"Could this year's trendiest new internet fad have the commercial potential of another eBay?"
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Investors look for the next eBay
By Richard Waters in San Francisco
Financial Times
Published: December 29 2003 22:46
news.ft.com
Could this year's trendiest new internet fad have the commercial potential of another eBay?
To judge by the flurry of deal-making as 2003 draws to a close, some of Silicon Valley's savviest venture capitalists seem to think so. But the path to internet riches could prove treacherous, not least because this new field is already crowded with imitators.
Social networking, the name given to the mini-craze, owes its origins to the "six degrees of separation" principle. This was the theory developed by US academic psychologist Stanley Milgram that everyone in the country could be linked to everyone else by a chain of personal connections no more than six steps long.
Armed with the power of the internet, the idea is simple: first get people to put in their personal details and encourage their friends to do the same, then provide a way for them to find and connect online to their circle of friends.
According to the entrepreneurs and venture capitalists flocking to the field, finding a use for this sort of extended online network should not be difficult.
Backers of these early networks - launched this year, most still exist only in a trial version - have already taken to talking of themselves as the "second generation" ready to take over the reins from dotcoms that have survived the shake-out.
"Everyone thought it was game over," and that there would be no chance to build another new internet movement from scratch, says Mark Pincus, chief executive of Tribe, one of the new networks. "We're fundamentally building a better way for people to do classified [advertising]," says Mr Pincus.
Even the backers of these new companies warn that the claims for social networking may be getting out of hand.
"There is a lot of hype and fluff around - it is going to cure cancer and end world hunger," says Allen Morgan, a partner at Mayfield, a venture capital fund that has backed Tribe.
But he adds: "The market opportunity in front of Tribe is as big or bigger than [that of] eBay."
The echoes of eBay grew deafening several weeks ago when Bob Kagle, the Benchmark partner who was an early supporter of the online auction company, invested in social networking company Friendster and joined the company's board. The $13m of venture capital that Friendster has just raised may seem small, but then Benchmark's $6.7m investment in eBay bought it 30 per cent of a company now worth $36bn.
Friendster's blue-chip board also includes John Doerr, a prominent venture capitalist, and Tim Koogle, former Yahoo chief executive. Jonathan Abrams, founder of Friendster, says he got the idea for the company after using an internet dating service. "It was creepy," he says - the lack of a personal introduction made blind dates off-putting.
The business now has 3m members. Users of Friendster can find and contact friends-of-friends who are up to four degrees of separation away. Members of the network are encouraged to enter personal details, such as their taste in books or music.
The ability to make new connections and the element of trust lie at the heart of all the social networking businesses. "The fact that you have a real identity, you're not anonymous, is going to force better behaviour," says Mr Pincus.
It is still far too early to judge whether new giants of internet commerce can be built around this basic idea. For now, the networking companies are locked in a race to build their audiences, much as the early dotcoms rushed to amass "eyeballs" - finding ways of making money comes later.
Though that approach risked being discredited by the many dotcoms that never found a workable business model, it proved a winning formula for the companies that survived the shake-out.
Variations on these themes are already emerging.
LinkedIn, a professional networking service that aims to connect people with mutual work-related interests, plans to charge a rate of $10 for each personal referral that passes through the network.
That is a small price to pay when you are hunting for professional contacts, whether it is to find out information, to do business or hire a worker, says Reid Hoffman, chief executive. Users "want to meet people they can trust".
Tribe, on the other hand, aims to draw advertising away from newspapers or other established websites. It draws its inspiration partly from Craigslist, a ground-breaking personal network set up in San Francisco in the mid-1990s by computer programmer Craig Newmark.
Tribe is aimed at "a gigantic, vertically-focused, database-driven form of classifieds," says Mr Pincus. In a sign of the potential they see for their existing classified businesses to move further online, the newspaper groups Washington Post and Knight Ridder have become early investors in Tribe.
The social networking phenomenon has eBay-like characteristics that make it particularly appealing to the venture capitalists. There is no need to create unique online "content" to attract an audience - they will provide it themselves.
Even more enticing, the networks have the same sort of self-propagating characteristics that eBay demonstrated. A new member of the network invites his or her friends to join as well. Assuming enough people find a use for the service, its growth could be exponential.
"Our customer acquisition costs are zero," says Mark Kvamme, a partner at Sequoia Capital, one of the backers of LinkedIn. "It's a very profitable business once you reach scale."
Most of the new networks may never get that far, though. Many users' internet habits are already formed, and winning an audience will mean luring people away from their existing online services.
Then there is the competition. The number of new networks is proliferating fast - and that is before internet giants such as Yahoo decide this is a market for them. Already some successful "first generation" dotcoms, such as jobs site Monster.com, have announced plans to introduce social networking elements to their services.
"eBay was able to sneak up on the market," says Bruce Dunlevie, a partner at Benchmark Capital. By the time rivals realised the huge money-making potential of online auctions, it was too late to mount a challenge.
Friendster and its rivals will not have that luxury. The social networking bandwagon is picking up speed, and there seems to be no shortage of eBay-wannabes ready to jump on. |
