Shaan Puri: Okay, so what is this? So something that entertains me. And so I wanted to create a podcast which was first and foremost, just an excuse to hang out with people who I haven’t been able to hang out with as much. So, now one way is to say, “Hey, let’s go grab a coffee.” And the other way is to say, “What if we recorded this so that other people could be a fly on the wall and hear stories or chatter about random stuff.” And I’m not trying to do it educationally. So for me it’s stories.
Shaan Puri: So the podcast is called My First Million. And the reason I picked that is because, the audience that listens to this they are entrepreneurs already or wantrepreneurs kind of thinking about, “Hey, that’s the dream. I’d love to sort of quit my job and start a business someday.” And I remember for me, and I think this applies to many people, which is the idea of a million bucks is like a magic number. Even today when everyone’s a billionaire, still if you’re a thousandaire, a million bucks sounds like all the money.
James Hong: Totally understand.
Shaan Puri: And so-
James Hong: In fact when I made my first million, I put it all in one account and I went to the ATM.
Shaan Puri: Just to look at it?
James Hong: Yeah. And I withdrew money so I would have a slip of paper that said I had a million dollars.
Shaan Puri: You framed that? What’d you do with the slip?
James Hong: Well, you know the funny thing is, then we had all these jokes because I had these ATM slips with a million dollars on it and we were just joking around, we’re like, “Man, we should keep these in our wallet, and then when you give a girl your phone number, you should be like, “Oh-“
Shaan Puri: Casually.
James Hong: Yeah. Like, “Let me write it down. Let me write it.” This was before everyone had phones or something. “Well, let me write it down in this slip of paper. I have one with me right here.” Never actually did it but it was a funny idea. And actually [inaudible 00:02:13] I remember then I was search Googling the idea and there were companies I remember that sold fake ATM slips online.
Shaan Puri: Oh wow.
James Hong: So I wasn’t the first-
Shaan Puri: So you weren’t the first guy thinking about doing this.
James Hong: It’s a whole new industry.
Shaan Puri: Yeah. So basically it’s called My First Million. I’m talking to people how they made a million bucks in all different ways. So, some people are tech entrepreneurs who start a business, some people made a million bucks selling mushrooms and they’re mushroom farmers, someone did it in crypto, CBD, all the different types of things, real estate. And so I want to tell stories so that the listeners basically hear, man, first there’s a million ways to success. You don’t have to follow a particular track.
Shaan Puri: And B, just a little bit of inspiration and entertainment, these stories tend to be really interesting. They kind of come out of nowhere, it wasn’t a perfect plan, it wasn’t a straight line, it usually has ups and downs. And so I want to tell those stories.
James Hong: Like in Harvard Business School they have these HBS cases, and everything in those cases is like, “Oh, you know Sean was looking out the window at the Charles River thinking about what he was going to do for his company.” And the solution is always, they give you all this data and then at the end it’s like, oh he did this and this and this and this and this. And then he did that and that and that and that.
James Hong: The solution was a neat package. And in reality you’re like, you know the guy he was not sleeping and he probably did 20 million things before he did what he actually ended up doing or she, whatever. But it’s funny because it’s always like that, but reality is never like that. You know what I mean?
Shaan Puri: Exactly.
James Hong: So it’s nice.
Shaan Puri: And so I’ll give the brief intro. So, we have James Hong on the show. Entrepreneur, started famously a company called Hot or Not. One of the first tremendously viral product before viral was really even a thing I would say. And now angel investor, all-around good guy. I’m excited to be talking to you. Last time I talked to you was like five years ago.
James Hong: Yeah it was a long time ago.
Shaan Puri: So it’s good to reconnect. And so I always start with, not kind of how’d you do it, but a different sort of question which is really, did you always want to make a million bucks? When you were growing up, did you want to be rich? Was that a goal of yours?
James Hong: Not necessarily. I wasn’t really like, “Oh, I have to be rich.” My mom tells me that, I kind of remember this, in third grade I drew her a picture of my house. And I just remember it was on the waterfront, and they had two helicopter landing pads. And so maybe I did, but by the time I grew up, by the time I went through college, I wasn’t really like, I need to be rich, but I did want to do something. You know what I mean?
James Hong: I didn’t want to be bored. The thing I learned at my first job which was at Hewlett Packard, I remember is when the web first came out and I was doing basically sales support for a technical product. And I created a website because I was tired of all these people calling me with the same questions. I basically eliminated my job and the job of two other people, my coworkers, we all got deployed onto other things.
James Hong: But I remember thinking, they gave me a raise of five grand or something like that. And I’m like, “I just eliminated three jobs that was probably back then a couple hundred grand or something like that, and I got five grand. And I just remember thinking, I’ll never make as much money as the value I deliver in a company, because a company, a big company at least, has to kind of pay people based on kind of the median value that any given person at the company will provide, right?
James Hong: I think that’s kind of the one thing that’s changed a little bit at Google and at Facebook, is that they’re now willing to be like, “Oh wow, you created hundreds of millions of dollars in value.” Maybe they still don’t give you a couple hundred million, but there’ll be like, “We’ll give you 10 million.” Maybe it’s not that different today, except that things operate at a higher scale, and that they’re able to because the margin is so high in it.
James Hong: But in any case I was like, “No. Screw that. I’m going to go work for myself because then I can actually extract what I actually created”
Shaan Puri: Yeah, most people don’t see that. So if you’re at a company, and this is not because companies are evil, this is really just the standard way you have to operate. If somebody is 10 times more productive, 10 times better than their peers, you can’t pay them 10 times as much usually.
James Hong: Yeah. That’s exactly the point. People make straight up more money at these big companies than they would being fairly successful as an entrepreneur, hitting a double or hitting a triple a even.
Shaan Puri: And that’s because the scale of these companies is [crosstalk 00:06:40]
James Hong: Yeah. Because the scale [crosstalk 00:06:41] and the margin is high. That’s really the difference.
Shaan Puri: Was it straight out of college that you were at Hewlett Packard or-
James Hong: That was straight out of college. So I was like, “Forget it.” Because in the meantime, a funny thing that happened is, I got out of college in ’95.
Shaan Puri: And where’d you go to school?
James Hong: I went to Berkeley and did engineering. Electrical engineering, computer science degree. And the funny thing is, I remember summer of ’94, that’s when Mosaic came out. The first web browser. Coming out of Berkeley, everyone who got good grades went to grad school or at worst got the good jobs. The good job was going to Intel or HP or whatever, and I went to HP. And meanwhile our friends who were not as strong students, who couldn’t get into a grad school, who couldn’t get a job at HP, they ended up taking jobs at other places that we’d never heard of. Like eBay and Yahoo.
James Hong: So around ’96 or around ’97, [inaudible 00:07:37] in ’96. Whenever Yahoo went public, all these friends got rich. And that’s kind of when you realized that, “Oh.”
Shaan Puri: What game [inaudible 00:07:46] plan.
James Hong: Exactly, right?
Shaan Puri: Did I win? Because that feels like I lost.
James Hong: When you come straight out of school you’re still thinking, oh, whoever gets the best grades, whoever works the hardest, blah, blah, blah, deserves the big prize. And then you’re like, “Wait, what just happened?” And that’s kind of when reality hit and it’s like, there’s a lot of things in life that determine how you end up doing. A lot of it is luck. A lot of it is just circumstance or whatever.
James Hong: Anyway, I realized and was like, I’m not going to get rich at HP and not only that, I didn’t get the value of [crosstalk 00:08:19] the jobs that I-
Shaan Puri: Made more efficient.
James Hong: Yeah, exactly. And so around that time I was like, “Okay, screw this.” At that point I was like, “I’m out of here.” And then I was like, well, I was either going to go to business school because back then everyone thought business school was the path. And actually to some degree it kind of was, because back then to start anything you needed to raise venture money, and it was easier to raise venture money if you had either a lot of experience on the engineering side, or it was MBA VC’s funding other MBAs, right?
James Hong: So, it was kind of seen as a path back then to get an MBA to become an entrepreneur. Today you don’t have to do that, mainly because the cost is so much lower of starting up, right?
Shaan Puri: Back then what did you need to start a business?
James Hong: Back then to start any company, well, first of all, certainly you needed a Sun machine, right? You needed a box from Sun to run the web server, and that might be half a million bucks or something. I mean, just to get started cost a lot of money. Plus there weren’t as many tools.
Shaan Puri: The kit was expensive. If you want to buy the box to play-
James Hong: Just to put up a website with a database on it, people thought you have to have a million bucks at least, right? And so nobody has a million bucks lying around.
Shaan Puri: And today what do you need for that?
James Hong: Nothing.
Shaan Puri: Five hours and-
James Hong: I mean, you get a free box, free incense from Amazon, whatever. It’s nothing. It’s virtually free. Actually when we started Hot or Not, when it first started taking off it was built on a PC I got for free from E-Trade, I think for opening an account with 500 bucks in it. It was the dingiest machine. It had no memory or anything, but it could run as a server, not very well but it got us online, right?
James Hong: And the first thing we thought was, we need to get a Sun machine when things took off. And so we got a Sun machine. We were leasing through Rackspace I think at the time. I remember distinctly hanging out in front of some restaurant in Palo Alto and Larry Page saying, “Oh yeah, you should buy from Rackable” Which was a 1U Rack Mount system company.
James Hong: And it turned out that my neighbor two doors down was the guy who, he was number 20 at Google. Remember when they used to say, “We have a neurosurgeon on staff.”
Shaan Puri: Yes.
James Hong: That was him, and he was in charge of scaling all their data center ops. So he was handy and he was like, “Yeah guys, you should get-“
Shaan Puri: And this is kind of an untold story about Google’s, one of the reasons why they were able to win and scale so crazy.
James Hong: Oh yeah absolutely.
Shaan Puri: People don’t talk too much about this, which is, they were using commodity cheap hardware instead of these expensive specialized systems that were harder to scale.
James Hong: Right. Because the robustness of a system with a thousand machines was much better than one Sun box. It’s basically centralizing all your problems in single points of failure in a one single box.
Shaan Puri: And you saw them and that was your Roger Bannister four minute mile where you’re like, “Oh, we can do it with that too.”
James Hong: Yeah.
Shaan Puri: If they’re doing it.
James Hong: Basically. And it was cheaper. We didn’t have money. I was in debt from business school and my partner was a PhD grad student. So we didn’t have money. We were a negative net worth. So, Hot or Not kind of was like Tinder in 2000, right? It was a website where people would submit their picture and other people would rate them on a scale of one to 10 on how hot they were.
James Hong: And this was kind of in the day when everyone was scared to post their photo online. If you posted your photo online, it was behind a password protected page that was for [inaudible 00:11:33], Ofoto back in the day. So, the concept of posting a photo for other people to see, that you didn’t have full control over who could see it, was completely foreign at the time.
Shaan Puri: Forget about the rating. [crosstalk 00:11:46]
James Hong: Yeah. Forget about the rating. The rating actually as an idea came slightly second. It was originally about voyeurism. I was addicted to reality TV back then.
Shaan Puri: What were you watching?
James Hong: Still am. Back then I used to watch a lot of Jerry Springer, Ricky Lake, all that kind of stuff. The best part of those days was I actually ended up going on some of those shows.
Shaan Puri: You were on Springer?
James Hong: Yeah. I was on Ricky Lake I think, or one of those.
Shaan Puri: As a guest or as the audience?
James Hong: Sally Jesse Raphael or something like that. I was a guest judge. They had people come out. The themes would be like, my friend thinks she’s hot and she’s really not. And then they would come out and talk about it and then I would come at the end and tell them their score.
Shaan Puri: Amazing. So where did that idea come from? Post your photo online, and then you said you added later, [crosstalk 00:12:33].
James Hong: Yeah. The rating was just kind of an add-on. We’re like, “Oh, it’d be cool to have a mechanism where the audience could give data back.” There is this whole, what they called the two way web at the time. The web is about conversations, right? And so it was like, the concept that the audience could actually give response back was new.
Shaan Puri: So you liked people watching.
James Hong: Right.
Shaan Puri: Still, where did the lightning bolt strike?
James Hong: Actually there’s a backstory to all of this, which is that, in the late nineties there was this guy called the Turkish Stud. I don’t know if you know about-
Shaan Puri: I’ve never heard this.
James Hong: Actually I think Borat was based on him. I think the guy who does Borat denies it, but it’s so clear. There was this guy in Turkey who had a webpage with pictures of him playing ping pong or whatever, and somebody, I don’t think to this day anyone knows who did it, but someone took those pictures and made another webpage that was a fake webpage. He called himself the Turkish Stud and he’s like, “Who wants to come to my country? I can invitate you, come have sex.”
James Hong: It was Borat basically. Like, “Oh, come with sexy [inaudible 00:13:35].” And it blew up. There was this company called eTour that kind of jumped on it. eTour, it was kind of the equivalent then of StumbleUpon, I think. I don’t know if people remember-
Shaan Puri: Which is the equivalent of-
James Hong: Which is the equivalent of whatever.
Shaan Puri: Reddit maybe today.
James Hong: It just [crosstalk 00:13:55] took you to random things on the web, because back then there wasn’t that much on the web, right? So, this company eTour made a big deal out of this guy and he ended up on Letterman and whatever. And within a month he had a million page views or something like that, right? My friend and I just thought it was funny. My co-founder Jim Young, he and I just thought it was hilarious because there were all these companies back in those days that were raising tons of money throwing lavish parties and stuff like that.
Shaan Puri: Who couldn’t get a 10th of the page views.
James Hong: Who couldn’t get any page views. And this is when C. [inaudible 00:14:28] was starting to talk about viral marketing with Hotmail and we’re like, “This is so fucking awesome.” It was just the irony, right? It’s like this guy, he didn’t even do it. Someone did it to him and he ended up on Letterman and getting all these hits that all these other people were dying for. We just thought it was funny.
James Hong: And so we kind of had in the back of our mind someday-
Shaan Puri: Let’s do something.
James Hong: I want to build a Turkish Stud, right? So it wasn’t even about money. It was about, I want to do something that goes viral.
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James Hong: And I was obsessed with this guy. I remember I had him as my screensaver, him playing ping pong. So when we were talking about just the various ideas one time, this voyeurism and whatever came up, and then you could rate them or whatever. And like, hey, this could be our Turkish Stud, right? And so actually when we built it, Jim was a grad student, I was working at a friend’s company at the time. We were just killing a lot of time and we were ready to set up in this house to do a startup.
James Hong: So, anyway, Jim just disappeared in his room and three or four days later he came out, he’s like, “Okay, it’s done.” Today you could build it in literally 20 minutes. But back then you had to do a lot of extra stuff, right? And so he came out he’s like, “It’s done.”
Shaan Puri: And it lets you upload a photo, then you click through other people’s photos.
James Hong: Yeah, basically. And then I tested it that weekend. I was just playing with it. My dad came into the room.
Shaan Puri: What do you mean by you tested it? What are you testing?
James Hong: I was just looking at it. He sent me a link, I didn’t look at it for a couple of days. Then I started looking at it a couple of days later when I was at home on the weekend. My dad was looking over my shoulder. He kind of walks in the room, he’s like, “Oh, what are you doing?” I was supposed to be working.
Shaan Puri: [crosstalk 00:16:44]
James Hong: By this point actually no, I had quit my job. I’m sorry. So I was unemployed. Now I remember. I was supposed to be looking for a job probably. So, I lied and said, “Ah, this is just something Jim’s doing.” And so my dad started playing with it and then I see him, he is the first person I ever saw get addicted to rating girls on Hot or Not.
Shaan Puri: Click, click, click. Which is swipe, swipe, swipe.
James Hong: Yeah. I had just taken photos from [inaudible 00:17:07] personals to seed it. And so he was like, “Oh, she’s hot.” I’m like, “Oh my God.” This is my dad, this 60-year-old Asian engineer who’s supposed to be asexual except the three times he had sex with my mom-
Shaan Puri: Right. Which was the mark of a conception.
James Hong: And had me and my siblings. Exactly. Practically. So I was like, Holy crap. This is pretty interesting. So then we launched it that Monday I remember, Monday or Tuesday, I think it was Monday. We launched it by, I sent an email. I put myself and Jim on the site and then I sent a link to our pictures and sent it to a bunch of our friends. I remember it was 42 people, which accounted it later, because 42 is a magic number, right?
Shaan Puri: Yeah of course.
James Hong: But anyway, so I sent it out and it just immediately took off. That was at two o’clock in the afternoon and by the end of the day we had had 30 something thousand IP addresses in our logs. [inaudible 00:18:05]. Back then a lot of people went through proxies or AOL and a lot of these dial ups user proxies. So there’s probably 100,000 people or more, and we’re like, “Holy shit. That was crazy.”
Shaan Puri: So people were just sending it to their friends.
James Hong: Yeah. People were just sending it and within an hour we had had like 20 or 30 submissions. And so I was like, “Okay, we can take off the fake photos now.” It was so slow because it was running on that one machine. I think after you voted it would take you to the next page view where it would tell you the score of that person, and then show you someone else to rate. The turnover of that page was about 20 seconds.
James Hong: People were doing it and clicking away to go into their other browser window doing whatever, and then coming back. It was amazing people were just doing it. And so we’re like, “Holy shit. This is nuts.” It just took off like crazy. So by the end of the week I think we were doing a couple of million page views a day.
Shaan Puri: And this is all still running on a laptop or at this point you start scaling?
James Hong: No I’ll get to that. But yeah, there are all of these crazy stories about how we scaled it. But it got to 2 million a day, and then within two months we were in People magazine. I think we were one of the top 20 most trafficked websites on the web at that time.
Shaan Puri: You had your Turkish Stud.
James Hong: Yeah. We beat the Turkish Stud, right?
Shaan Puri: He has you as his screensaver.
James Hong: [inaudible 00:19:24] the funniest thing about that is that, it turns out that the Turkish Stud got popular because he first hit the scene because there was this woman at salon.com, Salon was an online magazine back then that was pretty popular. And there’s this woman who was a writer named Janelle Brown, and she wrote about the Turkish Stud. She made the Turkey Stud happen really. Because I think that’s how eTour and everyone else found out about them.
James Hong: Well, my friend [inaudible 00:19:46] called me up the first day that we’re running it, he’s like, “Hey, I got a friend who works at salon.com named Janelle. Can you talk to her?” I’m like, “Okay, we’ll talk to her but we have to remain anonymous.” Because we didn’t know if we were going to get in trouble or people were going to be offended by this or whatever. And so he’s like, “Okay. She said she’ll talk to you anonymously.”
James Hong: So I did. I was talking to this woman Janelle and she was interviewing me, and she’s clicking on the site while she’s doing it. And we didn’t have that many photos on the site at the time. So she hit mine. But there was no way for her to know that. But she’s like, “Wait a minute, is this James hong?” I’m like, “Yeah.”
Shaan Puri: How did she put two and two together? How did she put a-
James Hong: Because Janelle Brown was the very first person I met in college. Her door literally faced my door in the dorms at Berkeley. She’s like, “James, it’s Janelle Brown.” Because at that point I just knew her [inaudible 00:20:42] friend Janelle, right? So I was like, “Oh my God. Janelle, please don’t tell anyone I’m doing this.”
James Hong: So she’s like, “Okay, okay, no problem. I said you’d be anonymous and I’ll respect that, all right.” So she did. But the traffic actually got so bad that first day that I called her and said, “Hey Janelle.”
Shaan Puri: Don’t run it?
James Hong: Yes. I was like, “Can you please not run it?” Because remember, we were running on a server that was at a time when… We were hosting the photos and it was $1,000 a megabit per second. So I figured at the end of that day or whatever, I was like, “Man, this thing is going to cost… The run rate was $50,000 a month and it was doubling every whatever hours. So the trick with bandwidth pricing, that no one knows this anymore because everyone just goes to AWS and gets charged on throughput.
James Hong: When you pay for bandwidth, most carriers will bill you at the 95th percentile of your usage. Which means you have 5% of you can spike to infinity and you’re fine, right? So that basically is a day and a half in 30 days, right? So, we had basically a day and a half of 40,000 to do as much as we want, but we were approaching that day and a half and we’re like, “Holy shit, this is going to be $40,000 a month or whatever.”
James Hong: Actually, we almost shut it down. So I asked Janelle, “Can you not run this?” She’s like, “I would love to help you but it’s a slow news day.” Now I understand how journalists work. They’re on a daily, they’ve got to put out something every day or whatever. So I was like, “Oh shit.” So our solution was, that night we moved it to Berkeley, because like I said, my partner was a grad student at Berkeley.
Shaan Puri: Right. So you used the university resources.
James Hong: I remember we drove to Berkeley at three in the morning, and we went to his grad student office and we set up the box. We hid it under his desk, we stacked books in front of the box. It was just like this lone wire coming out from under his desk.
Shaan Puri: That’s costing the university 50,000 a month.
James Hong: That was going to cost the university, and doubling. Like I said, it was doubling every four hours. Anyway, the site was down for a couple of hours. We turned it back on and we looked at the logs, we tailed the log, and it was like boom, boom, boom, boom, boom, boom, boom, boom, boom, boom, boom. Right? So we’re like, “Holy shit.” Because we weren’t sure if it was going to die once we turned it off for a couple of hours or whatever, right?
James Hong: Anyway, so I remember that was at 5:30 in the morning. We got it finally back up and then we drove home and crashed. And then Jim got a call from his advisor at nine or something. Apparently the IT guy at Berkeley spit his coffee out when he saw the logs or whatever, the NOC management tools and followed the wire. He must have followed the wire and then he’s like, “What the hell is this?”
James Hong: Luckily he didn’t turn the box off. Actually I remember I took a box of thumbtacks and took half the box and put it over the power switch and taped it. Maybe that was a signal to them not to turn this box off. But anyway, luckily Jim’s advisor, he was the dean of engineering at Berkeley, and he was also one of the co-founders of Cadence and Synopsys, and he was also a venture partner at Mayfield venture partners.
James Hong: So he was a very entrepreneurial guy, right?
Shaan Puri: This wasn’t a problem, this was an opportunity.
James Hong: Yes. In his wisdom, he saw this as an amazing thing. He’s like, “Okay look, I will buy you a couple of days but you got to figure something out.” And so we did. So we ended up calling Rackspace, which at that time was a rinky dink, very small company still relatively, but they were the leaders in managed hosting at the time. I looked at their about us page, and their VP of biz dev went to Stanford law school around the same time as a guy named Josh Becker went to law school at Stanford.
James Hong: So Josh put me in touch with him, and then I was like, “Hey, listen. We don’t have any money but I think we’re a good poster child for you guys.” Because that’s their whole shtick, is like, you don’t have to have money up front. They can scale you up today because they have machines ready to go. Because back then if you wanted to buy machines, even if we had the money, it would take-
Shaan Puri: Time.
James Hong: A month to get the machines, and to wrap them up and all that kind of stuff.
Shaan Puri: So you see this as the best marketing [crosstalk 00:25:17]
James Hong: I’m like, “Look, this is perfect.” So they’re like, “Okay, put a logo of Rackspace above the fold. We love what you’re doing. We love the growth.” And I basically said, “Look, I’m getting a ton of inbound inquiries about press. I will mention you guys everywhere I can.” And so they were like, “Perfect, let’s do it.” And [inaudible 00:25:35]. We didn’t even know how many machines we were going to end up taking, and they didn’t care. They were like, “Look, when you need new machines, tell us.”
James Hong: And we ended up calling them every night saying we needed more machines, right? And they were like, “Yes, let’s do it.” And we hadn’t even worked out the terms.
Shaan Puri: The whole deal.
James Hong: Yeah. There was no paperwork at this point.
Shaan Puri: Well, sometimes things move too fast.
James Hong: Well, yeah. And this is how the web really was back in the day. Everyone just kind of helped each other. I think eBay hosted Yahoo or maybe it was the other way around, but anyway, or maybe it was Netscape hosted eBay. Anyway, everyone used to help everyone. So they were like, “Yeah, don’t worry about it. Just get big and then we’ll figure it out later.” And that’s what we did. And so it grew and grew.
Shaan Puri: So what did the traffic get to kind of at its peak?
James Hong: Gosh. It’s been so long ago. I think we were doing about maybe 15 million, 10 to 15 million page views a day. And you have to remember today that might not seem as big, but at the time it was hard for things to grow as fast as they do because there was no social media. So when things got passed around they were passed around by email, it wasn’t as easy as just clicking a button.
James Hong: Any bit of friction reduction can increase the liquidity of any system by like 10X, right? So things just did not grow that fast back then. Today it would have probably been insane. Anyway, it was insane by those day’s standards. And like I said, within two months I think [Net 00:27:00] Nielsen or whatever [hadar 00:27:01] says, we were bigger than ESPN. And it was just two guys in their underwear in their living room coding, right, or whatever.
James Hong: So anyway, we cut that deal with them. But we still had the problem of, when we finally worked out the numbers they were like, “Okay, you can have a year.” They gave us a half a year of free hosting, and then a quarter of 50% off, and then a quarter of 25% off, and then in the year we would have to start paying. But that was more than generous, right? That was just amazing.
James Hong: At that point in time we were like, “Okay, we made our Turkish Stud.” We want this thing to keep going, but Jim needed to get back to his dissertation and I needed to go back to finding a job or whatever. We didn’t think that there was any business model in this. In fact, we stuck ads on the site when it first started, and I remember we were going through 24/7 Media, some ad network back in the day that was pretty big.
James Hong: The CPM at that time was 0.25 cents CPM. Which means for every thousand pages we got 0.25 cents. Today it’s dollars, right? And so basically it was barely enough, it wasn’t going to cover anything, right? So we still needed to figure out how to make this thing last. So the first thing we did was, that’s when we stopped hosting photos and we started sending people to Yahoo and saying, “Hey, just send us the URL of the photo on Yahoo and let Yahoo basically pay for this, right?
Shaan Puri: And that cut the bill by what?
James Hong: Well, I mean, that killed almost all of the bill, right? Now we just have to pay for the machines. But basically all of that 50,000 and doubling was bandwidth for the pictures, right? The funny thing is a month or two after we did that, Yahoo shut off all ability for anyone to use pictures that were hosted by them. But somehow we got whitelisted. And two years later I was speaking at Berkeley and I met a guy who worked on GeoCities.
Shaan Puri: He was your angel inside?
James Hong: Yeah. Basically. And I was like, “Hey listen, I don’t want to look a gift horse in the mouth. I’m kind of nervous to ask you, but why are you doing this for us?” And they were like, “Oh yeah, we love Hot or Not. We just didn’t want to be the guys who killed it.” So, like I said, people used to help people out. It was really cool. But anyway, we knew we had to get off of them. So the first thing we did was, we cut a deal with a Ofoto. People were starting to get digital cameras at the time, and they were willing to pay a bounty. A dollar for every user that has a digital camera.
James Hong: So what we did is we said, “Hey, if you don’t have a digital camera,” which most people at the time didn’t, “go to GeoCities and Yahoo will host it for free. But if you have a digital camera, please go to Ofoto and they would pay us a dollar basically.” And they even paid us 25 grand up front. Again, really just to help us out. There was a guy I knew named Mitch Brown who worked there who did BD, and then at the time the company was run by this guy, James Joaquin, he was CEO of Ofoto. He’s now running Obvious ventures with Evan Williams.
James Hong: Anyways, him and James, awesome people. James loved it too. So they were really just doing it as a favor to help us out. They didn’t really know us, right? But that’s how the web was.
Shaan Puri: And so, did it ever become a business or what ended up happening.
James Hong: So we realized it had to make money because we needed to hire somebody to run the thing, because clearly we weren’t going to run it. We were going to go back to getting a real job or going back to finishing Jim’s PhD. But slowly the ads started making more money. It wasn’t enough to pay for the bills. That’s why we added the dating side of it. So we were the first ones to do the concept of what you’d call double opt in dating.
Shaan Puri: Two clicks.
James Hong: Yeah it was two clicks. So we made it one click. We’d never seen it before. So we think we invented it. But you never know. Someone probably did it, but we had to figure out how to do it on our own.
Shaan Puri: That’s amazing, because now there’s no rejection. It’s like-
James Hong: Yes.
Shaan Puri: If we got connected it’s because we both said we think each other are hot.
James Hong: Right. Because our whole thing was, you have a highly liquid market place, there is no rejection because you don’t even remember everyone you said yes to. And the other thing that it did was it protected the woman. Because basically we saw match.com and all these guys is basically pimps, right? Like, “Oh look at all these women or men that you might think are hot. Oh you want to talk to him? You got to give me $20. You got to pay.” Right?
James Hong: And what that ended up doing is, that led to lots of men paying and flooding women with messages. And we were like, the women did just look at their photo and go no. And then that guy just got basically ripped off.
Shaan Puri: [crosstalk 00:31:52] no refunds.
James Hong: The signal-to-noise was too low for the woman. And so we thought that was just kind of an inefficient thing, right? Basically it was speed dating, and bringing speed dating online was a good idea. And so that’s what we did. So we turned that on. We turned on charging for it. So the way it worked was, one of the two people, once you matched, had to be a paid member. So it was the equivalent of, look, a guy smiles at a girl in a bar, she smiles back, at the end of day someone’s got to buy drinks, right? And it’s usually not the girl.
James Hong: And that’s how we had a payment model. So all of a sudden, as soon as we turned that on, I think by the end of the year we were at a half a million dollar run rate, which was enough to hire someone and pay the costs or whatever. I mean, actually at that point the cost was zero because we had the free hosting or whatever. If you can find any model that can convert even a small percentage of it. Actually we were converting 5% of our users were paid, including the women. And then by the end of it, we had optimized it to 20% of people who joined paid, right?
Shaan Puri: Awesome.
James Hong: It was enough to pay for everything. It doesn’t matter, if you have scale, if you can even have any model that makes enough money, if you are a lean operation, you can definitely pay your salaries and have a lifestyle business if you want, right? And so that’s what we had. Basically we were doing half a million and that just kept growing organically. And so, at that point we were the modern day equivalent of people who ran a laundromat. We just have to keep these machines running, and we have to install new machines to support. But we’re just collecting quarters.
James Hong: So we kind of stumbled upon. It sounds much more intentional than it was. We kind of stumbled into having a very profitable business.
Shaan Puri: And then you decide to sell the company at some point?
James Hong: Well, yeah. So we ran it for eight years. Around year three or year four we hired people. So what happened is, we ran it for three years or so out of the house, just the two of us. And at that point we were doing three to four million in revenue. Almost all of it was profit. My co-founder started riding motorcycles, and at some point I was like, “Hey, if something happens to you that’s probably not good for Hot or Not.” And also frankly he was tired and I was tired.
Shaan Puri: Not to be a buzzkill but-
James Hong: I mean, at that point he was running ops on a hundred machines. He was still having to go to the data center all the time. Running the ops probably got tiresome. He automated it as much as he could so he wouldn’t have to go in that often. But at some point in time we brought in a a friend of his from high school, Greg Lynn. And we brought in Don Pawlak who did customer service, because by that point I was doing a lot of the customer service emails and stuff like that.
James Hong: So we brought her in, and so we basically had now a company. We had employees. And then we started hiring more people and more people. Not that many, but we hired a few more people, and then it kind of became like we had responsibility. We had employees and we always have to manage people to some degree, and that wasn’t really either of our thing. And so we both kind of flamed out on it. We’re just not very operational people, either of us.
James Hong: I wouldn’t say that we’re not operational, but it’s not the part we enjoy. And so the more people we hired, kind of the more of a drag it became. And yeah, we both got tired probably year four, year five, I would say. Then I took a break and Jim took over, and then Jim left and I took over, and then at some point we’re just going to sell this thing. It was right before the 2008 crash. So it was a good timing in that sense. But we probably let it go for a lot less than it was worth just because it was a downturn. Because at that point in time it was doing 6 million in earnings.
James Hong: But both of us frankly were so tired of it, and our good friends had just started… Jim’s really close with Steve Chen at the time from YouTube, and we watched them go from zero to 1.6 billion in how long, like a year. And we didn’t really see Hot or Not getting to that scale that quickly ever. Arguably, you see what happened with Tinder and maybe that’s true. Although it’s not clear Hot or Not would become Tinder because Hot or Not had the rating part, which made it grow but could also hold it back from being pure play dating.
James Hong: But in any case we were just like, “Screw it.” We both just wanted to do anything else. At that point when I had left I had started this thing with Al Lieb, he was a co-founder of Evite called save my ass, which would send your girlfriend or wife flowers on a regular but semi random basis. It was one of the first subscription commerce.
Shaan Puri: That’s pretty clever actually.
James Hong: It was one of the first subscription commerce things I’d ever seen. But then I had to go back to Hot or Not so I stopped working. Al started ClearSlide which took off, so he ended up shutting it down. It was actually doing decently well. But anyway, neither of us could deal with it. So, we ended up selling the company mainly because we were just tired of it. We wanted something else to work on.
Shaan Puri: Again, because you make your first million, you made it basically while you were collecting quarters, like you said.
James Hong: Yes.
Shaan Puri: And you were running the laundromat.
James Hong: Dude, that was a awesome period of time, because I was still in my late twenties. We had the system sending us stats at noon and at midnight. That was mainly so we would know how the system is doing, if it had problems or not, how many matches were made per hour, blah, blah, blah, or up to that point in time. But it also had how much money we had made up to that time for that day.
James Hong: And so at noon and at midnight I would basically get this thing saying, “Oh, today you made $10,000, $15,000.” On a good day 20 something thousand dollars. And I would have to divvy it up, figure out my portion. But I was like, “Holy shit.”
Shaan Puri: This is magic.
James Hong: So, [inaudible 00:37:46] I had a bunch of my friends always knew, because basically I had nothing to do. I was just going out drinking with my friends all the time, almost five days a week. And at midnight I remember, I think it was my friend Phillip Kaplan, I just remember him like, “You’re buying?” Right? Because he saw me pull out my phone at midnight, I’m like, “I’m buying.” But it’s funny. Back in those days no one was making money on the web. This was like the dark period, right?
James Hong: I mean, I used to go out during with Phillip all the time, Evan Williams, at that time he was doing Blogger. I met Evan because I’d sent him a message saying, “Hey.” He was about to practically shut down Blogger. It was just him by himself at that point. And I was like, “Hey.” We had all this excess bandwidth at this point. So I was like, “Hey, if you want free photo hosting, happy to help you out, right?
James Hong: So, that’s how I met him and we became good friends. And so, I remember I would pick up Evan from his apartment in [inaudible 00:38:41]. He didn’t have much money at that point in time. So I was [crosstalk 00:38:46] a baller, right? So, how times have changed, right?
Shaan Puri: This is on you, right Evan?
James Hong: Yeah, yeah, basically. Anyway, those were really the days because the people who were still around, no one knew that we were going to make money at the time. And we were one of the few people who were making money. Most of the people were having a hard time. After the .com crash happened, all the MBAs kind of disappeared. And the only people who had stuck around were the people who were just passionate about it. So many people that are huge today, we were just hanging out back then.
James Hong: Because people are always like, “Oh, how do you know all these people?” The Silicon Valley, there are so many people running around, how do you know all these people? I was like, “Dude, there were 10 of us back then. We used to hang out.”
Shaan Puri: Right, it’s very simple.
James Hong: Yeah.
Shaan Puri: And so, you’re kind of amazing in that you’ve been here so long, you’ve built one of the kind of staple named products that everybody remembers fondly.
James Hong: Everyone over the age of X.
Shaan Puri: Yeah. If you don’t know, that’s like the litmus test. It’s like, we’re you really around or you just-
James Hong: Right. If I was single I’d be like, “Ah, no, I probably can’t date you.”
Shaan Puri: Yeah exactly. And so since then you’ve transitioned to being angel investor. How do you think about stuff now? Do you you think about getting back on the horse and starting a new thing. Do you love investing and that’s what you want to do?
James Hong: So I was never an angel investor. I just invested in my friends, right? Like I said, people back then, everyone helped everyone. So we would invest in friends. You would invest in people when they didn’t even know what they were going to do yet, right? And it was pretty cool.
Shaan Puri: What were the results of that? Because some people would say, investing in friends is a crazy financial strategy.
James Hong: Actually you know what?
Shaan Puri: But it seems to do really well.
James Hong: I mean, it probably depends on how well you pick your friends, right? I stupidly passed on a lot of friends where I’m like, “Ah, I don’t see it.” or whatever. And now in retroflex, I passed on Uber. I passed on all these things. I mean, literally, I would be a billionaire post-tax [crosstalk 00:40:56] if I had just invested in the people that I actually liked. But I think it depends on how you pick your friends.
James Hong: All of the people that I enjoy talking to and being friends with tend to be really smart and really quirky too.
Shaan Puri: Like creative.
James Hong: Yeah, smart creatives or whatever. People who are a little crazy but really smart and can pull stuff off, right? And so, those people tend to do well. I mean, I’ve definitely done pretty well, I think. I mean, actually I’ve never really compared to other people, but I think I’ve done pretty well with my angel investing. But I mainly just invest in my friends and I don’t really see myself as an investor.
James Hong: Actually in reality, being an angel investor is basically my cover for not working. Because I’m basically mostly just hanging out at home with my kids. I’m Mr. mom driving. I’m my kids chauffeur basically. Taking them to school, taking them to swimming or whatever.
Shaan Puri: I think about that a lot, and the person who introduced us, Michael Birch, he’s another person who I feel kind of got out of the rat race. He definitely does things, does lots of interesting projects, but he’s not just saying, “Okay.” He sold Bebo for 850 million. The next one’s got to be a billion, right? He’s not just endlessly in the rat race.
James Hong: Well, listen, I’m not going to criticize anyone if they choose to be in the rat race. If that’s what they want, that’s what they want. I’m all about, everyone has it figured out what makes them happy. The only advice I have to people really about this is, look, you only have to make yourself happy. Don’t try to make other people happy. Live your life for yourself, but be honest with yourself about what makes you happy.
James Hong: Because society wants to tell you, “Oh, you should want to make a ton of money.” or, “You should want to not make a ton of money and go meditate.” or whatever. And I’m just saying, whatever’s right for you is right for you. You got to be honest with yourself. But if you can be honest with yourself, go do whatever you want to do. I have friends who have to be billionaires, and look, that’s not my thing. But if that’s what makes them happy, go do it, right?
James Hong: But for me, I always thought I would do something else again. But then I had kids and then that can be all encompassing. And like for me, I just realized I built an app that was like a YouTube for kids before YouTube kids came out. I was like, “I just want to learn to code again.” And I made an iPhone app. And I’m a shitty coder. So I wasn’t very efficient. I was always coding until four in the morning. But the bus still comes at 7:30. So I’m getting no sleep and I was always grumpy.
James Hong: And I’m just kind of like, it doesn’t matter if it’s a hobby, I’m always thinking about it, right? And basically at some point my son was like, “Daddy, when are you going to play with us again?” And I was like, “Oh shit.”
Shaan Puri: Right, that got you.
James Hong: Well, I mean, at that point it’s a choice and I’m like, “Okay, fuck it. I can’t do this.” I am so obsessive about anything I build that the dad that I wanted to be, I wasn’t able to be it.
Shaan Puri: And so what’s the recipe for you now? What’s the recipe that makes you happy?
James Hong: Well, listen, look, it’s not to say that I don’t love the idea of starting a company. And it’s not for the money, it’s for the adrenaline rush, right? It’s basically like gambling. This thing’s likely to fail. It might succeed, it might win big. So it is like gambling in a way. And so it’s a huge adrenaline rush when you start a company. And that’s where the highs are high and the lows are low.
James Hong: Being an entrepreneur is like volunteering to be bipolar basically, right? And so, I had to decide. And I said, “Well, okay, screw it. I’m not willing to sacrifice these things. So the next best thing is I can just angel invest more.” And so that’s kind of what I’ve done. And I think I’ve been pretty successful at it. Not as successful as if I’d just invested in my friends. That’s kind of my new strategy. It’s like, if I have a friend…
James Hong: Like I have a friend who just ping me the other day and I’m like, “You know what, I don’t even need to know.” Because we had a call scheduled then I brought in a friend, and then I was like, “Hey guys, I got to go take my kids to swimming.” But it doesn’t matter. I mean, and the funny thing is, that’s what happened with Odeo and Twitter with Evan. I was like, “Hey.” after Blogger got sold.
James Hong: Because actually Blogger before it got bought by Google, he was in trouble. And Nick Denton and I were both kind of talking to Evan about maybe we could invest in it, basically to bill it out.
Shaan Puri: Keep it going.
James Hong: Yeah keep it going. And ended up not happening because he ended up selling it to Google for whatever million in 2002, or something like that, 2003. And so, when that happened I was like, “Evan, I don’t care what you’re doing next. I’m in.” Right. And then when he returned the money for Odeo, I was like, “Let me know when to put back into Twitter.” And then there’s a whole long story I ended up not.
Shaan Puri: Oh no.
James Hong: There’s a whole long story about that. It’s a tragedy. But it’s fine because-
Shaan Puri: We’re going to make another podcast, My Lost Million.
James Hong: Yeah, it’s another podcast. I basically decided I wanted to choose friendships over money, and that’s how that ended up happening. Long story short, and I don’t regret that actually.
Shaan Puri: We got to wrap up. So normally I have these five questions I ask at the end.
James Hong: Sure.
Shaan Puri: But there’s one that I’m really curious about for you, because I see you as this incredibly creative guy who has a very humble, not saying you know it all and all that stuff. I’m just curious, if you were 21 today, if I took all of your money out of your bank account, but I gave you back years, and I say you’re 21 today. How would you make your first million today? What would you be curious about. What would you be playing in? What spaces would you be playing in if you were back in the game at 21 today.
James Hong: Well, listen, I think as you alluded to earlier, you can make money in any space. So, I’m not going to speak about what space. I mean, you should probably work in whatever space you’re going to obsess about. And that can be, like you said, I mean, it could be anything. It doesn’t have to be tech. But whatever you’re obsessed about, that’s probably a good place to start because it’s the people who know a product inside and out that kind of can take it to the next level, and do something innovative or whatever that’ll kind of get you attention to make money.
Shaan Puri: So forget about advice first. I’m just curious what you would do.
James Hong: But what I will say to someone who’s 21 is this, after the crash happened, we actually got a buyout offer for 6 million in 2000. It was for the four of us and it was vesting over five years, and it was very tempting we thought about taking it. But then at the end of the day we basically decided, that was not enough money to sell out our youth. Because when you’re young you have no liabilities. You don’t have a mortgage. All you have is time.
Shaan Puri: Right. You’re drinking five days a week.
James Hong: But the reality is, time is all any of us have. Even at my age, time is all I have, right? Money is a manmade concept, right? I have my time, and I will never have time with no liabilities ever again once I get a family, or I have a mortgage or whatever. So, at this point I was living a really cheap lifestyle. It’s also true of lifestyle. Once you lease that car, it’s hard to go backwards, Right?
James Hong: I would say this, keep your life as frugal as possible. Don’t borrow money to live lavishly. Basically live as frugally as you can, team up with people, co-founders, who also can live that lifestyle with you so you don’t have to raise any money. Even though it’s easy to raise money today, I would still probably start things without raising any money. I mean, look, you got to live, so maybe you got to raise a little money to pay rent.
James Hong: You don’t have to be in Silicon Valley. You can be in an apartment in Houston paying 200 bucks a month rent or whatever, or $500 a month rent, as long as the two of you or three of you can live and build. And then just keep building until you come across something that has traction and then go scale it, right? And look, like I said, nothing is like an HBS case.
James Hong: Very few people I know have something hit on their first try. Nobody knows what’s going to happen. You just kind of meander and whatever kind of seems to be sticking, you go in that direction.
Shaan Puri: And so it sounds like what you would do is, you would keep your burn rate low, you would live frugally, you’d get in a house with a couple of friends and you would bang out ideas that you were just curious about or interested in personally.
James Hong: I would, personally. I had the benefit of, we were living in Jim’s parents. They had a investment house, and so I was living there rent free. Actually no. I was paying him rent actually, really nominal rent. And then when Hot or Not took off, I was like, “Dude, I’m not paying you rent anymore. And he’s like, “Okay.” I’m like, “This is going to be big. I’m not paying you rent.”
James Hong: But to the extent you can, keep your burn low and just keep building.
Shaan Puri: The lesson to me is not, save money. The lesson is, value the time, and make sure that you’re spending every year of your life the way you want to be spending it. And one of the ways to do that is to get that reserve capital so that you’re not going to go trade your hours for dollars aimlessly.
James Hong: I mean, look, I’m probably an extreme example of this argument. Look, I have enough money where I don’t have to work anymore. I don’t have any fiscal constraints, but I’m still not able to do this, because I got my kids and I’m choosing to do that instead. So money is not the only limiter out there. And so when you get older, you’re going to… You only accumulate liabilities in life, unless you’re willing to just abandon everything which is not-
Shaan Puri: Different strategy.
James Hong: Well, yeah. Like I said, people can do whatever they want for themselves, but that’s not my strategy, right? So, life is not easy for everyone equally. And so everyone has their own challenges on that. But like I said, if you can get a job at one of these companies, go work for a while, save that money. Don’t live like you’re making that money, and then go do it, and do it with a friend because it’s very, very mentally hard to do it alone.
Shaan Puri: Wonderful. Well, James it’s been an awesome conversation man. I really appreciate you coming out. It’s great seeing you again. Great talking to you again. And I think a lot of people are going to both enjoy the story of Hot or Not. A lot of people won’t even have ever heard of it before. So this would be the first time they hear about it.
James Hong: People I can’t date if I’m single.
Shaan Puri: Exactly.
James Hong: That’s the line.
Shaan Puri: And then I think what you said at the end here about valuing your time and making the choice that makes you happy, and not playing by other people’s playbook. I think that’s a great message. So, appreciate you coming on.
James Hong: All right, Thanks.
Shaan Puri: Awesome. Bye.