Sequoia’s investment memo on YouTube

YouTube represents an interesting seed-stage investment opportunity. ¹ (Fact note 1)Fact · 1With hindsightThis text is public because of a lawsuit. It is Botha Exhibit 2 to a declaration Roelof Botha filed in Viacom v. YouTube (Case 1:07-cv-02103, Document 194, filed 18 March 2010); in it he says he “prepared an investment memorandum for the Sequoia partnership” and attaches it. Each page carries a “HIGHLY CONFIDENTIAL” stamp and a production number, SC000161 to SC000169. The memo’s own contents list a company presentation and company metrics that the filed exhibit does not include, so the public copy may be incomplete. The sriramk.com PDF is a scan of the same filing. We found no copy on sequoiacap.com.SourcesUS District Court for the Southern District of New York, Viacom v. YouTube, Document 194 (CourtListener RECAP copy)Declaration of Roelof Botha18 Mar 2010sriramk.com (copy of the court exhibit)roelof-youtube.pdfFeb 2020The company’s goal is to become the primary outlet of user-generated video content on the Internet² (Editorial note 2)Editorial · 2Known at the timeThe opening goal is the founders’ own: their presentation, filed as Exhibit 1 beside the memo, states the same company purpose almost word for word. The memo does not argue for the vision. It adopts it and spends its pages on the deal, the unknowns and the people, which is where an investor’s judgment actually sits.SourceUS District Court for the Southern District of New York, Viacom v. YouTube, Document 194 (CourtListener RECAP copy)Declaration of Roelof Botha18 Mar 2010, and to allow anyone to upload, share, and browse this content.

The three entrepreneurs are scrappy and smart. They have built a very easy-to-use, fast growing service that taps several strong veins: user-generated content, online advertising, wide proliferation of inexpensive digital video capture devices, and continued broadband adoption.

The company has also developed code snippets that allow users to embed YouTube videos directly into other sites. In this way, the company is building a wide content distribution network, in addition to its direct-to-site traffic.

Our proposal is to invest $1m in the seed stage, followed by a $4m Series A once specific milestones are met.³ (Fact note 3)Fact · 3With hindsightOn 7 November 2005 YouTube announced that it had “completed a $3.5M round of private equity funding from Sequoia Capital”. The release does not say how that round relates to the two stages proposed here, and we have not found the final terms.SourceYouTube BlogYOUTUBE RECEIVES $3.5M IN FUNDING FROM SEQUOIA CAPITAL7 Nov 2005 Sequoia would own ~30% post Series A, with a pool of ~17%.

[ … ] Not shown: Seven groups of competitors, from Dailymotion to Google.

We need to help the company quickly hire a CEO and VP BD/Sales. The founding team is enthusiastic about bringing on an experience CEO to help lead the company. However, I’m not sure whether we can land a CEO before the Series A. I would appreciate any ideas on potential candidates for either role. My preference would be to launch a search immediately and to have a CEO in place within 90 days.⁴ (Fact note 4)Fact · 4With hindsightYouTube’s November 2005 funding release quotes Chad Hurley as “CEO and co-founder of YouTube”, and Google’s October 2006 acquisition release still names him “CEO and Co-Founder of YouTube”. A founder, not an outside hire, led the company to its sale. We do not know whether Sequoia ran the search the memo proposes.SourcesYouTube BlogYOUTUBE RECEIVES $3.5M IN FUNDING FROM SEQUOIA CAPITAL7 Nov 2005GoogleGoogle To Acquire YouTube for $1.65 Billion in Stock9 Oct 2006

[ … ] Not shown: New engineers, office space, and competition as a risk.

I believe that YouTube has a clear advertising revenue opportunity.⁵ (Fact note 5)Fact · 5With hindsightIn the expanded revenue disclosures of its February 2020 results, Alphabet reported YouTube advertising revenue of $8,150 million for 2017, $11,155 million for 2018 and $15,149 million for 2019. The memo’s largest scenario was $55m a year. Those revenues were earned inside Google, and they exclude YouTube’s non-advertising revenue.SourceAlphabet (Internet Archive copy of abc.xyz)Alphabet Announces Fourth Quarter and Fiscal Year 2019 Results3 Feb 2020 However, we don’t yet know what form of advertising would work best. Specifically, can the company develop attractive ad products that are not intrusive to the consumer experience? We can model revenue as follows: # unique videos streamed per day x % of videos monetized x CPM x 365 = estimated annual revenue.⁶ (Editorial note 6)Editorial · 6Known at the timeThe memo turns “advertising opportunity” into a formula with three unknowns: volume, the share of views that carry an ad, and price. Its scenarios do the arithmetic correctly; 30 million videos a day at a $20 CPM with 25% monetised comes to about $55m a year. The formula prices only views. It leaves out the embedded player the memo praises earlier, and says that network still has to be tested.

We are not sure how much YouTube could grow from its current level of 100,000 videos served per day.

[ … ] Not shown: Three revenue scenarios, from $6m to $55m a year.

Serving 10-30 million videos may appear daunting, as it represents >100x increase over the company’s current activity levels.⁷ (Fact note 7)Fact · 7With hindsightComscore reported on 11 October 2006 that “an average of 100 million video streams were served per day in July 2006”, ten months after the memo. That is above the memo’s top scenario of 30 million. Comscore counts streams, and the memo counts videos served; the two are close but not the same measure.SourcesComscoreComscore Data Confirms Reports of 100 Million Worldwide Daily Video Streams from YouTube.com in July 200611 Oct 2006US District Court for the Southern District of New York, Viacom v. YouTube, Document 194 (CourtListener RECAP copy)Declaration of Roelof Botha18 Mar 2010 But the company has achieved its current scale in only two months, and only has 15,000 videos today.

[ … ] Not shown: Scalability, and balancing viewers against videos.

We cannot point to many high comparable exit valuations.⁸ (Fact note 8)Fact · 8With hindsightOn 9 October 2006 Google agreed to acquire YouTube for $1.65 billion in a stock-for-stock deal, and it closed the purchase on 13 November 2006. The memo’s closest comparables had sold for about $70m and under $50m.SourcesGoogleGoogle To Acquire YouTube for $1.65 Billion in Stock9 Oct 2006GoogleGoogle Closes Acquisition of YouTube13 Nov 2006US District Court for the Southern District of New York, Viacom v. YouTube, Document 194 (CourtListener RECAP copy)Declaration of Roelof Botha18 Mar 2010

A few comparable companies include Webshots, flickr, Ofoto, Shutterfly, and Snapfish. While these companies deal only with still images, there are some similarities with YouTube. None of these companies have had exceptional exits. CNET bought Webshots for ~$70m, Yahoo! bought flickr for <$50m.

[ … ] Not shown: Other comparables: Shutterfly, Blogger and Tripadvisor.

I first met with the company three weeks ago, and we are in pole position for the financing. Several VCs have been cold calling the company, and a few media companies have also approached YouTube. I’d like to give the company our decision on Monday.

I recommend that we proceed with the financing as proposed.

YouTube has a great founding team that has hit on several promising themes. The company follows a trend of user-generated content that started with text (blogs), images (flickr, webshots, ofoto), and audio (podcasting). Video is a natural next step, and YouTube is well positioned to capture the lead.

[ … ] Not shown: Annexes: summary, competitor profiles, technology and team biographies.

YouTube’s founders, quoted in the memo’s competitor annex

If I were to categorize the content on YouTube today, I would break it down into two large categories: personal videos and viral videos. The viral videos, due to copyrights and obscene content, I admit, big-boys and ebaumsworld may beat us there.⁹ (Editorial note 9)Editorial · 9With hindsightThis is the memo’s only mention of copyright, and it comes in the founders’ words, as a reason rivals might win viral clips. The key risks section lists competition, revenue, scalability, balancing growth and exit, but no legal risk. Eighteen months later Viacom sued YouTube and Google for copyright infringement, and this memo became an exhibit in that case.SourcesUS District Court for the Southern District of New York, Viacom v. YouTube, Document 1 (CourtListener RECAP copy)Complaint for Declaratory and Injunctive Relief and Damages13 Mar 2007US District Court for the Southern District of New York, Viacom v. YouTube, Document 194 (CourtListener RECAP copy)Declaration of Roelof Botha18 Mar 2010