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