Tag Sale
Millions from Yahoo transformed the life of Del.icio.us founder Joshua Schachter--and set him up to find the next big thing.
By John Heilemann


(Business 2.0) - Right before Joshua Schachter announced in mid-December that Yahoo was acquiring his social-bookmarking startup, Del.icio.us, I'd spoken with Schachter more than once about the future of the company, and never had he remotely hinted that a sale was in the works. Quite the contrary, actually. So when we met for lunch the following week, I asked if getting bought had been in the cards all along. "Of course, it was always a possibility," Schachter said between bites of a monster cheeseburger. "But I didn't take it seriously until there was a tangible opportunity on the table. I tend not to fantasize about this stuff--that's just magical thinking."

The unwitting allusion to Joan Didion's best-selling memoir was apt. For the first words and overriding theme of The Year of Magical Thinking are "Life changes fast." On Dec. 8, Schachter was a 31-year-old bone-deep New Yorker, the CEO of a rapidly growing but revenueless social software outfit, and a hard-core geek with a reputation as a pioneer of "tagging"--a system for letting users label webpages with searchable keywords of their choice. Twenty-four hours later, he was a multimillionaire, a Yahoo employee, and a soon-to-be Californian. Life changes fast, indeed.

In the aftermath of the announcement, the Web was chockablock with discussion of the acquisition's merits and meaning for Yahoo. But what interested me more was Schachter's set of calculations: how he'd determined that selling out made sense for him, for his investors, and, not least, for Del.icio.us. Was the deal a tacit admission that the company had no future as an independent entity? And what does it portend for the startup game in the era of Web 2.0?

No one who knows Schachter believes that, in cooking up Del.icio.us in 2003, his primary motivations were pecuniary. "Joshua really is an accidental entrepreneur," says Fred Wilson, the New York venture capitalist who ultimately backed the company. In fact, Schachter, an electrical engineering graduate working at Morgan Stanley, was simply trying to get a handle on his vast collection of bookmarks. "I had 20,000 links in a file," he tells me, "and I couldn't find anything anymore."

By November 2004, a year after Schachter released Del.icio.us, the site had garnered some 40,000 users. And Schachter had attracted the notice of some major players. Google and Microsoft tried to hire him; Yahoo and Amazon.com tried to do the same and buy Del.icio.us. But none of the offers were substantial enough to tempt Schachter, who was now getting calls from venture capitalists. Soon enough, Schachter had quit Morgan Stanley and put in place a financing round: $1 million, most of it from Wilson's firm, Union Square Ventures, and the rest from sundry sources including Amazon and Marc Andreessen.

By the end of the year, Del.icio.us's user base was approaching 300,000 and the company was generating buzz as the hottest startup in the industry. Schachter, for his part, seemed utterly befuddled by all the commotion. "I keep being told that we're the poster child for Web 2.0," he remarked to me in November. "It freaks me out a little bit."

In need of cash for Del.icio.us's next phase of development, he and Wilson found investors eager to join a second financing round. But Microsoft came calling with an acquisition offer that had to be taken seriously. Then both Google and Yahoo hurled their hats into the ring as well.

Wilson had precious little interest in taking any of the offers. He believed that Del.icio.us had a shot at making it as a stand-alone business, and was looking forward, he says, to building "a monetization system for the service that was as natural and effective as the Overture/Google model in search." But when Schachter contemplated that path, the risks struck him as daunting if not insurmountable. "It was becoming clear that getting distribution for Del.icio.us in the future was going to be a challenge," he tells me. "And it was very likely that Google, Yahoo, and Microsoft would have all been down my throat within a year."

Interestingly, Google was both least aggressive and least attractive to Schachter. When he'd interviewed for a job there, the company had told him, "We don't need idea guys--we've got plenty of them. We just need developers." Now Google was wracked by internal debate over the value of Del.icio.us. Schachter says, "They came in and said, 'Well, maybe we're kinda sorta interested,' but there was no 'What's the plan? What are you thinking about? Where do you want to take this?'"

Meanwhile, Microsoft's interest was more ardent and straightforward. But Schachter was nagged by worries that in Redmond he would wind up being just another engineer.

Then there was Yahoo. "They really get this social software stuff; they're No. 1 in that," he says. "They've done a largely competent job of absorbing other companies and products without ruining them. Flickr still stands--it's huge, and they continue to put resources into it. They understood my vision, and they didn't argue with it. They led with 'We want you to come here and tell us where to go.'" Plus, he adds, "they have all this technology we can use to accelerate our plans--I can skip ahead and immediately build the Del.icio.us I'd envisioned as being two years away."

Thus did Schachter come to believe that the deal was what was best for Del.icio.us. And it's pretty good for him too. If reports of a price north of $30 million are accurate, the acquisition puts his net worth (on paper) at more than $15 million.

That, of course, ain't Google money, but it establishes Schachter as among the earliest, most visible winners of the Web 2.0 generation. "I look at the money as giving me freedom in the future," he says. "If and when I'm done at Yahoo, I'll get to make whatever I want and not have to give a shit about revenues or exit strategies--just focus on the product."

Whatever fate awaits Del.icio.us within the confines of Yahoo, the story of Schachter's dealmaking decision illuminates two points. The first has to do with Google. For the past couple of years, the search leviathan has seemed virtually omnipotent to much of the Internet industry. Certainly a crucial piece of the puzzle was the company's allure to the best, most creative engineers. But now along comes Joshua Schachter, and not only does he not want to be employed by Google, he believes that Yahoo is a more conducive place for a geek like him to flourish. Stone-freak anomaly or sign of things to come? It says here that the answer is the latter.

The second point revolves around Schachter. Though some of his fans are disappointed with his choice to take the path of least resistance, in the end he may prove in this new epoch to be the most dangerous type of entrepreneur: a guy with the talent and inclination to do something truly disruptive, armed with the financial wherewithal not to compromise the next time he takes the startup plunge. And when dudes like that start running amok, it may mark the moment (heaven help us) when we start talking about Web 3.0.

John Heilemann wrote "Pride Before the Fall." His next book is "The Valley." He lives in Brooklyn.

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.