Facebook is reportedly preparing to file its S-1 for an IPO as soon as today in what could be the largest tech IPO ever. The history of the company has been well chronicled, most recently in the movie The Social Network. The story includes some dramatic twists and turns as investors battled to invest in the hot company.
But there are two early angel investors in Facebook who have not been written about. These two investors are Venky Harinarayan and Anand Rajaraman, co-founders of early ecommerce company Junglee, which was acquired by Amazon in 1998. The pair later started a venture firm, Cambrian Ventures, and then founded Kosmix, which was acquired by Walmart.
Facebook declined to comment for this article.
Harinarayan and Rajaraman invested in Facebook as part of the Accel Partners-led funding round in 2005. While their stakes are small, the story is an interesting part of Facebook’s early history. And how the investment happened is one of those only-in-Silicon-Valley stories. It also shows just how far Facebook has come from its early days. In its S-1 filing, the company is expected to show impressive revenue numbers in the hundreds of millions if not billions of dollars, but in 2005 Facebook was still just another small ambitious startup.
The story starts when Harinarayan met a young entrepreneur named Sean Parker in 2002 or 2003. Harinarayan and Rajaraman had recently left Amazon and were working on website ideas and investment ideas around two key concepts: website virality and network effects. “What would happen if those two things came together in a single product?” Harinarayan says.
Parker pitched Harinarayan on a start-up he was working on called Plaxo, a kind of social address book. Their ideas about virality and network effects were very similar and Harinarayan was hooked. He wanted to invest. Eventually Sequoia Capital ended up investing the entire round and Harinarayan did not invest. But the two kept in touch and in 2004 Parker contacted Harinarayan. “He called me and said we really need to talk right now,” Harinarayan recalls. Parker came to Harinarayan’s office and told him he had left Plaxo. The circumstances under which Parker left Plaxo were not positive for Parker.
Later on, Parker told Harinarayan about a company called thefacebook.com that he had started working with. As Harinarayan got to know the company, Parker and cofounder Mark Zuckerberg sought his input as they were raising their first real venture financing (They had previously raised angel funding from Peter Thiel and Reid Hoffman.) Zuckerberg and Parker were considering the Washington Post as an investor, and Harinarayan’s previous company Junglee was funded by the Washington Post (Accel ended up investing in the round). “I was giving them honest input on VCs versus media companies (as investors), and I told them the benefits in both cases,” Harinarayan says.
Harinarayan remembers visiting Zuckerberg and Parker at their new office, which at that time was on University Avenue in Palo Alto. Parker showed Harinarayan the new murals that were painted on its walls. Facebook had less than 10 employees at that time. “Peter Thiel was telling me that the revenue per employee was the biggest he’d seen in his life,” Harinarayan says. Zuckerberg left a lasting impression on Harinarayan. “After Sean left I sat with Mark and we talked about stuff. I remember coming out of that meeting thinking this guy is amazingly smart.”
Around that time in March 2005, Parker came up with the idea of holding a panel at Stanford University. Speaking on the panel, which was called something like “Finding The Next Google,” were Peter Thiel, Sean Parker, Mark Zuckerberg and Harinarayan. The panel was designed to draw interest in the companies and also help with recruiting. The event ended up drawing a massive crowd of Stanford students. Facebook was still relatively small at that time so the intense interest in Facebook surprised Harinarayan. “The thing that surprised me the most was there were over 700 people in the audience,” Harinarayan says. “I’ve never seen so many people in one place at Stanford. Folks there were so passionate about Facebook I was absolutely stunned… I remember talking to Accel after. The key reason they invested was because they talked to Stanford students and found out that they use Facebook for two hours a day.”
Harinarayan decided he needed to invest. “After the panel I said to Sean, ‘You’ve got to let me and Anand invest,’” he says. Parker told him the valuation would be very high. But Harinarayan asked Parker to find a way to let them into the round. Parker came through and got a small piece for Harinarayan and Rajaraman to invest alongside Accel in the $12.7-million round in May 2005.
Harinarayan and Rajaraman received just a small stake–they declined to say how much stock they received. But it was preferred stock, which is rare for individual Facebook investors, most of whom have common stock.
Harinarayan says he met with Zuckerberg a couple more times after the investment and exchanged emails with him. But Harinarayan hasn’t stayed an active adviser as he and Rajaraman went on to start their own company, Kosmix, which was later acquired by Walmart. They now head @WalmartLabs. But he is clearly happy he happened to make the investment. “I’m super happy and thankful I had the opportunity to invest in Facebook,” Harinarayan says. “In the Valley it’s one of those things of the right thing at the right time.”
Did Harinarayan know Facebook was going to be such a big company? No, he says. “Initially I was talking with (Parker) and he was a good guy and I appreciated his product skills. I had no expectation I was getting anything in return.” Facebook was still much smaller than MySpace and Friendster at that time. While it may be strange to think about it now, with Facebook having more than 800 million users, in 2005 Facebook only had locked up the university crowd. The site had just launched in 2004, just more than a year earlier.
“There were a lot of questions at that point,” Harinarayan says. “Once people graduate from universities will they still use (Facebook)? I remember a VC coming in and telling me the valuation Accel paid is crazy.” Harinarayan was embarrassed and often wouldn’t tell people he met that he had invested. Now that investment definitely looks much different.
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