Tumblr: David Karp's $800 Million Art Project
January 2, 2013
By: Jeff Bercovici
FORBES – David Karp is in the midst of a rite of passage that seems universal for the young tycoons of the Internet’s social era: He’s buying himself a proper swank pad. And like Mark Zuckerberg‘s luxe but dowdy $6 million manse in Palo Alto and Sean Parker‘s Greenwich Village carriage house-cum-party palace, Karp’s choice says a lot about him–and Tumblr, the blogging platform he founded nearly six years ago. The 1,700-square-foot, $1.6 million loft, which he’s currently remodeling, is quite modest for a 26-year-old whose net worth, on paper, exceeds $200 million. That’s in part because it’s located in the world’s hipster capital, Williamsburg, Brooklyn, where irony trumps showiness–he’s quite possibly the richest person in the neighborhood. But the most telling feature is on the inside, which contains … virtually nothing. A spartan bedroom with a half-empty closet. A living room area with nothing but a sofa and a TV. (One concession to opulence: a restaurant-grade kitchen for his girlfriend, Rachel Eakley, a trained chef.) “I don’t have any books. I don’t have many clothes,” Karp shrugs. “I’m always so surprised when people fill their homes up with stuff.”
“He owns, like, three items,” confirms Marco Arment, Karp’s first and, for a long time, only employee at Tumblr. “He’s always looking for ways he can get rid of something.” Even Karp’s person is spare in the extreme: His one suit, though trimly cut, flaps around his 6-foot-1 frame when he fidgets, which he does a lot. Maybe it’s all the calories he burns this way that keeps him skinny, like a teenager who has yet to fill out his bones. “I’ve always been 40 pounds underweight,” he says.
For Tumblr’s CEO, minimalism isn’t just an esthetic choice. It’s the key to freedom. When he travels he avoids making plans more than a few days in advance, even on his trips to Japan, and packs only the sveltest of carry-ons. “It’s my Jason Bourne or James Bond fantasy, wanting to be perfectly mobile,” he says. One of Tumblr’s directors, Roelof Botha of the Silicon Valley venture firm Sequoia Capital, recalls showing up at a board meeting in New York toting only “the tiniest of duffel bags” for his trip. “David took one look at me and said, ‘You really brought all that stuff?’ ”
Karp’s intolerance for the inessential imbues Tumblr. Where others looked at the twin revolutions of blogging and social networking and saw new tools for communication, Karp saw possibilities for making them radically easier and more intuitive. Tumblr lowered the bar to creating a beautiful, dynamic website and raised the payoff in the form of positive social reinforcement.
If Facebook is where you check in with your real-life friends and Twitter is how you keep up with current events, the Tumblr experience can be boiled down to people expressing themselves publicly. Like those other two networks, Tumblr is organized in the form of streams of posts. But it’s far more sensory and emotive, a swirl of photographs, songs, inside jokes, animated cartoons and virtual warm fuzzies. On the main Tumblr feed compiled by its editors, a photojournalist’s visual diary of Afghanistan might be followed by a cartoonist’s impressionistic drawings of Darth Vader, which give way to a gallery of hamsters that look like President Obama.
Users make sense of the chaos with the aid of a dashboard, the interface for finding and following other users and keeping track of the feedback their posts receive. Hearts are good; “reblogs” are better, suggesting another user liked your post enough to share it with his or her followers. The tools for creating these multimedia posts are simple: seven buttons that let you add text, photos, hyperlinks, video, music, dialogues or quotes with a click.
The result: classic hockey-stick growth that’s getting steeper by the month. In November it shouldered its way into the top ten online destinations, edging out Microsoft’s Bing and drawing nearly 170 million visitors to its galaxy of user-created pages, according to the measurement firm Quantcast. Tumblr’s tens of millions of registered users create 120,000 new blogs every day, for a total of 86 million and counting, which drive some 18 billion page views per month. Its latest funding round, in September 2011, valued Tumblr at $800 million, making Karp’s 25%-plus stake worth more than $200 million. Then its traffic doubled.
An impressive start. But this is Tumblr’s make-or-break year, where it needs to prove three things: That it can continue the growth. That it can actually make money. And that David Karp, the creative genius and quintessential minimalist, is the right guy to lead Tumblr to glory. “The road is littered with dead companies that made the wrong move at the wrong time, the MySpaces of the world,” says Gartner analyst Brian Blau. “They’ve got to be really careful.”
Karp has momentum. When Hurricane Sandy flooded massive data centers in New York, knocking the Huffington Post, Gawker and BuzzFeed offline, all three gravitated to Tumblr as their temporary publishing platform. Hollywood has taken note, with no fewer than three new TV series in development spawned by Tumblr sensations that went viral. And this: When Oxford Dictionaries U.S.A. designated “GIF” its word of the year for 2012, it credited Tumblr with pushing the term, a technical name for a type of compressed image file, into the mainstream. “The growth we’ve seen in the last year just totally overshadows everything that came before it,” says Karp. “To be honest, it’s a place I never thought we’d be.”
And, in some ways, never hoped to be. Tumblr is growing up and, as anyone with a baby or a mortgage can tell you, that means expensive complications. “I really like David, but he’s got a brutal year ahead,” says Gawker Media owner Nick Denton. “The pressure on Internet media companies to deliver revenues is going way, way up.” Karp, who once showed disdain for advertising, finally allowed ads on Tumblr last May. The company finished 2012 with $13 million in revenue; the hope in this “leap” year is that it’ll get to $100 million.
If it can hit that sales figure, profits should follow — the key benchmark even for social media firms, which, until Facebook’s troubled public offering, could get away with being the shiny new social platform. “I don’t think there’s anybody that’s pushing for short-term maximization,” says Botha. “But to the extent we can get to profitability soon, it’s a good thing because you don’t have this existential crisis every day.”
And how soon is that? Money isn’t that pressing an issue–yet. Karp says Tumblr has banked “most of” the $125 million it has raised. But Tumblr spent an estimated $25 million on its operation last year and will likely have to shell out up to $40 million this year. In 2013 David Karp has a race on his hands: Can he break into the black before needing to hold his hand out again for investors?
When he started down the path that led to Tumblr, Karp was just another teenager obsessed with tech and too smart even for his elite public high school, New York City’s Bronx Science. Karp’s mother, a teacher on Manhattan’s Upper West Side, and his father, a musician, knew their son, the older of two boys, needed more avenues to pursue his interests. So his mom approached Fred Seibert, a family friend whose children she taught. A longtime executive at MTV Networks and Hanna-Barbera, Seibert was running his own animation production company. “David’s mom said, ‘Fred, your business has computers in it, right?’” Seibert recalls. “‘You know, my 14-year-old is really interested in computers. Could he come by and visit?’”
“I was terrified,” Karp says of that first meeting. But his fascination with the work of the engineers outweighed his trepidation, and the visits became regular until, Seibert recalls, “one day, he said, ‘I can come by every day now–I’m going into home schooling.’” That, he decided after crunching admissions statistics, was his best shot at getting into MIT–the best launchpad for computer engineers. He also began taking classes in Japanese at the Japan Society and seeing a math tutor, with whom he worked on writing software for winning at blackjack and poker.
But MIT was not in the cards. By the time his peers were writing application essays, Karp was working as head of product at the parenting website UrbanBaby. After CNET acquired the site in 2006, Karp used the proceeds from the sale of his shares to start his own little for-hire development firm, Davidville, where he also dabbled in creating products of his own. While he’d built a multiuser blogging platform for Seibert’s company, he wasn’t satisfied with it. “One day he came by and said, ‘This blogging thing is really hard. Isn’t it too hard?’” recalls Seibert, who had no idea what Karp was talking about. Knowing he was out of his depth, Seibert turned to one of his own investors, Bijan Sabet of Spark Capital.
“Fred called me up and said, ‘Hey, you’ve got to spend more time with David. He’s unbelievably talented,’” remembers Sabet. They got together, and Karp showed him a Web application he’d invented that made creating and sharing all kinds of digital content–text, photos, videos, hyperlinks–remarkably simple. It was Tumblr. “I was just blown away,” says Sabet. “I hadn’t seen anything that beautifully designed.”
But getting Karp to commit to it as a business was tough. He “didn’t want to be known as a business guy. David didn’t conceive of Tumblr as anything other than a tool he wanted for making his life better,” says Seibert. “He exhibited a passion early on, but it wasn’t a passion for building a business.”
“I basically spent the summer of 2007 trying to talk him into starting a company around it,” adds Sabet. “He was like, ‘Hey, I like my consulting company.’ But he was also intrigued about startups.” When Sabet brought Karp his first term sheet for a proposed venture investment, Karp balked, saying it was “too much money with too much pressure.” But when the kitty was reduced to $750,000 at a valuation of $3 million, led by Spark and the famously founder-friendly Union Square Ventures, Karp allowed himself to be persuaded.
Or, partly so, as Karp has to be talked out of his initial reluctance on a lot of fronts. As Tumblr has grown from embryo to leviathan, he has had to learn to subordinate his own instincts and inclinations to those of Seibert, Sabet and his other investors, whom he refers to collectively as “my mentors” and speaks of only in the most complimentary of ways, even when disagreeing with them.
One focus of disagreement was over Tumblr’s proper size. In its first year it was a two-man shop, Karp and Arment, whom Karp recruited via a Craigslist ad. In April 2008 they hired Marc LaFountain to handle user support, but he was in Virginia, and it took over a year before he met either of them in person. “So even when he had an employee, it didn’t feel like we did,” says Arment.
Around this time Karp told Sabet he’d been looking at the organizational structures of other digital media companies, from Craigslist, which had 26 people, to MySpace and Facebook, which each employed roughly 1,000. “And he says, ‘I could do it with four people for the rest of my life,’ and he really believed it,” says Sabet.
But reality bit. As Tumblr’s user base climbed into six and seven figures, the site increasingly had stability issues. Product fixes and improvements got stuck in a bottleneck. “We were getting overwhelmed,” says Arment.
“I was a little too clever at times,” Karp acknowledges. “The fact that I didn’t have the foresight to build out a bigger engineering team earlier cost us some serious months. The reason we’re so much more productive today is we’ve got people now who’ve been through this stuff before.”
But there’s a tradeoff. The bigger Tumblr gets, the more time Karp spends doing things that don’t play to his strengths Schmoozing clients, dazzling analysts, rallying the troops, raising the fear of God–these don’t come easily to the reserved Karp. “We’ve never seen him angry,” says Rick Webb, who helped run a digital marketing agency, the Barbarian Group, before joining Tumblr as its “revenue consultant.”
For years most business-side duties were handled by John Maloney, whom Karp had hired as Tumblr’s first president after working for him at UrbanBaby. But as the company took on executives to oversee those areas, Maloney told Karp he was ready to leave. “There weren’t a lot of politics around it,” says Maloney. “It got to the point that there were a lot of people in the room. I wanted to go and do my own thing.” He left last April, with Karp taking over his reports.
These days what keeps Karp up at night isn’t buggy code but “team stuff. Am I being a good enough leader for these guys? Am I giving them everything they deserve and setting this up as a collaborative, positive environment? When it feels like it’s slightly off, it’s all I can think about until I fix it.”
“The process is not completed, but he could probably give you a pretty good assessment of how far along he is in that process,” says Brad Burnham from Union Square Ventures, a Tumblr board member.
Yet the process might well end with Karp back where he started. Ever since Maloney left, insiders have discussed bringing in a bigger league version of him, à la Sheryl Sandberg at Facebook–adult supervision, leaving Karp free to focus on product strategy and vision. “David’s smart enough that if he needed to manage, he could, but he doesn’t relish that, so why put him in that box?” asks Sequoia’s Botha.
“I do think it’s a good idea,” says Burnham of hiring a strong number two with a broad remit. But that doesn’t mean it’s imminent. “It’s going to take a pretty special person to go into a situation where they really complement David’s strengths and work effectively with him.”
No one is talking about booting Karp from the top spot. “My commitment to David is he’s CEO as long as he wants to be CEO,” says Sabet. Adds Botha: “Tumblr wouldn’t be Tumblr without David. He needs to be a part of the core business if we’re going to make this a spectacular success.”
For Tumblr, spectacular success now boils down to one metric: profits. As recently as 2009 it was still trendy to doubt whether advertising or commerce could thrive on social platforms or whether users would rebel at intrusions into their personal conversations and creepy behavioral targeting.
For all its well-documented growing pains, Facebook has proven social’s revenue efficacy several times over–when it first crossed into the black in 2009 and, more recently, when it revealed that its nascent advertising efforts on mobile are already driving $3 million in revenue per day. Twitter, while smaller, is on a similar trajectory, with more than $545 million in ad revenues expected in 2013, according to eMarketer.
Tumblr, says Sabet, is “where Twitter was two or three years ago.” Now the company has to evolve into a sales machine, something that’s clearly not Karp’s forte: While no longer a teenage shoe gazer, he’s still too shy and introverted for the table-pounding, back-slapping role. That explains why Tumblr poached Groupon’s Lee Brown, a ten-year Yahoo vet, to become its head salesman last September and armed him with a dozen sellers, focused on bringing in sponsors like Adidas, GE and Coca-Cola.
None too soon. Until ending its ad ban in May, the only real monetization of Tumblr came from other people. More than 50 writers have leveraged their Tumblr blogs into books, and some have scored TV deals, including Lauren Bachelis, whose Hollywood Assistants is being adapted by CBS, and Emma Koenig, whose F–k! I’m in My Twenties is headed to NBC. Commerce within Tumblr has mostly revolved around the creation and licensing of design “themes” to users looking to spruce up their pages. “For the people who are making those themes, it’s incredibly lucrative,” says Chris Mohney, editor-in-chief of the in-house news organ Storyboard. But it’s less so for Tumblr itself, whose cut of the sales adds up to less than $5 million annually, reports the research firm PrivCo.
But if Tumblr’s moneymaking efforts to date have been modest, its ambitions are outsized. Karp proposes to reinvent Internet advertising all over again and to do it while eschewing the path blazed by Google, Facebook and Twitter.
In his critique of those companies’ offerings, the normally polite-to-a-fault Karp doesn’t pull punches. “Hyper-hyper-targeting of little blue links” is how he dismisses them. In 2010 he made headlines by publicly declaring that Web advertising “really turns our stomachs” and would never wind up on his network, a remark Karp’s nervous investors have been urging him to explain now that the company’s sales reps have started calling on Madison Avenue.
Here’s what he says he meant: Those “little blue links” are effective, but only in the most limited way, at the narrow end of the so-called purchase funnel. “It’s about grabbing you at the moment you’re ready to buy,” he says. Google, Facebook and Twitter can use a combination of behavioral targeting and borrowed social relevance to do that with a high degree of success, but they have little effect on consumers’ attitudes and emotions. That’s the job of so-called brand advertising.
Right now, despite the great migration of time and money to the Internet, almost all brand messaging occurs in traditional media, especially TV. “There’s $50 billion in brand, but none of it’s really on the Web,” says Tumblr’s revenue guy Webb.
The spenders of that $50 billion, Karp says, are awaiting digital advertising formats whose artistry and expression forge an emotional connection with consumers–the sort, romanticized in Mad Men and celebrated in Super Bowl commercials, that can make them laugh, cry or call their mothers.
The same tools that make Tumblr a favored medium for creative types make it the ultimate blank canvas for marketers. What brands pay for isn’t the ability to create content–that’s free for anyone–but the ability to promote it in two modules central to the Tumblr user experience: Spotlight (an accounts-to-follow suggestion) and the Radar (editors’ picks). Together these two venues generate more than 120 million impressions per day. The vast majority go to organically popular content, but 5% to 20% of those are made available for paid promotion. Rates are relatively high: The cost for a thousand impressions (CPM) ranges from $4 to $7, pushing into the premium end of the digital ad market. (Facebook’s CPMs range from 30 cents for small, generic banners to almost $10 for social ads delivered over mobile devices.)
Ad agency Droga5 used Tumblr to promote the launch of Kraft’s new, youth-targeted chewing gum brand, iD. One piece of content created for the campaign, an animated GIF of a dinosaur, was promoted through Radar and got more than 40,000 interactions, according to Chet Gulland, the agency’s head of digital strategy. About half were “reblogs,” meaning users essentially reposted the ads on their own pages and shared it with their friends. “It was really exciting to have a platform like that where you could reach a huge audience of exactly the right people and they seem so willing to engage with it,” he says.
The iD campaign also ran on Facebook, which, like Tumblr, charges for the ability to promote content. But recent changes to the algorithm governing Facebook’s main news feed have made it harder for brands to get their content seen without paying for extra promotion; some have likened this to extortion. In an angry blog post about the changes, Dallas Mavericks owner Mark Cuban cited Tumblr as a platform that brands should consider as an alternative to Facebook’s strong-arm tactics. “David has done a great job of making Tumblr a staple of younger demographics, to the point where for many it’s replacing Facebook as a day-to-day destination,” says Cuban. (The two are acquaintances.)
Another key difference is privacy. Whereas Facebook exploits users’ data to target them with specific ads, Tumblr doesn’t and won’t start, says Webb. “We don’t want to get mired in that crazy, scary privacy world Facebook is in,” he says. “That’s a big red line for us.”
While Tumblr does plan to roll out a limited degree of targeting before long, it’s doubtful it can ever come close to Facebook’s audience, much less its revenue. Whereas Mark Zuckerberg’s company strives to “make the world more open and connected,” Tumblr’s motto invites users to “Follow the world’s creators.” Catering to artists gave Tumblr an identity and a ready-made market but, in the long run, it’s measured in the hundreds of millions, not billions, of members. The whole world may not need a Tumblr. “I do sort of wonder how they’re going to transition from where they are today,” says Gartner’s Blau. “Tumblr has to change the perception that they’re only for the creative crowd.”
The key challenge for Tumblr going forward is the same one confronting every social network phenom: how successfully it can accommodate an audience that is rapidly transitioning from laptops and desktops to tablets and smartphones–and learn to make money off it. Though Tumblr’s minimalist design and intuitive navigation leave it better positioned for the move, it’s still a critical juncture. “This company was born on the Web,” says Sabet. “It was not a mobile-first company, as it were.”
Low-rated mobile apps that were initially outsourced have been redone in-house and now receive much higher ratings from users. While Tumblr still hasn’t quite figured out how some of its most popular features, like a browser bookmarklet that streamlines the sharing of Web pages, translate into the app universe, time spent on its mobile app is growing three times as fast as on the Web. “The inflection point we’re looking at is the beginning of 2014, where it flips to being majority mobile, and that keeps getting pushed up,” says Karp.
He’s a quick study. Besides, his mentors aren’t afraid to give him a good, hard correction when they think he needs one. “For all my learning how to be a CEO, I’ve made way fewer mistakes,” he says, thanks to “that support system I really trusted who could grab me by the back of the sweater and say, ‘David, you should pay attention.’”
These days, when Karp gets the urge to tinker, he doesn’t dive into code. Instead, he rolls up his sleeves and works on one of his three motorcycles. While that may seem to violate his rule against accumulating stuff, he likes how simple they are compared with cars. Almost no one can fix his own jalopy anymore, but with bikes, he says, “it’s all hanging out. Anything you want to get to, you can just pull it out and work on it.” Plus, you can’t have more than one backseat driver.
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