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Investing in Digital Content IV: The Social Media Opportunity

December 1, 2007

vcmike

This is the fourth post in a four part series coming out of my panel’s discussion at GigaOm’s NewTeeVee live conference.  In fairness I should probably come clean: first, I am taking points from my fellow panelists a bit out of context, and, dare I say, perhaps even exaggerating them a tad. Second, it is not really fair to reply to panelists a week or two after the panel when they are not present either to hear it or reply.

But none of that has stopped me so far so I won’t let it stop me now.  Earlier I took issue with fellow panelist George Zachary for arguing that VCs should never invest in content; then I complained about panelis Dennis Miller’s contention that only experienced traditional media and entertainment guys should invest in digital content. Now I am going back to George, who argued that VCs should invest in social networks, not content.

George is  a really smart guy and I’d bet he is going to make his LPs lots of money.  But , boy, has he ever got the social networking bug!  Not that there is necessarily anything wrong with that. Hard to argue that the whole MySpace-Youtube-Facebook thing isn’t changing the web in important ways. Which spells massive opportunity for the entrepreneurs and VCs who figure it out ahead of others.

But George’s zeal for social networks well illusrates a mindset fairly common in Silicon Valley, which, it seems to me, can get so carried away with finding the next “big thing,” that it often never gets around to this little detail called business model.

At least from what I can tell, nobody has yet really cracked the code on monetizing social networking and/or video sharing sites. MySpace, YouTube and Facebook have astronomical audience metrics, but strikingly lousy monetization metrics.

What is even more striking is how how many “ad supported” consumer internet and social networking startups are getting funded – sometimes at staggering valuations – where neither the entrepreneur nor the VC has any clue what it takes to build an advertising business.

The reality is that building an advertising business is pretty damn hard. Building a large and loyal audience does not in and of itself establish an advertising business: it is simply table stakes, which qualifies you to try.  To succeed takes advertising product sensibilities, sales savviness, and real organizational and operational competencies.  In other words, it takes knowledge of the business, execution strength, and a lot of hard work.

Sure, MySpace, YouTube and Facebook are great venture deals. But they will be very few and very far between.  And, call me old fashioned, but I’d wager that the biggest wins will be those who figure out how to make money in all this social media stuff.

Google’s brilliance was not building a better search widget and getting lots of people to use it, but rather unlocking the economic value of search. YouTube and Facebook have yet to do that for social media. So, while social networking and video sharing both surely are social phenomena, and while YouTube and Facebook both will go down as huge VC hits, victory has yet to be declared for social media as a business.

Not that it won’t.  The web is transforming itself into a vastly interlinked medium where connections and relationships between people has importance and value.  Someone is going to figure out how to unlock that value.

If I were a VC, that’s what I’d be looking for…

One Comment

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  1. DanO #
    December 2, 2007

    It seems to me that in order to invest in social networks you need to look at it as a short term investment. Like fashion, social networks are very trendy which I can’t imagine bodes well for investing. People move from one site to the next based on “what’s hot”. Today Facebook is all the rage but by this time next year it will probably be taking a back seat to the next “hot” site. Their success is solely based on their popularity with consumers who have no loyalty.

    What also makes these sites less and less useful is that users maintain profiles on each one but generally only spend measurable time using one, logging in to check messages and invites on the others. That explains the crazy metrics but most are just the same people from other sites creating pass through clicks. Who is getting the main usage?

    One of the pain points to building out your own social network is that when the next site comes and you sign up you have to start from scratch. As they become more open and eventually allow the user to basically pick up their network and move it to another site that will negate the necessity to keep multiple accounts. Users can then hop from one to the next leaving the last to shrivel up and disappear.

    So from my view, for what it is worth, if you can invest and get out quick then there stands a lot of upside assuming the company can grab significant market share until they go out of style. My question would be is there a feeling out there amongst the investors that someone will become the clear winner and stick around to provide the big returns down the road? I’ll save my rant about the economics of social networking sites for another day.

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