Forget politicians, reporters and Hollywood producers. When it comes to schmoozing, venture capitalists have them all beat. It isn’t so strange, then, that some of the biggest names in the business are betting millions on Internet companies that help people capitalize on their networks of friends.
In the past four weeks, investors have poured $24 million into three social networking startups. Benchmark Capital and Kleiner Perkins Caufield & Byers struck first with a $13 million Series B in Friendster (at a $40 million pre-money valuation) on Oct. 30. Less than two weeks later, Sequoia Capital was the sole investor in a $4.7 million Series A for LinkedIn. Then, last week, Mayfield led a $6.3 million Series B in Tribe Networks.
“It’s pretty clear that social networking is a land grab – it might even be a quicksand grab,” says Rafe Needleman, a technology columnist for AlwaysOn who recently hosted a panel on the subject.
On first blush, it looks like the kind of me-too investing that was so prevalent in the dot-com years. But, the VCs say, it is just a coincidence that these deals are all closing at about the same time. They have been looking at the burgeoning space for months.
For example, Bob Kagle of Benchmark and Allen Morgan of Mayfield both say they met with multiple social networking companies for about a year before they did their deals. Kagle wouldn’t say exactly whom he met with besides Jonathan Abrams, founder of Friendster, but Morgan says Abrams was among those he visited. Morgan was so enamored with the space that he pitched two social networking companies to his partners, but “they concluded one was enough right now.” He declined to name the company Mayfield passed on.
The timing of the deals wasn’t as far apart as it appears. Mayfield committed its portion of the investment in Tribe ($2.7 million) just a day after the Friendster deal was announced. The Tribe deal didn’t get announced until last week because the two strategic investors – the Washington Post Cos. and Knight Ridder Interactive – needed a few weeks to work out the final details of their agreements with Tribe.
Morgan personally has been working on the Tribe deal for months. He has known Tribe founder Mark Pincus, a serial entrepreneur, for close to seven years and was once his corporate attorney. The two looked at three to four “serious business ideas” before Pincus decided to pursue Tribe. The tight relationship worked to Mayfield’s advantage as a deal grew closer. A “bunch of people” tried to convince Pincus to let them invest after he and Morgan had a handshake agreement, but Pincus stuck with Morgan and didn’t ask to change the terms, Morgan says. He declined to reveal the valuation on the deal.
While some are likening the recent investments in social networking companies to a return of the frenzied dot-com deals of 1999, Morgan says, “There are two huge differences between 1999 and 2004.” For one, always-on broadband connections are now commonplace, making the Internet much more consumer friendly. Secondly, consumers have adjusted to using the Internet for “important things, like buying stuff and dating,” he says.
With a growing number of users who are comfortable with the Net and who have always-on access through cable modems, the time is ripe for services like those offered by Tribe, Morgan contends.
There are more than a dozen social networking sites, and the field is getting crowded with the addition of startups and established players that want a piece of the action. Evite, an online party planning site, has added social networking functionality to its service and big Internet companies like Monster and Google also have social networking plans.
Some, like Spoke Software, are coming at the market from a different angle. Instead of offering a service, Spoke sells enterprise software that promises to increase corporate sales by allowing a company’s thousands of employees to share contacts. DCM-Doll Capital Management last week led an $11.7 million Series C in Spoke. (See chart below).
The various social networking sites have similar functionality, but each appeals to a slightly different audience. LinkedIn, for example, targets people who want to network strictly for business. Friendster, started as a dating site, and is now more of a playground for twenty-somethings. And Tribe is a network for people looking for a job, an apartment or a dog-walker.
As they do on other social networking sites, Tribe’s users post a photo and a profile on the site, then invite others to join. Users also set up links to more than a thousand tribes or create their own. For example, the site lists tribes for Harvard Business School alumni, “failed Internet startup CEOs,” even “winos.” When users need something, they can tap into a tribe and ask for help. It’s a site where Mayfield’s Kevin Fong gives restaurant tips (he prefers the Alta Mira Hotel in Sausalito for brunch) and San Francisco paramedics recruit volunteers to practice on.
Tribe’s sub-groups are what set it apart from established sites like Craigslist, which is essentially one large community of people looking to buy and sell things, Morgan says. The sub-groups on Tribe make it the optimal place to “foster trusted affinity groups,” he says. “It’s a way to build local, trusted relationships for dating, selling a mountain bike or trading wine recommendations.”
Tribe doesn’t charge for its service, but it plans to charge for commercial listings like job openings. Craigslist lets users post just about anything for free, but it charges $75 for a 30-day job listing.
Unlike many of the social networking sites, which are trying to figure out how to make money from the millions of people logging on, Tribe’s approach of selling classified ads is “a solid, old-fashioned business,” Morgan says. “We did [the deal] in spite of the social networking fluff, not because of it.”
He estimates that Tribe’s revenue will be in the “single digit millions” within a year. Achieving profitability shouldn’t be very difficult because Tribe has a “low-cost structure.”
Selling online ads may not seem like a big business, but Morgan says Tribe’s potential is “the size of opportunity that eBay has. The business we’re going after is so big that there could be lots of really big, successful companies in that space.”
“Most of these guys are going to die. It’s the one that manages to get a nice focused business and has the resources to execute on it that has a chance of survival,” says Needleman of AlwaysOn. “I’m not going to say business success because I don’t now how many of these companies, even with lots of users, have proven their business model yet.”
It isn’t clear if the social networking companies will even be able to emerge as large, standalone companies. For example, it might make sense for a portal like Yahoo, MSN or AOL to buy a leader in the space, and that would put a lot of pressure on the smaller players that don’t have comparable resources, Needleman says.
Carolina Braunschweig contributed to this story.