The billion-dollar bet

Tumblr was billed as the linchpin for a new and improved Yahoo, or at the very least a much-needed “hip replacement” for the aging Internet giant.

Tumblr was everything Yahoo wasn’t: Trendy, influencing pop culture, coveted by millennials, brands and celebrities, a place for passionate communities. And it was growing fast.

“There were synergies that were very apparent to all of us, especially since they just had a younger, cooler audience and the Yahoo user base is dying,” says one former Yahoo employee. “We were like, ‘Great!’”

“The combination of Tumblr+Yahoo! could grow Yahoo!’s audience by 50% to more than a billion monthly visitors,” Mayer explained in a Tumblr post announcing the acquisition. “The two companies will also work together to create advertising opportunities.”

Sure, Yahoo had tried billion-dollar acquisitions in the past (remember GeoCities?), but this was different. This was Marissa Mayer, the powerful and brilliant Google executive, early in her tenure as Yahoo CEO and using her star power (along with Yahoo’s sizable checkbook) to bring one of New York’s most valuable startups into the purple mothership to help find a new audience and be cool again.

Few private tech companies were as beloved around the world as Tumblr. Teenagers in Brazil cried -- genuinely cried -- in 2011 when they got to meet a few random employees from the team behind the site. The reason: Tumblr helped people form powerful connections to others with similar life experiences. As Stacy Lambe, one of the brains behind the viral Tumblr account Texts From Hillary, recalls by e-mail, “I met my first boyfriend — after coming out — through a group of Tumblr gays that I eventually met in real life.”

That fondness for Tumblr extended to members of the marketing community focused on new media. “Everyone looked to it as the holy grail,” says George Bennett, group strategy director at Droga5, which does advertising work for many Fortune 100 companies. “If you can crack the secret sauce of what makes content on Tumblr go viral, then as a brand we’re on to something important.”

Tumblr, founded in 2007 by then 21-year-old David Karp in his mom's apartment, was the hottest thing on the Internet and the team knew it. "A lot of the rhetoric in the early days was, ‘We’re on to something big. There's no reason why something like this couldn’t be on the scale of a Twitter,'" says Jared Hecht, an early employee and now CEO of Fundera.

So when Karp asked all Tumblr employees to come in to their modern New York office early on a Monday morning in May and announced the sale to Yahoo, the reactions were mixed. Some younger employees didn’t know what Yahoo was (“They’re your weather app,” one manager told his team.) Some knew the name, but they were hoping to be bought by a trendier tech company or keep growing on their own. Some worried about the future. And some, including Karp, respected Mayer’s background, thought they could help Yahoo and help themselves -- and, of course, help themselves to Yahoo’s money.

Karp, then 26, reportedly received about $250 million from the deal. A few early employees like ex-CTO Marco Arment are said to have pocketed millions. The rest made thousands, or nothing at all because they hadn’t vested. “I certainly didn’t make never-have-to-work-again money, but it was more than fair to me,” says Mark Coatney, Tumblr’s former media director. “[It was] a little bit of money, but for god’s sake, I don’t think it’s enough to buy a house in New York City.”

Less discussed by the team that day was the problem that had always plagued the company: How Tumblr would make money.

Karp, a coder at heart, is described by colleagues as “openly hostile” to traditional advertising. He publicly pushed back against the traditional online advertising of “little blue links” and waited years to build up a robust sales team. When they did start rolling out ads, Tumblr provided marketers with limited data and limited reach (the ads were focused on the much smaller pool of active, logged-in users). Traditional marketers, for their part, faced a steep learning curve (GIFs, anyone?) and were also skittish about some of the raunchier user-generated content on Tumblr.

As Tumblr put off a real monetization plan for years, it ended up bleeding money. At the time of its sale, Tumblr had just $16 million in cash left in the bank, according to a public filing. It had spent down more than $100 million of its venture funding. That, as much as anything else, may have pushed Karp to sell.