The Original YouTube Investment Memo

Launched June 11. Has already overtaken all previously existing competitors and is now the dominant player in the space.

Roelof Botha, Sequoia Capital, 9/2/05

Today, YouTube dominates the internet.

People watch 1 billion hours of YouTube. Every day.

But as summer turned to fall in 2005, YouTube was just a three person company run by talented but obscure engineers. But someone saw their potential.

Roelof Botha of Sequoia Capital led seed and series A investments in the company, one of the great bets of all time. It sold for $1.65 billion to Google just a year later.

The original deal memo Roelof wrote in September 2005 was made public in its entirety via a lawsuit. As an angel investor, I was fascinated to read it this morning.

So how did Roelof and Sequoia know that this tiny company would be a huge success? Actually, given the data they had, it was surprisingly obvious.

YouTube’s traffic was exploding. In about 2.5 months, it had gone from 0 to far larger than its biggest competitors, Vimeo and Dailymotion.

Over the prior 3 months, page views had grown at a compounded monthly rate (CMGR) of about 140%. To put that in perspective, I’m quite impressed when I see anything over 20% for an early stage company.

With those metrics, almost anyone who had access to the deal would’ve invested. You don’t have to double every month that many times until you have something huge.

Just as clear as its traction was YouTube’s value proposition:

To become the primary outlet of user-generated video content on the internet, and to allow anyone to upload, share and browse this content.

If you can’t summarize your startup’s mission as cleanly as this, keep trying!

Roelof also could see where the market was going, as opposed to where it was. In 2005, broadband adoption was exploding and cameras were popping up on every device.

The only thing missing was a way to share all those new videos. YouTube completed the puzzle.

Interestingly, Roelof had worked with one of the co-founders at Paypal before joining Sequoia. It may be his network, rather than ability to read the tea leaves, that gave him the inside track to investing in YouTube.

I think the biggest risk for an investor reading this deal memo would be to not put enough money in. You don’t see companies more than doubling every month very often.

When you do, it’s time to go big or go home.

More on tech:

The Top 3 Startup Pitch Mistakes

An Investor’s Dream Cold E-mail

Why I Just Invested in Capbase, The Startup in a Box

Photo: “Chad Hurley” by jdlasica is licensed under CC BY 2.0

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