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from Wall Street Journal, August 13, 2004

EBay Buys Stake in Craigslist

By: Nick Wingfield

In an unusual pairing of an Internet colossus and a classified-listings Web site with a cult following, eBay Inc. said it acquired 25% of Craigslist, a deal that Craigslist's executives say will allow the site to retain one of its most treasured assets: its soul.

The deal follows a long courtship of Craigslist by some of the top Silicon Valley venture capitalists and Internet companies, including Yahoo Inc.and Google Inc., according to people familiar with the matter. EBay said its investment was part of a broader interest in the online classified-advertising market, a potential growth area for the company.

Founded almost ten years ago by San Francisco software engineer Craig Newmark, Craigslist has found a devoted audience among users in the Bay Area, New York and other cities across the U.S., who trawl its listings looking for everything from apartments to second-hand furniture to romantic encounters. While Craigslist is profitable, it has taken an unorthodox approach to doing business, charging only for those services its users deem "appropriate" -- a policy eBay has agreed not to meddle with, according to Mr. Newmark, the company's chairman.

The deal with eBay, financial terms of which weren't disclosed, ends a long hunt for an outside investor that divided Craigslist's small group of shareholders and threatened its nonconformist philosophy. EBay acquired its stake from a former Craigslist executive who was seeking to sell his shares. Mr. Newmark and the Craigslist CEO Jim Buckmaster said in separate messages posted on the Web that they never imagined a stake in Craigslist ending up in the hands of a publicly-traded company. Still, the former Craigslist executive made it clear to the company that he intended to sell his shares and began approaching other parties, including eBay.

Messrs. Newmark and Buckmaster said they warmed to the idea of eBay buying the former executive's stake after eBay executives made it clear they wouldn't ask it to alter its mission. "They have no interest in asking us to change that in anyway," Mr. Buckmaster said in an interview. "They're happy with us having our full autonomy. They recognize us as experts at what we do."

Craigslist executives declined to identify the former shareholder, but a person familiar with the matter said he is Phillip Knowlton, a resident of the San Francisco Bay Area. Mr. Knowlton didn't return voice mail and email messages seeking comment.

For eBay, the deal reflects a growing focus on classified listings, a market that differs from eBay's auctions, in which shoppers bid on an item and winners commit to purchase merchandise when the auction closes.Earlier this year, eBay paid $149 million to acquire Mobile.de, a Germany automobile classified Web site. Without a controlling stake in Craigslist, though, eBay won't derive any classified revenue in the near term from its investment.

"There are people for whom classifieds are the simplest way of selling something," said eBay spokesman Hani Durzy. "The reason we did this minority investment really was for learning purposes it gives us access to learn how the classified market online works."

EBay's motivation could also partly be defensive, allowing it to keep a stake in Craigslist out of a competitor's hands and giving it the chance to acquire the remainder of Craigslist should the company's founders decide to sell, according to a person familiar with the matter. In the past year, Mr. Knowlton, the former Craigslist executive, approached numerous venture-capital firms and Internet companies; Google and Yahoo, among others, had shown great interest in a possible deal with the company, according to people familiar with the matter. Spokeswomen for Google and Yahoo declined to comment.

Without naming any suitors, Mr. Buckmaster confirmed that Craigslist fielded a lot of calls from potential investors and acquirers. "We may get one inquiry a week," he said.

"Everyone was intrigued that these guys were able to build a profitable business in a sector that had seen more than its share of flameouts," said Bill Burnham, a partner at Softbank Capital Partners, who said he hadn't personally sought to invest in Craigslist.

The seemingly modest financial ambitions of Craigslist's executives make it more of cultural phenomenon than a traditional high-tech startup.Although it has dozens of categories teeming with listings on its various local sites, the company charges only recruiters and employers in San Francisco, Los Angeles and New York for posting job listings. A person familiar with Craigslist's finances estimates it will have between $7 million and $10 million in revenue this year, figures the company declines to confirm.

The possibility Craigslist could charge for many more areas of its site, such as real-estate listings, is what attracted so much interest from investors. Messrs. Newmark and Buckmaster, though, aren't in any rush to cash in. The company routinely posts messages on its discussion boards asking users whether they would object to new fees in certain areas of the site. For instance, it recently decided to keep portions of its job listings in New York and Los Angeles free for low-budget-film makers and others after members asked the company to do so.

When he originally gave a stake in Craigslist to the executive that sold his shares to eBay, Mr. Newmark said, he never expected them to be worth anything. "I made a gift of some equity in craigslist to a guy who was working with me at the time," Mr. Newmark wrote on his Internet blog (www.cnewmark.com). "I figured it didn't matter, since everyone agreed that the equity had only symbolic value, not dollar value."

Craigslist is run by a staff of 14 from two floors of an unglamorous Victorian in San Francisco's foggy Sunset district. Mr. Buckmaster has never owned a car and his driver's license lapsed several years ago, which he says will complicate his ability to visit eBay's headquarters in San Jose. Mr. Newmark rarely drives his hybrid Toyota Prius, which he routinely lends to friends.

The response to the eBay deal on Craigslist's own discussion boards after it was announced on Friday was mostly negative. One posting said, in halting language: "This is a mistake. eBay bad and robotic, Craig's List human and good. And now on the way to selling out."

Mr. Buckmaster said most of its users know Craigslist won't change, though. "We have to take our lumps from the knuckleheads," he said.