The internet entrepreneur who founded Bebo has paid $1m (£660,000) to buy back the social networking site five years after selling it to AOL for $850m.

Michael Birch, who co-founded the site with his wife, Xochi, in 2005, tweeted late on Monday: "We just bought back Bebo for $1m. Can we actually re-invent it? Who knows, but will be fun trying …"

Once the darling of younger teenagers in Britain, Bebo reached a peak of 40 million monthly users in 2008 when it was bought by AOL in a deal widely regarded even at the time as significantly overpriced.

By 2010 a lack of strategic leadership on the part of AOL and the rapid growth of Facebook had crippled Bebo, and AOL in effect closed it down, though users could still access the site.

The investment consortium Criterion Capital Partners bought Bebo's assets for between $2.5m and $10m in June 2010, later bringing Birch on board as strategic adviser.

Birch is now the sole owner after beating two rival bids in a post-bankruptcy auction. A team of designers and engineers at Birch's San Francisco-based business Monkey Inferno are now working on redesigning the site.

Shaan Puri, chief executive of Monkey Inferno, said: "We're excited about the ambitious challenge of bringing Bebo back, and couldn't be happier to announce that the product will be back in the hands of the founders. We know the odds are stacked against us but we love challenges and the Bebo users deserve better that what they have received in the past few years."

Puri added: "The $1m purchase covered all of the assets of Bebo Inc (hardware, software, intellectual property etc). In simple terms, we now own the website clear of any other shareholders.

"Needless to say, we are ecstatic to have the site back in the hands of the founders! It will be a huge challenge to reinvent Bebo, but we're up for the challenge."

Birch faces a significant battle to differentiate Bebo from Facebook, which allows users to join from the age of 13. Bebo's core user base was younger teenagers, a notoriously fickle market as the rival MySpace also discovered.

While MySpace has attempted a slick redesign and refocus on music, teens have also shifted towards apps including Snapchat, which lets users share pictures that self-destruct, and sharing tools such as Vine and Instagram.

Bebo is re-entering a very competitive and fast-moving market with only a fraction of its peak userbase. The site had 420,000 unique visitors in the UK in May this year, down from 626,000 in May 2012, according to comScore.

The Birches owned 70% of Bebo when it was sold to AOL and were estimated to have made $595m from the deal. Michael Birch has subsequently been an active investor in other startups, putting money and time into citysocializer, the Smarta startup awards and becoming a partner at PROfounders capital. He also started The Battery, a private members' club in San Francisco, as well as Monkey Inferno. Birch joins an exclusive list of executives who have returned to save their companies, including the Dell founder Michael Dell and Steve Jobs, who turned a floundering Apple into the world's most valuable company.