How To Build A Million-Dollar Business

YAHOO!

Unconventional Thinking

In 1994, David Filo and Jerry Yang were in typical start-up mode--working 20 hours a day, sleeping in the office, juiced on the idea that people were discovering their concept and plugging in. There was only one difference between them and most new entrepreneurs: They weren't making any money. We're not talking about an absence of profitability. We're talking about an absence of revenue. There were no sales. None. And, the fact is, the Yahoo! founders didn't care. Filo and Yang were working like maniacs for the sheer joy of it.

Their mission? Bringing order to the terrible, tangled World Wide Web. Back then--in the prehistory of the Internet--plenty of interesting Web sites existed. But the forum wasn't organized; there was no system that enabled people to find the sites they wanted in an easy, orderly way.

Even Yang and Filo, who were studying for their Ph.D.s in computer engineering at Stanford University in Palo Alto, California, found the Web cumbersome. "We had started looking at Web sites, but we couldn't keep track of the good places we'd been," says Filo, 31. So the two created a list of their favorite Web sites, along with a framework for organizing the Web and a search engine that made finding the right site as simple as typing in the right keywords. They dubbed their service Yahoo!, an anagram for Yet Another Hierarchical Officious Oracle. And it took off.

By 1995, the service had become so popular, the partners were able to raise $1 million in venture capital to expand the business. There was no trail to follow, however; back then, Internet commerce was still in its infancy. But the partners knew they had a tiger by the tail. "What we did took 20 hours a day," says Yang, 29. "But we were one of the first to [try to organize the Web], and we did it better than anyone."

And the consensus is, they still do. Now based in Santa Clara, California, Yahoo! gets an astronomical 1 billion hits per month. Compare 1997 first-quarter ad sales of $9.5 million to last year's first-quarter sales of $1.7 million, and it's a cinch that this year's ad revenues will beat last year's $19 million by a sizeable margin.

Good as it sounds, inventing a new industry has presented challenges at every turn. The first and most basic: How to make money. Even as the Internet was gaining popularity, efforts to commercialize it met with more than a little resistance. To make matters worse, Yang and Filo were among those who believed in keeping the Internet accessible--and therefore free.

"It was tough," Yang admits. "We really didn't know which business model would work, and we considered everything," including systems that would simply support the operation without generating a profit, such as promoting companies in exchange for some of their hardware.

Though advertising emerged as the clear choice (allowing Yahoo! to eschew user fees), it wasn't clear that advertisers would go for the idea. That Yahoo! has landed sponsorship from such diverse corporate giants as IBM, American Express, Lexus, British Airways and Guinness is a testament to its momentum.

But can the momentum continue? Keeping the service fresh, fascinating and at the fore isn't easy. Every day, expectations rise, and new companies enter the fray. Then again, Yang and Filo have more than investment capital, a nifty computer program and 225 employees to help them stay online and on target. They've also got commitment. "We believe the Internet can change people's lives," says Yang. It certainly changed theirs.

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This article was originally published in the September 1997 print edition of Entrepreneur with the headline: How To Build A Million-Dollar Business.

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