Print
Email
Print Edition Stories
Stuart Garfield
MHT's Jim Connolly: Social network sites focus on niches, sports
MHT Editor Doug Banks on NECN: How companies are using social media
How is the economic crisis affecting tech companies?
As more Americans than ever flock to social networking sites, one group is running in the other direction: investors.
In 2006 and 2007, New England web startups saw double-digit growth in venture capital funding. Now investors are turning a cold shoulder to customer-facing Internet companies, fearing that startups of 2005 and 2006 may turn out to be the frothy by-product of a mini-bubble marked by the buzzword “Web 2.0.”
“There’s so much money that’s going to be lost in that sector from a venture perspective that ‘Web 2.0’ is going to be a four-letter word — and it already is,” said Jo Tango, partner at Kepha Partners. Tango, a former partner at Highland Capital Partners, left Highland in 2006 to launch Kepha. He said problems with Internet investing are going to extend beyond the current downturn, as baby boomers retire and consumer spending dips.
“If you define Web 2.0 as consumer-driven business models, for the next 20 years I think it’s going to be tough sledding,” he said.
The sleigh ride may end soon for School Pulse Inc., if the online calendar application for moms can’t find funding soon, said founder and CEO John Boynton. The company laid off three of its six workers last month. He’s considering a merger with other undercapitalized online players, but he said that only viral growth can bring success. “If you’re relying on (advertising) for your audience growth, you’re kind of like a sick person on a respirator,” he said. “You’ve got to deliver a value proposition that is genuinely viral.”
Investors and industry watchers say projected ad revenue doesn’t match the advertising spend needed to acquire a new user. Some venture-funded social web plays have added fee-based revenue models to supplement ad revenue. Last February, Eons Inc., the Charlestown-based operator of a social site for baby boomers, spun off its obituaries page as a paid service akin to newspaper classifieds. CEO Jeffrey Taylor, who also founded Monster.com Inc., said he thinks there’s still money to be made on the social web. “In the old-fashioned world, we would say most of the profit gets made once you think the industry is done,” he said. He reported that the paid model has been successful to this point.
Meanwhile, some of the bootstrapped and angel-funded web startups of 2006 are quietly chugging along. Some say they’re glad they never got a large lump of VC cash. Needham-based Flagr Inc., for example, never received angel or VC funding. Co-founder David Wurtz said if it had, obligations to investors might have brought the social-mapping community to a fire sale by now. Flagr.com has 25,000 users actively flagging their activities, and breaks even above its only expenses — about $100 a month in server fees, according to Wurtz, who now works part-time on Flagr from his home.
Web-based company Pawspot Inc. closed its Woburn offices in 2007 and its handful of full-time employees now work part-time from home, keeping the online community of pet owners up and running. The company was founded in 2006 and raised just under $1 million in angel funds. It is now approaching the break-even point on advertising revenue, said CEO Scott Nathan.
General Catalyst Partners managing director Larry Bohn said he thinks the only business-viable way to attract users now may be to grow organically. The days of heavily capitalized social web startups are over, he said.
However, there’s no question the pool of online social media users is growing. A Pew Research Center report released earlier this month on “adults and social networking services” pegged the share of adult Internet users who keep a profile on an online social network at 35 percent and growing. In a set of predictions released this week, Forrester Research analysts said 85 percent of U.S. online consumers will be using social web content by the end of the year.
But Bohn said the smart money now isn’t in drawing users, who are flocking to the established social-web giants. Now, good investments against the social web are business-to-business plays that allow companies to tap into new customer bases that the major online players have already aggregated, he said.
E-commerce is still strong, he said, citing Internet sales that made a lone oasis in a barren Christmas season last year. ComScore Inc. reported online sales for the weekend before Christmas up 98 percent over the previous year. There are opportunities for companies that provide ways for social websites to add “buy” buttons, Bohn said.
“There’s a big trend there to tap into a lot of these social networks for consumers to take advantage of Internet shopping and recommendations,” he said. “There’s a bunch of technology for people to be able to list their favorite products on Facebook, and then people can buy them.”
In 2007, Bohn invested with Victoria’s Secret in the Massachusetts e-commerce startup n2N Commerce Inc. The company closed its doors in January 2008, after a $30 million initial investment. Bohn declined to comment on n2N.
RSS Feeds
Comments
Please Login/Register to post comments.
No comments have been added or approved.