michael's thoughts

Fred Wilson, a venture capitalist in New York, wrote a post on his site recently about social networks. His venture funds haven’t invested in the social networking space yet, but looking at the minimal initial investments required and large returns from companies like MySpace makes him wonder if he should jump in. I commented on his post to share my thoughts, but since it was a long comment I figured I may as well just save it here so I can remember what I said later.

Yeah, social networking is a bit of a sticky wicket. It’s such an interesting space, in theory, but I don’t think the application has been done right yet. The current models are mainly all using advertizing revenue (there are exceptions on the business side of the house – Ryze, Linked In). But it seems to me, without insider knowledge, that click throughs and conversions are going to be on the low end of the graph.

Plus the space is very fad-driven (I first got interested when friendster was all the rage, now it’s myspace, but facebook is key in some demographics). On the other hand, it actually is a pain in the butt to sign up on a new site in that you have to recreate your profile, re-invite your social network, and then are you expected to login to multiple sites each day? Likely not. Yet I don’t think the current models really make the most of “network effect” lock-in. It feels like the worst of both worlds.

I have no idea what to say about the teen space, but I think there are a few interesting possibilities in social networking. It would be possible to go for a web services backend – use something like FOAF and offer up a pre-built backend to upcoming sites. That way users register once, keep their friends connections, and new and interesting services can be built by third parties that will live and die on the merits of their services and not the cost to switch. Meanwhile since you are building a platform you actually do get the “network effect” lock-in benefits.

Or maybe someone will figure out business networking. Ryze and Linked In ain’t it. I think the right model is going to be a cross between a social networking site, a guru.com or elance.com, and ebay. Create a real marketplace for professionals to actually work. Let freelancers create ad-hoc startup companies based on skillsets and ebay style ratings of past performance. There’s a lot of great revenue opportunities there – certainly startup lawyers and accounting firms would pay more per click than ringtones providers. Or not.

I think social networking is a viable business space, but I wouldn’t go chasing the teenagers. Even though you will always get more visits per day, since grownups do have to work and have grownup-type things to do, I think the value of the visits you can get skewing older is higher. Or else build the backend platform and make the web service transaction fee the placing of an ad on the front-end service’s site.