Venture Well: Now the hard part
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by David Shabelman
TheDeal.com
25, Jun 2004
thedeal.com
There was no shortage of hype last year when a flurry of venture capital firms invested in social networking companies. But the hype was nearly matched by skepticism from others who wondered if this was another bubble in the making — the latest and greatest new Internet technology waiting for a fall.
Seven months after the biggest fundings, the talk has died down and the companies are trying to figure out how to make themselves pay off for investors.
Social networks such as Friendster Inc. and more business-oriented networks such as Spoke Software Inc. and LinkedIn Ltd. allow users to make new social and business contacts via the Web. Investment interest peaked in November 2003 with a slew of deals:
•Friendster picked up $13 million in a round that included Battery Ventures, Benchmark Capital and Kleiner Perkins Caufield & Byers.
• LinkedIn raised $4.7 million from Sequoia Capital.
• Spoke Software raised $11.7 million from DCM-Doll Capital Management, Partech International, Sierra Ventures and U.S. Venture Partners.
• Tribe Networks Inc. captured $6.3 million in a round led by Mayfield.
In February, another company, Visible Path Corp., garnered $3.7 million from Kleiner Perkins and others.
"I don't know if there was a rush to get into social networking," says Rob Theis, general partner with Menlo Park, Calif.'s DCM-Doll Capital Management. "It happened to be coincidental that a number of companies started around the same time."
But with money in hand, social network companies are now being asked to show their business models work. So far, the signs are decidedly mixed.
"Everyone's gotten excited about social networking, but there really isn't a lot of 'there' there," says James Currier, CEO and co-founder of Tickle Inc., a profitable matchmaking and social networking company. "There is no business model."
Tickle is one of the few companies in the niche that has clearly succeeded. It has been profitable since 2002 and was sold to Monster Worldwide Inc. for $94 million on May 24.
Its secret? It charges fees for its core online personality tests and matchmaking services — enough to generate $25 million in revenue in the past year. The social networking feature generates some income but was "a throw-in," Currier says.
By contrast, social networking sites such as Friendster, Tribe.net and MySpace.com so far rely on advertising to generate revenue, though they are expected to add paid premium services in the future.
Friendster has generated the most buzz, but the Sunnyvale, Calif., company has had difficulty maintaining the momentum it built last year. According to comScore Media Metrix, the number of unique visitors to Friendster dropped to 1.1 million in April, versus a peak of 1.75 million unique visitors it had in October 2003. (Did you say "fad"?)
"To the extent that people viewed social networking as the next mass consumer Internet experience, that enthusiasm has died down because of Friendster's failure to scale," says David Hornik, a partner at Menlo Park-based August Capital, an early investor in Tickle.
Business-related networking sites may have an easier time extracting revenue from their users.
Spoke Software, which has raised more than $20 million in venture funding, produces a program that analyzes a salesperson's e-mail traffic to assess the strength of relationships and collect information about sources of referrals.
Sheryl Kingstone, program manager with Boston-based research and consulting firm Yankee Group, says she expects business networking software eventually to be integrated into customer relationship management, or CRM, platforms because it can facilitate sales.
"While it's a niche, it's a very important niche because it has a bigger probability of increasing the velocity of a sale," she says. "What it's doing is getting the right people together at the right time, cost effectively and quickly."
Ben Smith, CEO of Spoke, says he expects the company to make a number of announcements regarding partnerships with CRM companies over the next six months. While the technology behind some social networking systems is not overly complex, Spoke has 18 patents, which Smith says gives the company an advantage over the competition.
"We're certainly seeing a lot of copycats now, but the technology is fairly difficult," he says.
DCM's Theis says his firm accepts that it will take time for Spoke to gain traction in the marketplace, particularly because the software is in a new category that businesses may not understand yet.
"We see our investment profile of five to seven years as reasonable to develop something to achieve some level of exit value," he says.
LinkedIn, another business-related networking site, serves a slightly different function. The Mountain View, Calif., company helps professionals find and connect with one another. Many use its site to search for jobs and to recruit others. The site is currently free, but LinkedIn expects to begin charging for some of its services by the end of the year, according to Konstantin Guericke, vice president of marketing.
LinkedIn does not have to invest to acquire users, he says, relying on viral marketing instead to build up its user base. LinkedIn currently has 700,000 registered users who did 1 million searches in the past month. The company has only 22 employees — none in sales.
So far only one business networking company has been sold. On March 1 Barry Diller's InterActiveCorp agreed to pay an undisclosed amount for Hollywood, Calif.-based ZeroDegrees Inc., which allows users to network with friends and associates to find a job, hire someone or gather other business information. But it was not venture-backed.
Jas Dhillon, president and CEO of ZeroDegrees, says he sold out to New York-based InterActiveCorp rather than raise venture money because he feared that VCs would just want quick returns. A strategic buyer such as Diller is more likely to stick behind the business, he says.
"Venture companies bring their cachet, but they drive companies to more short-term exit-oriented strategies rather than building long-term value," he says. |
