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Reference: http://www.movieprop.com/internet/history.htm
Yahoo's roots go back to the very roots of the Internet itself. In the early days Yahoo was just a word, just a name. Yahoo is an abbreviation in fact for Yet Another Hierarchical Officious Oracle. The acronym represents the fact that Yahoo seeks to be a directory or hierarchy that serves as an oracle or knowledge giver to the modern day office dweller who is officious. The source of the silly exclamation point at the end of Yahoo! is anyone's guess. Yahoo was originally started by just two men; David Filo, and Jerry Yang while attending Stanford University. Originally it was just basically a project to keep favorite bookmarks catalogued as at the time in 94 or so as the only means to find things on the internet was spider based engines such as altavista. As Yahoo grew, the strains on a university's resources became more and more extreme. Yahoo basically moved in and set up shop in Netscape facilities in 1995. In the days before browser wars Netscape was a very large portal in its own right. and had vast technical resources.
As Yahoo grew as a directory people would bookmark it and link to this one of their favorite sites. Yahoo would not be where it is today at all if it were not for all of the sites that linked to it early on. The link, even before yahoo served as the lifeblood of the internet and the means by which people could endorse their favorite sites. Yahoo basically just took this to a whole new level. By linking to so many sites in categories many sites in return linked to them. Yahoo received an enormous amount of television and other media attention from 94 to 97 or so and became the defacto spokesman for the internet world.
Yahoo purchased geocities, and free e-mail provider rocketmail.com from their parent companies. This was so that Yahoo could provide free webpage add e-mail services to its visitors. Yahoo also acquired Webring.com by acquring their parent company. Webring was a company with roots similar to Yahoo that grew as a means for individuals to organize data selectively by subject. When a webring on a given topic became too big or unfocused then another one could be formed with membership determined by the knowledge of the founder of the ring. This was a serious yahoo threat and that is partly why they were acquired.

Yahoo proceeded to create things that the general public would come back to see. Free e-mail would force people to come back daily to check their e-mail. Free webhosting via geocities would not only increase Yahoo's reach for advertisers but it also would make it so in effect people collectively would be coming to Yahoo to find their own sites and Yahoo would make money coming to their flagship site and as people left for their favorite geocities pages. As free e-mail and webpage services grew in the late 90's the market became common everywhere.
All of these changes also have negated one factor, that the internet has grown, but Yahoo's editorial surfing staff has not grown all that much. Yahoo's core supporters in the beginning were webmasters who gave Yahoo the grass roots support and help necessary for a small force of two to transfrom itself into the world's leading on-line entity. Submissions for new sites to their directory have risen astronomically and if Yahoo is not careful then another upstart will gain grass roots support and mount a guerilla warfare campaign against them with the help of millions of webmasters.