They gave too much away for free in order to get a large user base. They needed a large number of users to impress VC's and get the next tranche of money. Then

They gave too much away for free in order to get a large user base. They needed a large number of users to impress VC's and get the next tranche of money. Then the investors apply pressure to keep the growth going which means they have to keep the freebies flowing. Now your on a treadmill that only ends in selling out for a big exit. It worked, they sold to Facebook and the founders/investors made out nicely. The alternative strategy would be to price more realistically and bootstrap up with positive cash flow. Of course, this takes longer and maybe someone else will capture most of the market by using the previous strategy. A free service still comes with a cost, the cost is the risk that they could pull the plug because they don't have enough money or your just no important to them. Hence they constantly needed more VC money and to keep the investors happy a sell out to a big company was the only viable exit. This meant they were focused on selling the company as the exit strategy for making money. If instead they had higher prices and gave less away for free they would have been a viable standalone company and so had no need to sell out.