars of revenue to Google off the bat Yeah, I've seen different estimates from different points in time sometimes that they share 67% of revenue sometimes that they share 80% of revenue But the right way to think about it is most of the revenue on a click in Google ad sense actually goes to the website publisher And Google takes the smaller part as their spiff. Yes, that's right Whereas if you actually own the search results page and you are running first party ads You get 100% yeah, but it's very similar to the portal ad deals that they were doing with a well Now there's some sharing revenue with the publisher. It's the same model right At's a great point. It's someone else's traffic The net result of this by the way of the ad sense launch google has had a Troubled dance over the years Back and forth with publishers are they good for publishers? Are they bad for publishers? What does it mean for the news industry blah blah blah Right in this moment when they launch ad sense Publishers and especially small ones love them I'm making content on the internet and all I have to do is drop into HTML and google just starts depositing money in my bank account This is amazing think about this too. This is the precursor to the youtube business model for creators Oh, wait, you mean I get to just create content and put it on youtube and google deposits money in my account This is the first version of that an ad network running on a thing that you make is a beautiful thing for a small business owner Totally and with all the liquidity of advertisers of google So they launched this thing you know Jeff codes it up at the beginning of 2003 kind of call it end of q1 2003 they launch ad sense by the end of the year so just a few months later It's doing over a million dollars a day in revenue That's crazy It's just crazy how fast this grew and we're zoomed in on ad sense right now But you know, we're still pre IPO here the rest of the business is still very much developing It's worth sort of bouncing around to a few different parts of google to share some updates that kind of didn't fit Into the story arc along the way One is 20% time is happening people are launching all sorts of fun side projects and there's google labs Which is this really great way that they're starting to surface this stuff to users google news comes out of this is legitimately someone's actual 20% time their own personal motivations Actually particularly after september 11th. There's this super strong hunger for people to have a way to get rapidly updating news on a topic Yes, you couldn't get that before you had to go to CNN.com right so google news is starting to really get some traction and Speaking of disputes with publishers that is starting to heat up as well The second thing is their organic search ranking is really developing What started as just page rank plus then using the anchor text They're starting to use all sorts of things later by 2007 They were using 200 different pieces of information to determine the ranking on a query and Early on I know some of these early signals included data that they were actually feeding back from Observing traffic. There's this data network effect that's starting to happen where more people use google and that makes google better A on the whole so they can understand oh if someone keeps bouncing off that page every time this query is searched Then clearly that thing doesn't belong. We're doing a bad job on this query. Yeah. Yeah Or be personalization. What can we learn about you from a whole bunch of things that you've done in the past now Without spoiling too much of the future. There's not a strong reason to be logged into google yet So personalization only works so well But once google accounts become a thing then that'll really take off So it's worth knowing and I really didn't know this Page rank really is the thing that got google going But that part of the algorithm isn't really the thing that's the main Differentiable asset today. It was just the start and I think this is also a major difference in mindset of Larry Insurgain google versus the other search providers Everybody else to said oh, we've got our insight like okay. Great. We're done. You know, yes We solve search google has never said we solve search and they just keep investing and investing and investing I think a they believe search is going to be bigger than anyone could have realized but b They sort of had the insight of the exponential curve of content on the internet is growing faster than Google will ever be able to sort of index at all or come up with clever strategies to sort it all And it's so dynamically changing that will actually never catch up And so we need to constantly be investing to approximate good results Because we'll actually never have optimal results. Yep totally And then the third big sort of thing that kept developing is their infrastructure They put so much over these years into Building out all the hardware that we were talking about a ton of software stuff Yep, and that hardware stuff shifted from We're being really, you know entrepreneurial shall we say and how we use commodity hardware cheaply to Oh, we're designing our own data centers. Yep. Absolutely. And we're designing Our own file systems with gfs or you know, I think we'll talk about a lot of it in the next episode But very real System-level software that is pioneering. Yep big table map reduce, etc Yep, that's on top of the clever search software that they're writing for things like synonyms People don't pay that much attention to this but synonym matching is actually a crucial part of getting search right If you're searching for cat and there's a whole incredibly relevant page about kittens And you don't have a good way to understand synonyms Then you're never going to surface it even though it might be incredibly relevant And Google had all these little tricks like Realizing oh wait when users are searching for cool cat pictures And then they change cat to kitten and that happens a lot we can infer That That is actually a synonym and then we can develop our own constantly updating synonym Dictionary in real time which will make our search results better and they have a thousand of these things And so they're just pushing and pushing and pushing So we're finishing out 2003 here They're effectively never capital constrained from this point on they can always fund every idea that they have The business has flipped from one that kind of pre-June of 2002-ish they had to make trade-offs and after Call at the end of 2002 there's no more trade-offs ever They always have the cash for every single thing they want to do Yes, we talked about 2002 and the 440 million of revenue and the 185 million of profits 2003 that explodes to one and a half billion in revenue and almost 350 million in Operating income. What was operating income the year before? 185 million so one from 185 to 350 in one year. Yep in one year Wow, so some of you might be listening and be like well, wait a minute Sounds like their margins got a lot worse and yeah depending on your accounting It did you get to keep all the money from Adwords and you only get to keep 20% of the money from AdSense. Yep AdSense is the answer AdSense added like half a billion dollars in 2003 at much lower margin, but was awesome Yeah, and as best we can understand it Google AdWords stayed an 85% gross margin business. Yeah, incredible Okay, so that takes us to the last chapter of our story today in 2004 Which is the I think today thought of as famous Google IPO and today thought of as successful and today thought of as yes successful IPO at the time infamous and horribly unsuccessful Google IPO of 2004 So I don't think other than Microsoft there had ever been another company like this where There was no Good reason for Google to go public It was wildly profitable generating plenty of cash did not need the investment money I assume they've never spent their IPO proceeds. No, of course not. They've never not been wildly wildly wildly profitable And actually even more so than Microsoft Google had a really really good reason not to go public Which was Microsoft as we alluded to There was desperate paranoia in the company of we can't let Microsoft. They are the actual front door to the internet for all of our users through internet explorer who actually has the capital to fight us And they have no idea what a good business this is. Yes, we can't let them know how good this is Fortunately, I guess for the investing public and unfortunately for Google the jobs act had not been passed yet And so the 500 shareholder rule was still in effect for companies in the US Which was that if you crossed the threshold of having 500 distinct shareholders for your company You had to report your financials publicly as if you were a public company You know, David I read all this too. They had venture capital backers. They had to go public Sequoia and Kleiner Perkins are not going to be just sitting there on their hands like we love being private shareholders forever like dividends. Yeah, no In 2003 in these funds that We just went through the dot com crash So most of their other companies got wiped out and it's not like they're the venture capital funds of today that Come up with all these clever strategies to look like more permanent vehicles and offer liquidity These were closed and freaking funds that need to get their money out Well, I think the question is did Larry and Sergei care about that Whether they did or didn't the 500 shareholder rule was a forcing function But obviously the VCs but to your point I guess the VCs didn't control the board Larry and Sergei control the company. Yeah exactly Just like Bill and Paul and Microsoft It was extremely rare that because Google never needed to raise VC money after the series a Larry and Sergei Together with the employees and the option pool to control the majority of the votes in the company. Hmm meta Google Microsoft. There's something correlated between founder control and Incredibly good capital efficiency in a business. Yeah interesting Regardless, this is all academic because truly the 500 shareholder rule would have required them to disclose their financials anyway So like might as well go public and make the VCs happy I guess and employees too There was clearly pent up employee demand and there wasn't the same kind of liquidity markets that there is today David put four underlines under that This IPO made half of the 2000 people who worked at Google millionaires. Yes There's a lot of interest for the city to go public yes So as we get to end the 2003 beginning in 2004 they know they're gonna cross The threshold during 2004 they're gonna have to go public They start interviewing investment banks And Larry and Sergei you know they really don't want to do this They don't like anything about the process. Shocking. They don't like the IPO pops They don't like how much money the banks make etc etc etc So they're interviewing banks. We should say this IPO pop thing. It sounds good right? It's like a phrase that the investment banking community invented to make it sound like a good thing A pop is a bad thing for existing shareholders It means that in the IPO you incorrectly priced it too low and then within one day Upside that should have were really like is yours because it happened in all the intrinsic value was built over these years Goes to the people who had access to buy your IPO shares the investment banks clients And then they get this nice little pop on day one And you were mispriced that is the problem that a lot of people try to solve for in different ways Yes So during the IPO process They learn from Bill Hammricht of WR Hammrich to be T. Convestment Bank in San Francisco Who really doesn't have the same incentives that the big banks in New York have with their clients That actually there is an alternative way To price your IPO Something called a Dutch auction IPO process which is this arcane thing that I've been done before How do you do good price discovery? Well the optimal way to do this is a reverse auction where you start the bidding high And you come down in price incrementally Until you reach a clearing Price where the entire offering size is spoken for with bids at that price And you can imagine just how much this appeals to Larry and Sergei and Google. Oh my god Sounds perfect. They're like this is like the whole business. This is what we do anyway. This is delightful There's this legend that Eric Schmidt talks about of they also they got a letter from a little old lady That hearing that Google is about to go public and really hoping she could get it and the small retail investor would have access to and that pulled it their hard strings and I'm sure that's true too, but you can see why this appeals in a vacuum This sounds perfect and like everyone should do it. Yes And theoretically this is also like kind of what the investment banker what algorithm are they actually running? It should be something like this right? They're meeting with clients or pick it up the phone Are you in at this price or are you in how much would you want at that price like you kind of should be running this algorithm in a Loose human way anyway. Yes Now so they're worried about pricing and they're worried about the IPO mechanism They're also really worried about losing control Because once they go public even though they have control of the company now as a private company The employee shares are sort of captive people are going to start selling now all of a sudden the public markets are going to control a lot more of the company There's risk that Larry and Sergei might collectively lose control of the company here So they do a thing that no one else in the technology industry does and Google has been swearing up and down that they're not a media company and then they look to the media companies and they go wait a minute when the media companies Need to separate editorial control and have sort of family stewardship Of editorial control, but they want to let the shareholders come in and they don't want the business to be able to affect editorial too much. They've got this great dual class structure We're a tech company. Yes Where the families of the New York Times company or Dow Jones back then or basically all the major newspaper companies the original family owners had super voting shares that insured that collectively the family would retain majority voting control over the company even if they lost economic control So Larry and Sergei decide oh great We're going to do a dual class share structure for Google too which today is super common Yes, but Google started it Google was the first tech company to do this. I mean today. It's everybody You know Facebook slash meta. Ali Baba Shopify Spotify Coinbase Airbnb zoom data dog at every major IPO Since Google every major tech IPO has had this famously snapchat even pushed the envelope so far When they IPO the public shares have no votes So it's not even to super voting. It's like oh you probably might you you get no votes whatsoever That's like being a green Bay Packers shareholder. Yeah exactly Google pioneered all of this which I think is why in retrospect This IPO is viewed as a famous success. Okay, so they do the Dutch auction in practice. It does not go well But why that this is the sorry the numbers on this are pretty crazy They are initially floating in the Dutch auction using the software and by the way Google software engineers wrote the software. I know amazing in this crazy And I don't think it's like Google owned I think they were collaborating with the investment bank. So the saw it's like this weird joint Partnership that they're doing where it's Google engineers, but it's this investment bank running the process And they're trying to figure out We're in the range between a hundred and eight dollars a share and a hundred and thirty five dollars a share Should we price will it be fully subscribed Well The actual price where they end up filling the order is at eighty five dollars a share Yep, it's Google a twenty three billion dollar market cap and IPO and they raise one point seven billion dollars You know, this is like great right? It's a one point seven billion dollar raise 23 billion dollar market cap that looks like an astronomically high Multiple that the company's been given so you should walk away and say they really maximize value there And they probably were just wrong in that initial range that they were looking for a hundred eight dollars a share to one thirty five And it only priced at eighty five well trust the mechanism I guess it's only actually worth eighty five dollars a share nope pops to a hundred bucks Unclosing of trading the very same day eighteen percent bought day one Then by the end of the very next year Sixteen months later is almost a five X yeah This thing was not at all price correctly So there's a reason why when you look at the legacy of the Google IPO Dual-class share structure great idea everybody does it Dutch auction IPO not a great idea Nobody has done it since it doubled within the first few months Yeah, I mean, it's great PR right the stocks doing well people think hi of your company that's good for all sorts of reasons But this did absolutely zero for making sure that the company doesn't leave money on the table Yep, so funny. It's all kind of a footnote of history anyway because Know what's a few percentage points between friends when the company would go to over two trillion dollars today as we are recording this are roughly a hundred X the market cap when an IPO and David you're not counting dividends Not counting dividends right of course you reinvested dividends you'd make significantly more than a hundred X since IPO well after our Steve Bomber interview Never gonna not count dividends again But to preview a little bit the rest of the series Google's a 2.1 Call it trillion dollar market cap company today roughly a hundred X since the IPO Amazingly do I'm gonna ask do you know I know you know What Google slash alphabets price to earnings ratio is right now. Oh baby. I do know because I was just looking this up It is kind of an all-time low 20 20 price earnings six X revenue so compare that to its peer companies Amazon's PE is 35 Microsoft is 37 Nvidia is 46 Apple is 30 and meta is 27 and Google alphabets down at 20 And it's not like alphabets not growing revenue. They're growing revenue just as fast if not faster than all of those companies except in video Something is going on here. This price sure seems to reflect that even though revenue is growing nicely and margins are quite high Somebody and that somebody is mr. market thinks the future is a lot bleaker than they do for those other companies Never mind the Google Invented AI and publish the transport No, we will get to all that we will get to all that spoilers. Okay spoilers But Okay, that's where we're going to leave Google for part one, but one more little little Start of a story to tease you with for part two next time So the same month In April of 2004 when Google files its s1 for its IPO Google does a unexpected product launch on April Fool's Day Which really was not a good idea because Google had a history of Fake April Fool's joke announcements But if you have one that kind of sounds ridiculous don't launch on April Fool's Day because people think it's a joke Because the product they launch actually sounds way too good to be true web Based email From Google With one gigabyte of free storage for every single user now to put that in context Yahoo and hotmail Yahoo mail and hotmail at the time had like two megabytes of free storage per user I think it was 20x the next best as the stat that I read on Gmail. Yep And it comes with google search baked in across all of your emails and it's entirely web-based runs in your browser anytime anywhere It's like the greatest April Fool's gift to you know internet users everywhere That Google could provide here So the question though is why did they do this knowing what we now know about Google David wouldn't it be great if there was a reason like a really compelling reason for someone to be logged into Google And wouldn't it be great if we could just attach More things to a user's life that could be entry points To Google search and the greatest business of all time Search ads What if then what if okay, David? We're gonna tell the whole Gmail story as part of chapter two But I do have to give you one thing that is specific to this episode Go for it. So the engineer who started Gmail Paul Bukeite now of course a partner at Y combinator and actually with Brett Taylor started friend feed That's right Paul Bukeite is awesome and recently launched a new venture fund And actually the original coiner of the term don't be evil at Google. That's right So He's working on Gmail. It's very early. It's like 2001 He's been working on this thing for two and a half three years before it launches So we're at the very beginning of it and he is 20% time right? It's a 20% project And it starts as I'm gonna look in your Unix directory at your mail And I'm just gonna treat that like the web just the same way that we treat web pages And so I'm just gonna take a search box and I'm gonna point it at your mail folder And I'm gonna let you search That's it. That's like the only functionality of what would become Gmail So the search bar is actually the first feature of Gmail and everything else came later And as he's playing around with this he has this idea Well if our core business is indexing organic results and showing some ads maybe in addition to indexing and searching This organic results out of your mail folder I should just go grab ads from our ad database and just kind of display them around and see How well the content matches He's showing this off internally Larry and Sergei see it and they go Wait Does this work on websites too? And so The thing that led to ad sense Ah this was the beginning of the idea for ad sense was actually part of the prototyping process of Gmail Ah, amazing. I love it. I love it I love how you saved this to the end because you knew we were gonna do the little tease here on Gmail Well you texted me you said oh, I think we should do a little Gmail foreshadow in the uh great Yes, great great great so thank you to Paul Pukka you Kate for sharing the story with us Amazing all right bringing a home that is the building of Google search business Let's bring this one home. Yeah, so David this chapter this episode definitely feels like the building of the castle Yeah, and maybe next episode is going to be the Building of the city around it the state around it the nation state around it Yeah, and depending on your metaphor is it a you know an entire Property a platform that they're building around it a city is it a moat is it a yeah, but it's definitely This one is building the castle. We'll have to see all right. Let's go into playbook for part one Ben what do you got the way that I framed playbook for this one is I tried to just itemize the bullet points of why did Google work And as I think through them if I had to sort of lay him out to someone starts with the best original algorithm insight They had the best organic relevance out there which created the best results in order fast delightful clean simple UX And they were truly dedicated to organic search. I mean the aversion to paid inclusion for as long as they were served them very well So this amazing original algorithm for organic searches one to best execution of the search advertising model. I mean once you get all those puzzle pieces in place the auction the switch to cost per click Factoring in relevance, you know, the with click through rate It really is this truly beautiful system advertisers are incentivized to make their ads more relevant and only bid on the most relevant key words Because it means they don't have to pay as much. It's the best ads to the right users at the right time And to your point David it maximizes is literally the algorithm to maximize Google's expected value It is like a harmonious system that they developed Three clever infrastructure advantages. They just invented stuff and they thought about problems differently and they reasoned from first principles For they hired the best people truly only world class people for a very long time and because when the dot com crash happened They could basically get anybody that they wanted there in the second half of this episode Paul Bukite had a great quote when I was talking with him I don't even think I realized it at the time that it was Truly it just the best people in the industry working around him So That's four five culture a culture of thinking insanely big Mostly by inexperienced Untainted people that helps you with creativity that helps you cope with new ideas It was like the naivete of kids on a college campus who are dreaming match with the brain power of the very best PhDs and this hardcore belief that whatever our big ideas are We always have to think with scale every little implementation detail has to be as this scales will this work Or do we need to rearchitect the system is very impressive. So culture Which includes power law dynamics by the way being willing to make big bull bets because they could be these multi-billion dollar payoffs That's five six the self reinforcing data network effects once it takes off I think that is underappreciated about Google a lot of people say oh the algorithm But like the algorithm is so dependent on all the data that is generated And then lastly a mission that has stood the test of time Organize the world's information. It's not too broad. It's not too narrow. It feels altruistic But of course the business behind it is actually the best business of all time Yeah, I would add on to the second the last one you had there the data network effects it also is the Flywheel effect of liquidity in the marketplace of Users and queries and advertisers. Yeah everything that we just talked about like once Google had that realization of oh Our business gets better the more Users and advertisers we have And thus we should be willing to spend basically anything to increase those two pools This is my quintessence. Okay. I'm stealing your quintessence. I love it I feel like this is the most unique insight of this episode is whoa These are economies of scale that don't just reduce your costs as you get bigger But it increases your revenue as you get bigger. Yeah Okay, well, I didn't mean to steal you a thunder with quintessence. Sorry about that We did our quintessence really this episode. Okay. Okay. Okay. All right. Give me your playbook great. I've got two other sort of meta points that jumped out to me from this episode in addition to What you just said about the incredible encapsulation of why Google worked great When You and I were talking about Doing this and starting the Google series the reason We decided now as the right time was because of everything going on in AI And it feels like understanding Google has never been more relevant and like if we're gonna do Google on acquired We got to start at the beginning and understand How Google was built because that's what we do and I thought oh this Episode will set the stage to Then get to today Telling the story though and doing the research. I was like Today is exactly the same. Yes, I had the exact same thought between What happened between 1996 and 2002 Feels like Everything that we are living through right now 2021 today right or even let's start with due to the chat gpt moment put sharper I thought this was gonna be well We're gonna have to eat a lot of vegetables to understand Google so that we can understand where the transformer came from To get to the real great meat and what we can learn about AI by studying the present But I think by studying the way that search played out How did monetization work? How did the value chains work? How did distribution work? How did monetization work that uniquely enabled distribution? Where did all the competitive dynamics come from? This is a History doesn't repeat but it rhymes and God does this rhyme Totally transferable Lessons and dynamics yep when you were telling the story of go to an overture and the launch of Ted and you know How upset people were but how really I was thinking like well What would the analogy be today like what if somebody made a Japa you know in an LLM a model and What it told you was just what people paid it to tell you like people would go crazy If that happened but like yes, is that worth trying should somebody try that like let's see, you know Product design here on acquired by David Rosenberg. Yeah, right right probably a bad idea But it feels like such a similar yeah moment that we're in that's just what struck me Over the head doing all of this so like wow history doesn't repeat itself, but it does rhyme yeah And then the other big playbook theme I had was God did Google really come of age at exactly the right time We talked about this earlier, but if Larry and Sergei had met and started working on this A few years earlier it would have been Yahoo Because the web was just so much smaller like you didn't need a technology-based search engine to Understand it right and then if they'd started a few years later It would have been too late it would already been too big you would have needed too much. Yep Technology empowered to make it work. It was the perfect window There was a very narrow window to start the Google of that era And again, maybe this is a subpoint of my first playbook theme of just the parallels to today. Yep All right powers What of the seven powers does Google have and for new listeners to the show this is based on a book called seven powers by Hamilton Helmer And it is the seven factors that enable a business to achieve persistent differential returns Or basically had to be way more profitable than your closest competitor sustainably And the seven are counter positioning scale economies switching costs network economies process power branding and cornered resource Let's see To start I guess let's just go down the list I actually don't think there was tremendous counter positioning here. You could argue versus Yahoo Well, it's interesting because it was in new industry They were counter positioned against the other search engines that existed at the time in that they as we talked about with excite When they were trying to sell back rub too excited the other search engines wanted you to stay on the page Yeah, and Google didn't but I don't think that really counts because it was a new industry and those were bit players There was no incumbent already there. Right and Google is just better being better is not counter positioning The best argument for counter positioning is versus the portals Yeah, versus Yahoo It may have become clear at some point that search actually is important But the portals couldn't really pivot to it because they couldn't give up all of their portal ad revenues Yeah, I think that's also right and also take Yahoo Yahoo had constructed itself as a media company even though it was started by two electrical engineering PhDs from Stanford right and just couldn't pivot I mean famously tried to write a bought-over chair then it bought ink to me And then they spent years trying to put overturning to me together to create a packaged competitor to Google This was the ill-fated project Panama at Yahoo Which by the way acquired Easter egg that is where Yan Kuhn and Ryan Acton met Yahoo And then they would get so frustrated and leave and start what's up But yeah, I think there's counter positioning against Yahoo there. Okay scale economies For sure, there's more power is here too, but the whole thing is scale economies and it's More than just the traditional one. I mean think about Hamilton's traditional definition here is that Netflix has scale economies because it can amortize the cost of buying a given piece of content across more users This is more than that. I mean this is for a given Piece of infrastructure or software or hardware investment that Google wants to make or a user acquisition cost Right they can amortize that across more Users But also as they scale they make more revenue per user Right I don't know what that is. Is that a new power? Super scale economies. Yeah, where is this come from auction-based businesses whenever you have auctions to determine pricing The more liquidity you have The higher price is and so are there other businesses that we can kind of look at that are similar Do scale economies ever explain why scale gets you more revenue What is the thing where with an increase in scale their prices go up? Hmm they maximize their available take on any given micro auction This is weird I'm trying to think in another auction-based world like christies would kind of have this or Sotheby's as you get more and more people into the Auction house audience any given Sale is likely to go at a higher value a real estate brokerage if people were actually like loyal clients of a real estate brokerage Oh, is this just network economies that the more Queries you have the more advertisers you have the more advertisers you'll have the more But typically network economies are when people join the network it creates value for other people in the network That is true from a advertiser to a surcher and a surcher to an advertiser So we should say this definitely has network economies It's almost like there's negative network economies from advertiser to advertiser You don't want your competitors to be on the platform, but Google does Yeah, maybe you're right. Maybe there's something unique to auction models here because the price is dynamic Hamilton if you're listening we need to talk Yeah Okay, let's keep going yep switching costs not yet not yet talk about that the next episode When you're not logged in and there's no personalization no real switching costs yet Yep, and everything else you'd switch to is worse honestly Branding Yeah to a certain extent absolutely they built a brand of trust and speed and and fun I had a Google shirt. I used to read Google blogs. I mean I'm trying to think let me date the year 2002 to six I was As big a Google fan of things that were Googley as I was an Apple fan for that period of my time and I think a lot of people were I think for those of us who weren't in Silicon Valley That's what it meant to be successful at Silicon Valley was to become Google Yeah, I would agree with that too. I think it's weak branding power though because that's not a branding power like our mess has branding power It's gone away over to now. It's just a and for the literal definition are people willing to pay more for the brand like our advertisers willing to spend more on Google than elsewhere note their rational actors They had an employment brand though to your point they absolutely had an employment brand smart people would be willing to do Anything to work at Google yep, and lastly cornered resource Not really at this point in time not really and process power. I also don't think there's much there Yeah, I don't think so Okay, quintessence. We already talked about yours. Do you want to say another word on it now? The increasing returns to scale the revenue side is unbelievable And the fact that they can have that insight and then realize they need to go be super aggressive on spending It makes total sense if you have a long view and think Our our poos are all they get to grow up people are gonna be sticky forever It is worth investing heavily to win this race. It's amazing. Yes I love your quintessence It's totally right. I will second and underline it One not quite as good, but alternative quintessence. I want to put out there about Google Is a quote from a page in Steven Levy's book in the placks On June 8th 2007 just in Rosenstein who until recently have been a Google product manager sent an email to his colleagues I am writing to spread good news The mis-have said Facebook really is that company Which company that one the company that shows up once in a very long while The Google of yesterday the Microsoft of long ago that company that's on the cusp of changing the world That's still small enough where each employee has a huge impact on the organization Where you know you'll kick yourself in three years if you don't jump on the bandwagon now Even after someone had told you it was rolling toward The promised land That was Google Google was that company Microsoft was the first that company Google was that company and then Facebook was that company Against exactly right And they are exceedingly exceedingly rare Yes, they are So that about captures it That's my quintessence Google was that company All right carve-outs Carvouts I have a three-way tie of three excellent TV shows that I watched in the last I guess two months because we didn't do carve-outs with Steve Valmer great The first And I think the most landmark of mine Is the rehearsal with Nathan Fielder season two Oh my god I don't want to spoil anything for anyone So if you're a person who believes that anything is spoilers stop I'll tell you things that you'll learn in the first ten minutes of the first episode Nathan just to give you some quick background a decade ago did a show called Nathan for you Where he went and helped small business owners Figure out how to make their businesses better improve on a key area But It's all kind of satirical the way that he helps them accomplish their goals is Very bad for their business in most other respects He's an incredible comedian really dry sense of humor and The thing that he did in Nathan for you Was like a pretty good commitment to the bit the lengths that he would go to for example to get a coffee shop owner To get more traffic in their store. They rebranded the store to dumb Starbucks And he spent hundreds of thousands of dollars of the studios money or maybe millions of dollars to commit to this rebrand Obviously a bad idea, but great TV in the rehearsal He commits to the bit so unbelievably hard it takes years of his life and He has a goal to reduce the number of playing crashes by doing a deep study of the thing that causes playing crashes Which he believes to be pilot communication and in this Season of the rehearsal He builds a labrite a labrite sets and Hires a bunch of actors to simulate different experiences To help these pilots feel more comfortable communicating with each other so that fewer planes will crash And I am telling you David. This is the tip of the iceberg. It gets crazy Sounds amazing commitment to the bit at an all-time great. Are we committed to the bit? We are nowhere nearest committed to the bit as Nathan said doesn't it sounds like we're not yeah It's inspiring. Okay, so that's one two is a much more casual very enjoyable show called your friends and neighbors On Apple TV It's John Ham. It's beautifully shot It's a little bit like the you know following rich people around like succession is these sort of fictional characters But with an unexpected twist Love your friends and neighbors on Apple TV and then and or season two on Disney was excellent Starts a little slow first three four episodes are not as good as season one in my opinion But the last eight episodes are like some of the best Star Wars canon that exists I love it Ben you are my in addition to being my best friend You are also my smart friend who has like great TV recommendations So I love that you get to be that smart you know TV recommend their friend for the internet too I'm here for you and I will continue dumping this on you even though I know you don't watch TV You'll never get any likes to This is for listeners. This isn't for you Two little kids tough tough My car about I've got two well. I've got one standard carve out Gamecraft season three gamecraft podcast. We used to cross over with Mitch and Blake years ago They have really committed to the bit season three is excellent. I'm so glad they've kept up the podcast It's really great if you like gaming gaming industry Mitch and Blake are two of the best in the business My next carve out related to that Is actually sort of a real-time dilemma carve out and this is good because it could be a multi-part series here on Google I'll report back and the next episode Which direction I went with this carve out so As I said before I think I did a preemptive carve out of so excited for switch two Switch to finally launched I haven't gotten one yet. I have a reservation for a shopping appointment at the Nintendo store in San Francisco The new Nintendo store here in San Francisco Super excited. I can't wait for it. I can't wait to play it with my daughters someday is there approaching that age All right, what's the decision as I was watching reviews on YouTube I started getting into steam deck content and now I'm desperately conflicted Do I want to get the switch to like I'd been planning Or do I want to go in a totally different direction and get a steam deck? Well, I choir listeners tune in if you weren't interested in Google part two Yeah, on its own merits now you could be had pins and needles Yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah, yeah I would ask Our listener base for help with this decision. I would love all of your thoughts But because of our editing process the reality is I will have made my decision already by the time this episode goes live So tweet a picture so listeners. Yeah, yes. Yes. Yes. All right. That's what I got awesome Well, we've got some thank yous We talked to a zillion people as seems to be the new precedent when we do these large tech companies One off the top Arvin Navarot-Nam for worldly partners did an awesome write-up On the company as usual which he will make available By clicking the link in the show notes and then David you've been maintaining the list Yes, I've been maintaining the list of some of the folks we should thank for helping us with this episode In addition to the many other folks we talked to who we can't mention but thank you. You know who you are But specifically thank you to Craig Silverstein Google's first employee to Anna Patterson to Omede Cortistani Alan Eustace Claybevor Brett Taylor Jeff Dean Jen Fitzpatrick Danny Sullivan Nick Fox and to Paul Bukeye to Bill Gross to Wesley Jan and to Esart Lipkivitz Thank you so much for the conversations David I feel like we got a dream team of people if we want to go start a tech company That all start a lineup. I started joking by the end of the research process. I was like I think we are sapping Billions of dollars of market cap out of the economy by taking people's time to have these conversations So we greatly appreciate it. Yep All right listeners. We'll see you next time. We'll see you next time You