VentureBeat

About six months ago, critics pummeled Facebook founder and CEO Mark Zuckerberg.

He’d made questionable management decisions, or so it appeared from the outside. He’d fumbled the site’s redesign and botched the company’s terms of service agreement — moves that whipped up negative publicity and user backlash. Some people asked whether it was time for Zuckerberg to go.

Six months later, those critics have gone. The company is enjoying astounding momentum — blowing through user growth forecasts and becoming cash-flow positive earlier than expected. Recent management hires make the company look more impressive than ever. Zuckerberg remains firmly in charge.

What happened? Insiders say changes reflect the steady decision-making over the past year and a half by a maturing Zuckerberg. Facebook’s founder, who was under drinking age when he received his first investment round from a venture capitalist five years ago (investor Jim Breyer once complained he couldn’t even buy Zuckerberg a glass of wine to celebrate the round) is emerging as a talented business manager, according to a number of executives and investors I talked to over the past several weeks: He’s hiring seasoned executives and entrusting key roles to them, becoming more comfortable communicating and leading, and bringing more order to the chaos that so far has characterized the company.

David Sze, a venture capitalist from Greylock Capital and investor in Facebook, says he has watched Zuckerberg over the past two years since his investment, and may have underestimated Zuckerberg’s ability to scale. “When I invested, I thought Mark was one in a million. Now I think Mark is maybe one in a trillion.”

Several executives and board members, including Sheryl Sandberg, Mike Schroepfer, Chamath Palihapitiya, Jim Breyer and David Sze talked openly for this piece. Other employees requested anonymity.

Finding the right business culture

As an example of Zuckerberg’s new footing, take the incident surrounding the hiring and firing of the company’s chief financial officer, Gideon Yu (pictured right). Just 18 months ago, hiring Gideon Yu, the seasoned former Yahoo treasurer and YouTube CFO, was considered a ridiculous coup for Facebook. So much so that when Yu left earlier this year, some outsiders saw it as a strategic fumble, and press reports started questioning Zuckerberg’s rule: Why was there so much dissension within Facebook’s leadership? Talk with employees, though, and they’ll tell you sentiment was different on the inside. Facebook had grown so much in stature that even Yu became expendable. Several employees say they weren’t rattled by Yu’s unexplained departure. Zuckerberg silenced the critics in June when he hired the highly respected former Genentech chief financial officer, David Ebersman, as the new CFO.

“Every six months, he can upgrade every role in the company,” said one employee about Zuckerberg, requesting anonymity. “That’s true for Gideon Yu, it’s even true for [COO Sheryl] Sandberg.”

The Yu replacement was more than just another management shuffle. It was part of an emerging preoccupation by Zuckerberg with business culture. Genentech’s Ebersman (left) embodied much of those ideals. Well before the hire, Zuckerberg forwarded an article about Genentech to one of his advertising product leaders, Tim Kendall. The piece extolled Genentech’s hardworking but “meaning”-based culture, which has kept Genentech on the edge of innovation and growing for 25 years. Zuckerberg’s focus on culture contrasts with three years ago, when he hired Owen Van Natta, the former Amazon executive: “Zuck cared less about incorporating Amazon’s culture,” said one manager. “It was more: ‘Can this guy make me win?’” Van Natta left last year.

The ruthless meritocracy

Zuckerberg’s increased sensitivity about hiring is double-edged, however: It means a more ruthless “managing out” of employees if they underperform. Every employee is rated on a scale from 1 to 5, with five being the highest. No one gets a five. If you get a 1 or a 2, you’re quickly shown the door. Related to that are the steady departures of early founders and executives. Two of them, Adam D’Angelo and Dustin Moskovitz, were Zuckerberg’s high-school and college friends, respectively. They weren’t forced out, but they burned out or realized they weren’t right for their jobs. Had they not left of their own accord, they’d have been passed over in hierarchy shifts. “There’s a clear path of bodies,” said one employee, conceding that it’s easy to come to a cynical view: “Zuckerberg uses people for what they’re worth and kicks them to the curb.” However, if you talk to employees still at the company, they see it differently: It’s a ruthless Silicon Valley-style meritocracy — where the talented and hardworking rise to the top.

For years, Facebook had no human resources manager. In 2006, the company hired an HR manager, but she stayed 3 months and then left. Zuckerberg couldn’t care less about HR. However, things changed when Zuckerberg appointed a 25-year-old engineer to run the department, Chris Cox (right). The grad-school dropout was the last person you’d think could run HR, but it was the beginning of what would become a serious investment of time into fixing Facebook’s hiring message. A very early employee, Cox shared Zuckerberg’s vision as intimately as anyone. The Zen-like Cox would greet prospective employees with a 30-minute Facebook mantra about how Facebook is going to change the world by connecting people.

The Sandberg era of “stability” begins

Cox’s work built on the evangelism of early Zuckerberg acolytes like the charismatic Sean Parker (who left the company two years ago). Facebook’s reputation spread — it was the coolest company in the valley to work for. Oddly though, as late as 2007, Facebook’s employees weren’t having that much fun. Cliques tended to form around whoever seemed Zuckerberg’s favorite executive at the time. For a while it was Parker, then it was Van Natta, then someone else. Facebook was a snakepit. People jostled for position: “Angst, stress and burnout,” recalls one insider.

That all changed in March 2008, when Zuckerberg brought on Sheryl Sandberg (left), a respected executive at Google who had built out a considerable team at that company. The two met at a party thrown by a Google executive. Zuckerberg peppered her with questions about how to “scale” a business, and then wooed her to join him. After Zuckerberg made several promises — including locating his desk next to hers and meeting at least once a week — Sandberg agreed.

Sandberg’s reign as COO, of course, has brought its own form of politics, but at least it’s brought stability. The evidence: “They seem more jazzed, happier,” says Saar Gur, an investor with several friends at Google and Facebook. Googlers, some who never thought they’d leave Google, are leaving to join Facebook and spreading the word. “I’ve got friends at Google who say that for the first time they feel like they’re really missing something by not working at Facebook,” said Gur. Up to 20 percent of Facebook’s employee base now hails from Google.

It’s incentives, stupid

There’s also a growing recognition by Zuckerberg that “all human behavior boils down to incentives.” That’s reflected by Zuckerberg’s efforts to motivate each person according to what gets them excited: For engineers, that means giving them the best product to build, but for business executives, it means big financial incentives. Zuckerberg backs that up with an unconventional compensation scheme. Most Silicon Valley companies grant you a single set of stock options. You may get a bonus if you do well, but it’s unusual to be able to increase your stock option grant. At Facebook, if you excel in meeting your project goals, you can double your stock option count in 1.5 year “refreshing” cycles. This individual multiplier is added on to another bonus that is based on how well the company does as a whole, in terms of user and revenue growth. But here’s the tough part: Managers have to force-rank their employees. The more Machiavellian managers make a point of telling their employees where they stand. If you’re tenth on of team of 10, you’re hanging on by a thread, and you know it.

So absorbed has Zuckerberg become in running the company that although he feigns wanting to code, and pledges he’s going to go home and work on product features, it’s rare that he actually codes anymore, say those around him. Instead, he’s making himself accessible for things like interviews of candidates, talking strategy, and putting together deals. Before acquiring Friendfeed, Zuckerberg briefed up with his legal and business team, and formulated the deal terms to buy the company, negotiating it personally.

The focus on execution, creativity and big bets

Zuckerberg bought Friendfeed because of its talented team. In Silicon Valley, it’s well known that the talent bell-curve among engineers is steep. A good engineer can be 10 times more efficient than an average engineer — a genius engineer translates into more impact for Facebook, and Zuckerberg understands that, says Mike Schroepfer, vice president of engineering. Schropefer (pictured right), the former Mozilla executive, was himself hired to replace predecessor D’Angelo. In hiring, Facebook cares not just about raw talent — including IQ or GPA — but also about whether someone has shown they can follow through and do things. Creativity is also sought for. The hiring of Blake Ross, the former Firefox developer, and of the Friendfeed team, are frequently mentioned as examples.

Zuckerberg has ceded vast swaths of authority to executives around him, starting with the hiring of Sheryl Sandberg, the former Google executive. Sandberg leads Facebook’s business and operations. Under her are business execs, Dan Rose and Mike Murphy. Zuckerberg devised a new role, led by Chamath Palihapitiya, that ties together the three existing business units (product, sales, business) in a singular focus on ways to grow user numbers. Such a “VP of Growth” is unusual, if unheard of, at large companies. In retrospect, though, Zuckerberg’s move was a stroke of brilliance.

“Zuck,” as he is referred to by employees, had serious doubts about creating such a position. It meant departing from the company’s focus on core feature development, and looking at data that showed more precisely how users were using the site, from clicking on links to sharing buttons — and tweaking those features to boost activity accordingly. Zuck locked horns with Palihapitiya (left), debating, for example, whether it was the sheer number of friends a user starts with, or simple virality (making it easy to invite other friends) that was more critical to driving growth. Palihapitiya was behind virality. They decided to push both, but optimized for virality first, then friend count. It turned out to be the right decision. Growth accelerated. It was “a massive, colossal home-run,” in Palihapitiya’s words.

Zuckerberg acknowledges this, and seems to enjoy the Devil’s Advocate role Palihapitiya plays. Like Zuckerberg, Palihapitiya is strong willed, and speaks his mind (in Palaihapitiya’s case, it sometimes leads to controversy), and few others at Facebook play that role. Palihapitiya says Zuckerberg deserves credit for trusting him. Palihapitiya had struggled in earlier roles, where he’d had mixed success at best, including presiding over Facebook’s disastrous Beacon project. But by giving him another shot, Zuck turned Palihapitiya from a self-described “B player” into an A-player. In part, one employee said, Palihapitiya’s resurrection stemmed from the deeper bench of talent now at Facebook: The company is now readier to take such risks.

The evolving communicator

Palihapitiya says Zuckerberg is so attentive that he leans over and “physically listens to you.” Indeed, the delegation of power coincides with an increased attention by Zuckerberg to communication. Earlier this year, Zuckerberg personally took responsibility for a delayed program that would buy back employee stock. Someone drafted a letter to employees disclosing the delay and gave it to Zuckerberg, but Zuckerberg inserted a sentence saying he was sorry (even though Sandberg said numerous factors led to the delay, many of them not in Zuckerberg’s control).

He’s developed more ease in public speaking, in part because of more than a year of company-wide question-and-answer meetings. ”He’d say very few words before,” Palihapitiya recalls. Zuckerberg, whose demeanor is often described as halting, but intense, has since taken speaking training and been receptive to speaking tips from others. In part, he’s also driven by an awareness of how important communication is for the company. He used to be preoccupied with building out features for the Web site, less by public perception. When controversy broke out two years ago around Beacon, it was an awakening: “I don’t think he internalized how brand damaging it was,” said a long-time employee who watched how Zuckerberg learned from the experience. “Now he’s absurdly concerned about [branding].”

If you look closely enough at Facebook, for all the chaos that still reigns at the company amid the frantic product launches, there is emerging a paradoxical appreciation for order and process. The company’s new digs exemplify this: Zuckerberg has placed his desk at the geometric center of the new building — located at the shortest walking distance form any point in the building. Next to him sit the leaders of each company division: Schroepfer, of engineering, Cox of product (Cox took over product last year, moving over from HR) and Sandberg, of operations. This way, any employee can walk by the area up to four times a day: “I want to bump into people on my way to get coffee,” says Schroepfer, who argues the structure affects psychology.

Zuck the great

Despite the signs of Zuckerberg’s personal development, insiders say he has always displayed qualities that make him a leader. He is relentlessly competitive. Last month, he and other engineers challenged each other to do 5,000 pushups in a week. Zuckerberg vowed he could do it, but others doubted him, placing 30-to-1 odds against it, recalls Sandberg. Zuckerberg insisted the goal was easily attainable. He took regular breaks throughout the day to do 10-15 pushups, even if he was in the middle of a meeting with visitors. He completed the 5,000.

Outside of Facebook, and his girlfriend Priscilla Chan, there’s time for much else in Zuck’s life. He’s been called an ascetic. He unabashedly tells people he does not party. People compare him to Google’s co-founders Larry Page and Sergey Brin: disciplined and focused. On the business side, he likes to push forecasts higher in a continued test of his executives (see our piece about his challenge to Palihapitiya). People also talk about his intelligence. Palihapitiya refers to Zuck’s ability to “random walk,” or compute outcomes of particular decisions. He often moves two or three steps ahead of people he’s talking with, making it easy to fall behind. One example often mentioned of Zuckerberg’s prescience was his conceiving of the idea for Facebook’s platform as early as 2005.

Finally, Zuckerberg’s long-term vision for the company — he thinks in terms of decades — makes him prone to make huge, risky bets. He pushed through a redesign that caused massive protests, but with further tweaks, those protests have died down. The Terms of Service controversy earlier this year is another example. Instead of suggesting a quick removal of an offending clause related to personal privacy, he moved to completely overhaul the TOS — and encouraged users to participate.

If there were rumors about internal dissension at Facebook, board member Jim Breyer says that not once has the board ever thought of removing Zuckerberg as CEO (not that it could if it tried; Zuckerberg, the largest shareholder, still effectively controls the board). Breyer says Zuckerberg reminds him of Michael Dell — the founder of Dell who made a series of courageous decisions to disrupt the market with his PC company by innovating on the business model (selling PCs directly to consumers online). Like Dell, Zuckerberg is managing to create a huge business, even while lacking the dominant technology position that a Microsoft or Google had enjoyed in their markets. Zuckerberg’s continued hiring of talented leaders is the most impressive, says Breyer: “Mark is getting better and better with each month.”

For Palihapitiya, a better comparison is basketball’s greatest star: “Michael Jordan was not born the best basketball player in the world. He grew into it with practice,” Palihapitiya said. “Mark Zuckerberg has evolved and will evolve into being one of the best CEOs. He will build an enduring company that has generated immense value, but it will be an evolution.”

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Tags: co:Facebook, people:Chamath-Palihapitiya, people:Chris Cox, people:David-Sze, people:Jim-Breyer, people:Mark-Zuckerberg, people:Mike Schroepfer, people:Sheryl Sandberg