How Facebook Won

Tarang Shah, a former venture capitalist, interviewed over a dozen of his old peers to learn how billion-dollar companies are created. He turned this into a book called Venture Capitalists at Work, which was recently released.

I interviewed Tarang about one of the topics in the book � Facebook.

InvestorPlace: Could Friendster, which got its start in 2002, have been the winner in social networking?

Shah: The company made a few technology mistakes and didn’t pay real attention to what users wanted. It kept calculating third and fourth degrees of connections when users really wanted to know first and second degree of connections, just their friends of friends. (Facebook even today only shows second degree of connections).

Given the amount of permutations and the state of database technology, it took minutes to refresh a page. This drove users crazy, and they ran away to MySpace. In fact, they could have run away to anything else that was working at that time. There is a big lesson in user interface and user experience here. In nutshell, if Friendster had paid real attention to user needs and technology choice, one can argue that they could have been what Facebook is today.

Then why did MySpace fail?

MySpace wasn’t built on [an] actual identity and allowed users to self-express themselves. So, it did appeal to a young and edgy user segment. However, for the market at large, it became a site that they couldn�t relate to. So that put a ceiling on how much MySpace could grow.

So what did Facebook do right?

By starting with a college-focused social network, Facebook founder Mark Zuckerberg did a few things right. Students saw great value in connecting with other students from their own college and staying up-to-date with hyper-local college events, parties and activities.

Zuckerberg was very strategic in rolling out colleges. He connected Ivy League college students with each other and then colleges in the same geographical areas. Then they opened it up for the market at large. He used the same focused, modular approach with international expansion.

Also, like other game-changing entrepreneurs — Bill Gates, Steve Jobs — Zuckerberg had a big vision and a huge motivation to win big. He surrounded himself with a very capable team, and that’s evident in the scale at which Facebook operates today.

Like Google (NASDAQ:GOOG), that team is solving an immense technological problem in a very scalable fashion. They constantly keep testing new features and adding what resonates with their users. They started out with a very simple profile page and had big success with photos and then added status updates, videos, etc. The list of features keeps growing. It has become a platform on which billion-dollar successes like Zynga are built now.

And they are not afraid of buying things they failed at or couldn’t do well themselves. Clearly, they missed the whole Twitter thing and now have integrated with them to share updates rather than pushing only their own updates.

Can anyone topple Facebook now?

I believe that’s a very, very difficult thing to do at this stage. They have executed so well that it leaves very little room for someone to offer a 10x advantage to lure away users and bring their networks with them.