Tuesday, May 10, 2005

Social Networks Get Serious

Thanks to my buddy Neal Young for pointing me to Yesterday's NY Times Technology section, which featured a story "Skeptics Take Another Look at Social Sites." Many of the doomsayers who earlier predicted a bursting of the growing social network software bubble are now reconsidering.

I am pleased to hear this but confess that I still don't see anything I would pay for on LinkedIn, which is featured prominently in the article as a well-funded social network software startup.

1 comment:

Anonymous said...

The New York Times
May 9, 2005
Skeptics Take Another Look at Social Sites

SAN FRANCISCO, May 8 - There was a time when David Sze, a venture capitalist at Greylock Partners, could be counted among those skeptical of the millions of dollars being poured into Internet companies that were creating online communities to foster business and social contacts.

"Basically, it reminded us a lot of what we saw in the late 1990's," Mr. Sze said of the first rush of investment in social networking ventures in 2003. "It was, 'Let's hope some users come and if they do, we'll figure out how to turn that into a business.' We didn't see a real business model there."

Even now, a year and a half later, the question persists of how these ventures can make money - and justify the millions already invested. Still, some of the start-ups have shown such impressive growth in number of users that they are starting to win backing from skeptics like Mr. Sze. And there are some signs that selling classified ads on these Web sites may be a solid business model.

In October, Mr. Sze and Greylock partners took the plunge as majority investor when LinkedIn, a social networking venture based in Palo Alto, Calif., was seeking an infusion of $10 million to expand its operations. The company had previously raised $4.7 million in venture financing in November 2003, most of it from Sequoia Capital.

LinkedIn had signed up only 40,000 members on its site when its founders first approached Greylock in 2003, Mr. Sze said. By last fall, it had nearly a million members. Today the site has 2.5 million registered users.

"They're showing the rapid growth you like to see," Mr. Sze said.

Like other social networking sites, LinkedIn is hoping to create a viable business by capturing a small piece of a classified advertising market estimated to be worth more than $20 billion. That strategy has been tested in recent months.

"A lot of these sites rose with great fanfare, but many are still scrambling to make a go of it," said Greg Sterling, an analyst with the Kelsey Group, a market research firm.

The study of social networking, a decades-old academic discipline, has given the world the concept of six degrees of separation, among other theories that help explain the nature of social interactions. In the context of computers, it is a catch-all phrase used to describe any effort to replicate people's social and business networks over the Internet, or to create new communities around shared interests.

The LinkedIn Web site allows business professionals to make contacts for sales leads and the like. Users are encouraged to invite people within their business sphere to join the site and connect with people they know who are already part of the network. Joining is free, although there is the nonfinancial cost of deciding whether to give permission - or deny access - every time someone seeks to make a connection through you.

In February, the company announced it would charge employers $95 to post a job listing for 30 days, the first in a series of revenue-generating strategies. The company would not provide any figures, but a search at the site revealed that it had at least 1,000 job listings over the previous month.

"Everyone knows that the best jobs come through people's networks," said Reid Hoffman, the chief executive and co-founder of the company. "So this seemed a natural starting point for us to start demonstrating to people how they can use their online network in a very strong way." Job seekers and employers alike can use the service to screen each other through mutual connections.

"They're giving recruiters access to people they wouldn't normally be able to get to," said Charlene Li, an analyst with Forrester Research. "These are passive job seekers - people who aren't actively looking for jobs - who are extremely valuable to the recruiter and the hiring manager."

These are not the type of people posting their résumés on big online employment boards like Monster or HotJobs on Yahoo, she said. Monster recently added a social networking component, but Ms. Li said that LinkedIn catered to a much higher-skilled job seeker than Monster.

More recently, the company introduced what it called LinkedIn Services, which invites users to find local lawyers, accountants and other professionals through one's social network.

"People say you shouldn't use the yellow pages to find a lawyer, but that's exactly what most people end up doing," said LinkedIn's co-founder and marketing director, Konstantin Guericke. "This is a way of getting recommendations through trusted contacts."

The finder service is free, though the company will start charging service providers who want to provide more detailed profiles - just like in the yellow pages. The site will start charging for other services in the coming months, Mr. Guericke said.

He said the company was on target to start turning a profit by the first quarter of 2006.

"I would say LinkedIn has successfully made the transition from a novelty site into a model that has some sustainability," Mr. Sterling, of the Kelsey Group, said.

Mr. Sterling and Ms. Li said they were less sanguine about the success of other social networking companies.

Another start-up, Tribe.net, which is based in San Francisco and raised $6.3 million in venture funding in November 2003, is less focused on business contacts than LinkedIn. Members there are encouraged to join "tribes" of mutual interest - whether mountain climbing or searching for low-priced ethnic restaurants - or create their own.

Tribe is a free service that charges for classified ads posted on its site. Ultimately, the company hopes to generate enough traffic so that it can do a brisk business selling classified ads aimed at specific audiences - a San Franciscan wanting to sell used climbing gear, say, can direct the ad to the tribe for Northern California rock climbers. Mark J. Pincus, the company's founder, would not share specific revenue figures, but said help-wanted ads and apartment listings currently accounted for virtually all of Tribe's revenues.

"I think Tribe's concept is sound, but they've had trouble executing," Mr. Sterling said. The problem is that Tribe does not yet have the kind of traffic needed to sustain a vibrant local marketplace - a point that Mr. Pincus concedes. The service has reached a "critical mass" of users in the San Francisco area, Mr. Pincus said, but nowhere else.

Tribe had 243,000 unique visitors in March, according to comScore Media Metrix, which measures Internet traffic, compared with the 3.7 million people who turned to Craigslist, a Web site used to find apartments or jobs, or to sell used items. But Mr. Pincus said that traffic on Tribe had tripled over the last 12 months, and said he expected it to triple again over the coming year.

"Up until now, we haven't spent money on marketing because we've wanted to be conservative," Mr. Pincus said. "But with revenues starting to come in, we're now spending money on marketing to get more traffic." The company is currently closing a new round of venture funding.

And then there's Friendster, which helps people keep in touch online with their social set and was a sensation among teenagers and people in their 20's when it started in 2003.

Friendster, which received roughly $13 million in venture funding in October 2003, most of it from Benchmark Capital and Kleiner Perkins Caufield & Byers, seemed rich with potential because it could deliver a golden demographic to advertisers.

Yet early users soon started to complain that the company was slow to enliven its site, and Friendster found itself eclipsed by a pair of newer, more narrowly focused social networking companies - MySpace, specializing in music, and Thefacebook.com, geared to college students.

Friendster had 975,000 unique visitors in March, according to comScore. By contrast, 11.3 million users visited MySpace that month, and 4.1 million people visited Thefacebook.

"You're talking about a notoriously difficult group to reach, so this is very valuable to traditional brand marketers," said Ms. Li of Forrester. "The problem facing Friendster is that others, especially MySpace, have done a really impressive job reaching this group."

Friendster is cash-flow positive through the sale of ads on its site, a company spokeswoman said. The looming question is whether it will earn the kind of revenues that venture capitalists need to see when investing $13 million in a single start-up.