The Story Behind The $1.5B Pornhub Curse

0:00All right, Sam, I want to play a game. I want to start this with a game where I'm going to read you. And you don't know this, by the way. You didn't know I was going to do this. I'm going to read you the most trafficked websites in the United States. And as a simple test, you're a business guy. You studied the business world. I want you to tell me, do you know who's the owner or CEO of these businesses? Okay. All right. I like this game. Number one, Google.com. Sergey and Larry Page. Sergey something and Larry Page. Correct. Next one, YouTube.

0:33Chad H and Jared and one other guy. Steve Chen. Exactly. Correct. Reddit. Huffman and Ohanian. Correct. Amazon. Bezos. Okay, number five. Now we're getting to the good stuff. Okay, so first, I think you'll get this one easy. Facebook. Zuckerberg. Okay, number six. Pornhub. Bastion something. A German guy. Incorrect, sir. Yeah. I feel like I can rule the world. I know I could be what I want to. I put my all in it like no days off. On the road, let's travel. So this is the number six most trafficked website in the United States. Three billion visits in a month. Is it called MindGeek or MindFreak or something?

1:22MindGeek is a name of a company that owned it. However, the founding story is pretty crazy. And I don't know if you're a sci-fi guy or a fantasy guy, but in many fantasy book series, there's this concept like in Lord of the Rings, there's the ring. Or in Harry Potter, there's the Elder Wand. And it's an idea that there's these assets that are so powerful that people want to own it. But whenever you own it, your ownership is going to be very short-lived. It's almost like the item is too powerful. It sort of corrupts you and puts a target on your back and other people start coming for you. It's a real sticky situation, one might say.

2:06This is like it's Game of Thrones, right? Everybody wants to sit on the Iron Throne. But when you're on the Iron Throne, you're not going to last very long. And so this is a Game of Thrones style story for tech that I went down a rabbit hole. I want to share with you because I didn't know this story. So let me tell you how it went down. Okay, so rewind the clock. We go back to 2005. up until then you know internet's been out for roughly been been semi-mainstream for 10 years and of course porn was popular right away but the way that all porn sites worked was it was like yahoo it was a directory of links so you would go to um whatever i don't know jugworld.com and it would just it would just show you a hundred links to places where you could go watch videos not the videos but to the other websites links to other websites or links to other photos It was mostly photos at the time.

2:52It wasn't even that much video. So 2005, a big milestone happens, which is that YouTube launches. And YouTube launches with a pretty simple proposition, which is we'll make it really easy to host a video online. You don't have to host it on your own servers. We'll host it on our servers. And then also, instead of just sending somebody that file, you send them just a link and they can watch it here. And we'll just have all the videos here in one place. Which was mind-blowing. Sounds so obvious now, but at the time was different. And if you haven't read it, go read the Sequoia memo. of his investment, Roloff, both his investment in YouTube if you want to see how like uncertain and how like small and non-obvious this was at the beginning.

3:32So YouTube launches, it starts to get popular. Now there's copycats that come out in the porn version of this. Red Tube, right? Just off of YouTube. Red Tube. You porn, whatever. A bunch of these come out. And they're all flooded with pirated content. So they're just like kind of like LimeWire back in the day. They just take, you know, stuff that you're supposed to pay for, and they would just upload it for free on here. And they would have banner ads to make money. And even though these were kind of sketchy websites, they were 10x better in every way. So it was more private, right? You didn't have to go anywhere, you could just have it in your bedroom.

4:08It was instantaneous, right? The distance between the craving and the fulfillment of the craving were one click away. There was infinite variety. So you didn't have to pick and choose, you could just keep going till you find what you like. There was infinite niches. And so people discovered that people were into all kinds of weird stuff because now there was a long tail of content and it was free, whereas most porn at the time was paid. Because at the time, there was somebody who was called the king of porn. He's the guy who was sitting on the iron throne at the time. And this was the CEO of Vivid Entertainment.

4:37And what was Vivid Entertainment? They're like a Hollywood studio. They're making like, you know... Porn or normal movies? No, they're making porn, but they're making it like in the Hollywood way where there's an actress and there's a set and there's cameraman. And people buy DVDs. Yeah, buy the DVD. And so Vivid at the time was the king. This guy was known as the king of porn. He was written up in all these articles. In fact, the year that he was written up in all these articles is the same year these new disruptive websites came out and revenue starts to fall and it falls 50 % and it falls 80 % and it just basically goes down the drain.

5:09How big was it? It was doing tens of millions in revenue. but there were many studios like this so they were they were the biggest one but there was like you know just like in hollywood there's many studios all right so i don't know if you remember google uh google bought youtube because youtube is getting a had a huge lawsuit from viacom these are like parallel stories youtube was also flooded with pirate content because of that they were getting sued like crazy and because they were worried that they would go out of business they sold to google for like a billion and a half dollars at the same time vivid copies that playbook.

5:39They look at what Viacom is doing to YouTube. They start suing the crap out of all the website. And so the first owner of the throne, Vivid, goes down. Then the second owner of the throne, which was these like red tube and whatever, they start getting hammered as well because they're getting sued. All right. So who's the third one to pick up the baton? Where does Pornhub come into this? Okay. So at the time, there's three college students in Canada. and they realized that there's a lot of traffic to these websites. They meet, out of all things, at a competitive foosball tournament. And the guy who's the best foosball player, aka Chief Nerd, like Sir Dork, he happens to be the best programmer of the bunch.

6:23And he creates a live streaming video website to stream their foosball competitions. And there's not much of an audience for the foosball competitions, But he realizes as he's building all this video tech, he's like, hey, I think we could do the same thing for porn. Was the intention porn or was the intention something else and porn users use it most? So these guys made the link sites. So that site I talked about, Jugworld, that's their site. But they made like 100 of these. They made like 100 directory sites, just links to other websites. Then they see the YouTube thing and they pick up this guy, I think his name is Matthew Kieser or something.

6:55Kieser is the guy who built the video streaming site and he's the best programmer. So he's like, I think I can make a YouTube for this stuff. And we can, instead of having these directories where we send the traffic away, we can just keep the traffic. And at the time, they had already kind of like, you know, started to discover things. They're like, oh, people like, you know, people like this, people like this. They were just creating other directories. And eventually they looked at Vivid, who was the king at the time, and they were like, we should make our own Vivid. And so in the same office, they created Pornhub, the website that was going to host all this stuff and they created a company called browsers which is a oh yeah producer of content so they created a content producer and they created the platform the network like netflix making their own shows exactly or like you know um ftx had this you know sister company that and by the way nobody knew these companies were linked so everybody thought these were two uh not only unlinked companies they thought they were enemies because at the time all of the studios were hated the platforms that were giving away the content for free people didn't know that one of the biggest Studios was actually the owner of one of the biggest websites at the time.

8:00And so in the same way that there was FTX and Alameda living in the same house, kind of sharing funds, browsers and Pornhub were doing the same thing. People just didn't know. In fact, the guy came out and was quoted. He was like, that would make no sense. Why would we do that? That would be 100 % against our core interest as browsers to do that. We hate the platforms. And meanwhile, he was also the owner. So these guys start this thing and it takes off like a rocket. They're like, dude, we have no idea what we fell into. We were sleeping in the office. We worked every single day, every weekend.

8:32We couldn't hire enough. This was now like 2007 or eight, I think. So they weren't the first mover, but they ended up becoming the biggest mover. And here's why. So they basically scaled this thing better than anyone else could. And one of the keys was they had browsers. They had their own content that was not pirated or like it was pirated, but they owned it so they didn't care that they could use on the network. So even when other stuff got taken down, they still had more content than other people. And so they scaled up. They go from basically just three friends to 80 people, 150 people, 250 people.

9:03And they're hiring friends and family. And they're like, dude, we have an office? They're like, no, no, no. They started buying houses next to each other. Just created a neighborhood. And they're all just working out of that one area. Bootstrapped? Bootstrapped. No investors, no nothing. So just growing because word of mouth traffic and obviously people love their product, and they're just coming back over and over again. And the key is that this guy, Keezer, was an SEO savant. He came out later and he goes, we were the number one rank for porn and sex on Google. He's like, do you know how hard, how competitive that is?

9:36He's like, that's what I did. I pulled that off. I became the number one search. That's how we defeated all of the other things. And then we had content that wasn't getting taken down. So they grow it to 250. They make one of the guy's brothers, the CEO. They're like, you're the CEO. You have some business experience. You do this. So that guy starts doing a roll-up, like a private equity roll-up. So he starts buying up all the other ones who are afraid of getting sued. And so he's buying them up for cheap. And he's just consolidating power and just creating one big mega behemoth. Because then he could fight whoever was going to sue them because now they owned all the traffic.

10:06So they had something to fight with. And so he starts building this thing up. And by the way, this whole industry is so funny because you think of it as a sketchy thing. but like one of the sites, for example, that they bought, it was called Homegrown. It was started as a VHS tape exchange for like swinger couples, right? Like the most like fringe of the fringe thing. But this kid is a Stanford MBA student, buys it. His mom helps him raise the money and they do a, they do like a leverage buyout of this thing. Like it was actually kind of sophisticated under the hood, even though on the surface it looked like, you know, these, you know, really sketchy gray area things.

10:41But it's like Stanford MBAs are buying this stuff. So anyways, fast forward to 2009. They've scaled it to 250 employees. They're making millions and millions of dollars. They're making more money than they ever knew what to do with. But they're getting paranoid because they know you're sitting on the throne that people are going to come for you. And so they start seeing some bad stuff. The government seizes$9 million out of one of their bank accounts, just takes it. And they're like, shit, what do we do? They start trying to move money around. They hire security 24-7. They're followed by black-tinted SUVs.

11:12The Keizer guy, the SEO guy, he just quits. He's like, I can't take this anymore. It's too stressful. They're like, dude, you're walking away from so much money. He's like, I don't care. I can't handle this. So they finally just decide, look, it's too stressful. We can't do this anymore. Let's cash out. Now, there's not a lot of buyers for this thing, right? Because institutional investors can't really buy this type of asset. And now it's big. How big? Like it was worth over$100 million. So they sell it to that guy you were referring to, this guy, Fabian Tillman. So$140 million is what they sold it to him for.

11:42What was his background? Fabian's background was, I think he had also, he was already in this space. So what he did was, this guy was like a programming genius. So at 17, he basically started, he created a website that was just for internet traffic. So it's like Alexa, right? Like internet traffic sites, just that statistic, sorry. So he's just a nerd. He loves the internet. So he creates a site that tracks successful internet companies, which ones are growing the fastest. However, you know how I started this by reading you like, what's the sixth most popular website in the United States? He sees that the most popular websites are all porn websites.

12:16And so he's like, huh, what if I create software for them? So he goes to them, he's like, what do you need? And they're like, well, you know, one of the hard things is we make money off of affiliates, but our affiliate tracking sucks. So he builds an affiliate tracking tool that becomes the number one most used piece of code for affiliate tracking on the internet. And it's being used by these porn websites. And he builds that company up. He's super young. He's like, you know, 20 years old or something. He sells it. He's super rich now. He's got hundreds of millions of dollars. And so he then goes and he buys Pornhub for$140 million.

12:53And then he just like grows it like crazy. So he, I think in like three to six months, he doubled the profits of the business because this guy's just a better operator. He knew how to monetize better. And he also knew how to solve the problems around the content licensing. So he spends a million dollars buying content licensing rights so that they don't get sued anymore. He changes the name. He launches a PR campaign around safe sex. And he starts getting in with politicians and all this stuff, right? And he tries to do other stuff too. He buys celebs.com and tries to create a TMZ. He tries to create a bigger media empire, but nothing can keep up with the growth of the core asset.

13:33And so he ends up 32 years old. The company has 500 employees. and he's the biggest porn tycoon on the planet now. And this guy has sort of made it. However, there is one problem. And this problem is that, like I said, this great power corrupts and people puts a target on his back. People start coming after him. And he's hard to find too, right? If you look for photos of this guy at Google, you actually can't see that many pictures of him, right? Well, he did a couple of interviews at tech conferences later when they started to try to branch out. So similar to how OnlyFans has tried to branch out and hire musicians, be like, hey, show behind the scenes content.

14:09of your music process or whatever. They're trying to branch out. He tried to do the same thing. Kind of hard when your name is Pornhub, though. Well, he created other websites, right? So he created separate websites altogether that he wanted to use the same team and cash to start. But crazy stuff is happening, right? So like he's on one hand, he's figuring out how to monetize it way better. And he's like, oh, like, and by the way, he's hiring like data scientists. And the data scientists are like, sir, we found it. The best way to get a free user to pay for content is a video that is two minutes and 59 seconds.

14:41And that is the point where a man is most committed and is willing to impulsively buy something. If we try to put a paywall before that or after that, it's not going to work. Two minutes and 59 seconds is what we found is the optimal time in order to increase revenue. And they do, they increase revenue a lot. Oh, there's one other thing I didn't mention, which is along the way, people start to get curious. They're like, okay, he's building this huge empire. He's rolling up all these sites. He's buying more and more sites. like how much cash does this guy have? How did he generate so much cash?

15:10And what later comes out is that he got a$362 million loan from unknown secret investors. And it turns out that basically there was two guys who he went to all the big banks and the big banks were like, look, we can't do this. We can't lend the money. So he goes to private. It turns out he raised from 125 secret lenders. Their names have not been revealed except for one group. Their names have been revealed. It was a bunch of ex, I don't know if it was JP Morgan or Morgan Stanley or whatever, some big bank, two bankers from there spun out, created their own lending firm specifically to lend just to this one play.

15:45They're like, this is going to be so lucrative that we have to just leave our jobs, quit our jobs, raise money, and just lend it to this guy. And they lended it at a 20 % interest rate. And so even though he was growing and making all this money, he had huge monthly commitments because he raises$360 million at 20 % interest. Yeah, so his debt payment or his interest payment is 80 or 100 million dollars a year 60 million a year exactly and and they're and they're also under attack like the ceo he owns a 16 million dollar house it gets burned down by arsonists and bill ackman comes into the fray do you want to know how bill ackman comes into this into this story so in the game of thrones now bill ackman comes in from westeros and he's like he's reading an article one day this is the story i don't know how true this is but the story is he's reading article in the new york times and it's about a girl a teenage girl who's sent nude photos to her boyfriend.

16:37The boyfriend then leaked it onto one of these websites. And Ackman's like, that's so wrong. And she couldn't get it taken down. And she's felt so bullied and whatever. He's got daughters. He's like, this is terrible. And so he's like, and so you know how right now he's on a crusade to take down Harvard, take down Business Insider. He goes on a crusade to take down Pornhub. And so he tries to find him. He's like, dude, this is like some offshore company by this German single owner. I can't pressure him. He's not a public stock. I can't become an activist. What can I do? He's like, so he thinks about it.

17:08First, he's stumped. Then he's like, wait a minute. What if I like, you know, when the US government sanctions Russia, he's like, what if I sanction Pornhub by cutting off their flow of money? So he's like, hey, they need payment processors. And so what Bill Ackman does is he goes and he immediately texts the CEO of Visa and he sends him the article. He's like, your company is enabling this. These guys are making money off of this. you better do something about this. And the CEO of Visa is like, dude, I don't want any trouble from Bill Ackman, agrees that it's wrong. It's not a huge portion of Visa's revenue.

17:42And he texts them back, I'm on it. Within five minutes, I'm on it. One day later, Visa cuts off Pornhub. So does MasterCard. So they lose their ability to actually process payments until they later try to change all their policies. They now verify everybody with their license and shit like that in order to use the website. Bill Ackman has this old tweet. He goes, if you've been victimized by Pornhub or any of their affiliates, you may be eligible for a large amount of compensation. And I encourage you to email this person who counsels 70 plus victims who can help you pursue your claim. So he puts all his weight behind this thing.

18:14This is pre-Israel, pre-Harvard, pre-Business Insider. Pornhub is who he's going after. hell hath no fury like bill ackman scorned right like yeah he is crazy he goes after you so the crazy part is the story doesn't end there so you i thought and you thought that porno was owned by a company called mind geek and mind geek is run by this guy fabian tillman however a few years ago uh or sorry three three or four years into owning it he's grown the company like crazy however he gets in trouble trouble for tax uh tax fraud or tax like evasion or something like that he and he's in Germany. I don't know all the details around the tax thing, but I know that he gets in trouble on taxes.

18:53He's forced to sell on a fire sale. He sells it for$77 million. Oh, wow. So the value has gone down somehow. The sixth most trafficked website in America sells for$77 million. That's how much Morning Brew sold for. Like, come on. This is the only time where I'm allowed to go on Pornhub on my work computer so I can look at their stats. So according to SimilarWeb, Pornhub gets 2 billion visits a month. average visit duration, 10 minutes, which is a lot, and 10 pages per visit. So they just get a ton of traffic. So it's just huge. And by the way, now let me tell you, so this is a choose your own adventure story.

19:30Aren't you curious what happened to those original founders who sold it for the 140 million? What are they doing now? I'm curious about them. And I'm curious about who bought Pornhub for$77 million. So which one do you want? Do you want to know about the shadowy businessman who bought it? Or do you want to know about the original founders? Choose your own adventure. I want to go in both, but I want to go with the original for now. So if you go look at their LinkedIn's now, which I did. What's their name? So one guy's name, I mean, so one is Stefan Manos. Another one is Usam Yusuf. And then there's the guy Keezer.

20:03All of them. If you go to their LinkedIn's now, there is no mention of any of this. They're like, yeah, it's all about their philanthropy. It's whatever. But here's the interesting thing. So the guy, Yusuf, he sells and he's like, okay, I just want to get away from all this. That was too stressful, too sketchy. It became way bigger than we started. We didn't intend to do that. It just sort of one thing led to another. I need to reset. And in his reset year, he's like, well, how do I invest all this money I have? And so he starts reading and he reads 150 books about investing. And he comes away a Warren Buffett disciple.

20:39And he's like, you know what? I'm going to go into value investing. And he creates a Berkshire Hathaway for internet companies called Valsef. And Valsef is basically like Constellation Software. They're just buying up profitable, cash-flowing internet companies. Dude, and they're killing it. They're killing it. They're now... It's a billion-dollar company now. They have over$100 million in EBITDA every year. They've acquired like, whatever, 50 companies or so. They have like$500 million in revenues. And then they have like 20 % to 30 % net profit margins. and just listen to the guy. So they create this thing called the Valsef Group and they're like, all right, we're going to, you know, first they start buying up like other content websites because that's what they know.

21:20And then they start studying Constellation software, which is the same thing that Andrew Wilkinson did and several, many other people have done because Constellation is like, what are the OGs of this? And he's like, huh, I read the stuff that Warren Buffett was doing on the stock market, but this private, private software companies is even better. He goes, it's 10 times better because there's like 30 ,000 of these companies and there's no competition to buy them. What year? What year is this? 2016. Wow. And so he starts copying their playbook. And he's like, look, this market is opaque. It's inefficient.

21:54I think you could deploy a high rate of capital and get economics similar to what, you know, the moguls of the previous times were. So he's like, Murdoch, you know, he rolled up cable and newspapers back in the 50s and 60s. He's like, that's what I think I'm going to be able to do with these profitable software companies. Example of the companies are Nevatar, a cloud-based car rental software company designed to automate a bunch of the stuff. Or it's like a construction software business, just like things that you don't even know exist. But like this one has been around, it's called Mac Practice.

22:25Since 2004, it started in Lincoln, Nebraska. It's created best-in-class software for chiropractors. Exactly. So the first company they bought, 2016, is something that sells software to small hotels. Then the next year, they buy three. The next year, they buy eight. Now they're buying 20 to 25 a year and they're just buying them that are like, they're small. And the same thing that Constellation does. So I think Constellation bought like thousands of companies during the last few years. I think the average size Constellation software business is$3 million in revenue, isn't it? Exactly, exactly.

22:53And so I don't know if it's revenue or EBITDA, but it's small. They're not like, it's not huge PE deals. It's the same thing. These guys are looking for companies that are five to 10 million in revenue. And so they go, and they're just studying Constellation. They're like, it's great. Basically you buy them, you need them to run on their own individually so that it doesn't add more bloat to headquarters and they're just buying stuff all over europe and he's like uh he goes right now my problem is i'm trying to decide between a great opportunity and a good opportunity which is just this guy's great did he partner and i think he partnered with some of the other the other founders right yeah yeah it was two i think two or three of them that i know it was uh the two of abusive and uh the Manos one because I don't know what the Keizer guy does now.

23:34They don't even mention Pornhub on. So if you go to Valsoft.com our history like that words that I even mentioned anywhere. Yeah, there's parts of my history I don't mention either, right? Like we all get it. These guys are planning to go IPO, which is pretty crazy. So that's where these guys went, which is insane. Now, what happened to the site? Who bought it? So the story that came out was that the, you know, who's the next person on the throne? they said that actually the employees bought it out for$77 million. Like the two executives bought it out. But that didn't smell quite right. Where do these employees get$77 million to buy this?