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Is The Daily Deal Backlash Overblown?

15 Sep

According to the business maxim, you can always tell who the leader is in a given market: it’s the one with all the arrows sticking out of its back.

While this axiom is applicable across the business landscape it is particularly relevant in the startup world given that most leaders in an emerging market end up taking as much incoming fire from me-too startups coming up from the rear as they do from incumbents threatened by the continued advance on their territory.

I raise this point because I’ve been surprised in recent weeks at the backlash in the media and across the venture landscape against daily deal sites, most notably Groupon and LivingSocial.

To be sure, the daily deals business has become ferociously competitive. There are now dozens of venture-backed businesses pursuing some configuration of the daily deal/social buying/demand aggregation business model. To this number add the emerging group of established web companies now brand extending into the deals business–Facebook, Yelp, Travelzoo, OpenTable, Amazon, and Google, to name but a few.

The birth of any new industry is rarely elegant, planned or pretty. With little argument, whenever one is dealing with the kind of torrid growth that both Groupon and LivingSocial have experienced one will find plenty of areas to criticize. However, I think some of this criticism is misguided. To call a marketplace with hundreds of competitors vying for consumer dollars emerging might be an oversimplification, but emerging it very much is. Let’s not forget that like the early days of social networking, the winning model in this space has not yet been fully realized. Constant iteration is underway, all being attempted at the breakneck pace one would expect in a marketplace still decidedly in its land grab phase. This means things are going to break — loudly and often. This is not altogether bad.

The daily deals space is the kind of web phenomenon we have seen before: Explosive growth, high user engagement, huge cash flow implications for the companies, lofty valuations, investors elbowing their way into funding rounds, and lots of media attention to fuel the frenzy.

In this environment, Groupon and LivingSocial have broken out as the market’s de-facto leaders and built robust businesses. Revenue growth has been nothing short of spectacular. In turn, the companies have responded by raising sizable funding rounds to further consolidate their positions and extend their reach into new markets. Investors and employees have every reason to be proud of these accomplishments. So far, so good.

This, however, is far from saying that their status as perennial leaders is a fait accompli or that they cannot be felled by either other participants or by their own strategic missteps. Indeed, it is still early days. This is perhaps why I find the latest hand-wringing over Groupon’s recent stumbles in the media somewhat disconcerting.

Massive customer churn is to be expected. Explosive growth, particularly as relates to web companies, raises the notion of the shiny new object theory. This notion should inform us that exponential growth and buzz brings huge consumer curiosity which, in turn, brings an influx of users that will try the product/service once and never return. Is this a reflection of a company that has provided a poor user experience? Or, is this simply the realization that 30-40% y/y revenue growth is likely unsustainable and that large swings in customer churn will be in evidence for a long time to come? I am in this latter school of thought.

The “churn” issue so often cited by critics is not simply a matter of consumers being fickle but one of SMBs and merchants as well. They are still trying to figure out how to work with deal sites and whether such marketing campaigns are right for their specific businesses. This will take time.

The Spaghetti Test. Additionally, daily deal sites are incented to build vast Rolodexes and cover wide areas of terrain to extend their brands. This means lots of offers are being written across broad categories of SMBs where the suitability of the daily deal model is still not thoroughly understood and where there is little historical frame of reference. While most managers are loath to admit it, the Spaghetti Test of  ‘throw it against the wall and see if it sticks’ inevitably drives a lot of iteration around determining which offers resonate and which do not. This results in a lot of mediocre offers that don’t perform well which can leave merchants and consumers with a poor experience.

Work to be done. Critics are right to point out that there is still a lot of work to be done in elevating the daily deals business to deliver on the full promise of its massive potential–both for consumers and for businesses. Merchants need better post-deal monitoring and CRM-like tools to help with yield management and provide better tracking and analysis. Merchants also want more control and flexibility over how offers are created, sold and redeemed so they can maximize profits while minimizing the impact on their organization when the “crush” of redemptions comes. [Fortunately, startups are already innovating around these themes to fill precisely these voids.]

Consumers, for their part, are demanding better offer targeting, more consistency in pricing and redemptions, and less intrusive appeals in order to fight against emerging deal fatigue now evident across the space. Personalization software needs to catch up so that users can better tag offers of interest and opt-out of those that are annoying or redundant (Cupcakes? Again?)  Also, Hyperlocal and Location-Based-Targeting need to demonstrate that they are more than just elegant theories.  Too many service-oriented SMBs (i.e. hair salons, etc) have gotten burned in money-losing offers for premium services to out-of-town customers with whom there is no opportunity to develop a long-term customer relationship. That kind of mismatch is being corrected but hyperlocal offer targeting has a ways to go.

Ultimately, the scale that Groupon and LivingSocial have achieved has likely put them beyond the reach of most competitors. The battles ahead, therefore, will be over how best to go vertical. The winners will be those most savvy at customer segmentation and in finding unique offerings positioned against specific themes and product categories. Predictably, there are numerous companies doing precisely that — tweaking group-buying mechanics and applying them to niche, premium markets and making a successful play in those areas. In another market in another time, this “go vertical” approach may have doomed a company to a market insufficiently large to support its efforts. However, as companies such as Gilt Groupe and One Kings Lane have demonstrated, the daily deals market is large enough that even pursuing a niche approach and a narrow customer segment can prove to be enormously lucrative.

Taking Stock of Our Netscape Moment

22 May

The LinkedIn IPO came out with a bang Thursday and in the intervening 72 hours the offering has already provoked sweeping re-assessments and re-appraisals of technology markets in general and the prospects for consumer web/social media IPOs in particular. It is hard to argue with success; and LNKD was nothing if not a wildly successful offering. Capital markets elites will bicker over some of the “inside baseball” issues having to do with “small float” mechanics or allegations of mispricing, but such quarrels are really just noise in the overall discussion.  LNKD was the largest technology IPO since Google in August 2004 and provided the much-needed confidence builder for the technology sector that market participants were hoping for. While there have been a number of well-received tech IPOs in recent years – OpenTable, Green Dot, to name a few — LinkedIn was arguably the highest profile name to go public in the past seven years and, as it happens, was one of the fabled five horsemen of consumer web/social media fame — a loose group which typically includes Facebook, Zynga, Twitter, and Groupon — that garner the greatest amount of attention from the media and the highest trading volume in the secondary market.

To be sure, it is hard to overstate the serious ramifications of a failed LinkedIn IPO. That the LNKD offering was an unqualified success bodes extremely well for the long-awaited offerings of Facebook and its peers and provides the proverbial rising tide to lift the respective boats of many lesser-known names in technology. The market validation accorded the LinkedIn offering will have a coat-tail effect across a broad swath of social media companies and venture investors will fast-track plans to find a public exit for many of these companies.

While it is still too early to divine what the long-term impact will be of the LNKD offering, it is undeniable that the morale boost it gave to founders and stakeholders is palpable. The IPO window for tech had been so constrained for so long that there will be some natural reassessment of IPO plans for dozens of companies that were all but assumed to be eventual M&A targets. This is a good and healthy exercise. The notion of “being a public company” has taken a drubbing in the past decade for any number of reasons — too expensive; too much regulation; required disclosures that would only help competitors; plenty of capital already available to good companies in the secondary market; management attention would be siphoned off to cater to Wall Street/institutional demands, and so on.

While the debate over being a public company vs. staying a private one is perhaps a topic for another post, I am in the camp that believes that many of the anti-IPO arguments most often raised in recent years are either overblown or are rapidly losing their relevancy. There are intangible benefits of being a publicly traded technology company that most criticisms — even the valid ones — fail to adequately counter. In the case of LNKD, getting a lofty public market valuation — and, by extension, validation — was critical for the company and for the dozens of social media/Web 2.0 companies that will all but assuredly follow LNKD into the public markets over the coming year or so. The LinkedIn IPO validated recent secondary market valuations of the company and provided the critical corroboration that venture investors and secondary buyers were not simply drinking their own Kool Aid. In time, owning a position in LNKD will become important for many large financial institutions and asset managers, which will in turn support the company’s and the sector’s long-term valuation as well as buoy the prospects of other talked-about social media/consumer web companies as they consider wading into the public markets. And that is a very good thing.

A Bubble over “Bubbles”

28 Apr

 

Perhaps no subject in the venture/tech start-up ecosystem over the past year has received greater attention–and been the focus of more collective hand-wringing–than the issue of bubble/not a bubble. With little argument, there are varied opinions on this and fairly good analysis on both sides. For my part, let me come right out and say it: Yes, we are in a bubble–it is primarily a bubble of prognosticators and market participants of all persuasions tripping over themselves to be the first to call what is occurring in technology markets a “bubble.” Taking a position on this subject might be great for bloggers seeking to drive traffic and for talking heads and Wall Street analysts looking to increase their respective profiles by saying inflammatory things but it hardly gets anyone closer to a reasoned understanding on what is occurring on the ground and, more importantly, on what lies ahead.

Like all good arguments, there are core issues worth having a spirited debate over; and then, there are lots of sideshow marginalia that have little bearing on what is actually going on and what actually matters. [AngelGate, anyone?]

FDR was on to something when he announced that the only thing we had to fear was….(wait for it)….fear itself. FDR knew something about the power of language. The power of language is particularly relevant here because I believe one cannot have a meaningful discussion about current market conditions and the behavior of some market participants without first clearly defining our terms. There are healthy, albeit heated, markets and then there are bubbles, and one does not necessarily beget the other.

I think I speak for many tech market participants in declaring that “the B-word” will be inextricably linked to the 1998-2001 boom/bust cycle that came to define the technology/venture landscape for many participants that were there to experience it first-hand. As such, given the negative connotations and the fairly brief historical context we are dealing with, the word “bubble” is loaded and, hence, problematic. This is not to suggest that one cannot use the word; I simply believe that tossing the word around cavalierly whenever a market becomes heated and — egads! — frothy is overkill and, as it happens, not terribly descriptive.

Fortunately, there have been a lot of smart, experienced people developing thought leadership on this issue. Diverse voices such as Mike Arrington, Howard Lindzon and Forbes’ Eric Jackson have all made impassioned arguments worth reading. I could get into an itemization of points and counter-points on where I am coming out on the question of bubble/not a bubble, but it would be a lengthy exercise and, at the end of the day, something of a transient position given the fast-moving environment we are in.

However, I am fairly confident that while there are some broad similarities between the current environment and the 1998-2001 period, few of the underpinnings behind the ’98-’01 bubble appear to be in evidence in the current environment. In short, there are far more dissimilarities than similarities and those differences are profound: much better companies, real (and often, huge!) profits, better monetization and distribution, true scalability, lower development costs, and on and on.

Additionally, the market froth that exists today concerning valuations is still contained within a relatively small segment of the broad technology landscape and among a select group of (largely) professional investors. By their very nature as “consumer-focused” enterprises, consumer internet companies capture the public’s imagination and garner the greatest amount of attention from the media. [Last I checked, no one was planning a major Hollywood film about the founders of SAP.]

Additionally, much of the current froth in valuations has been primarily directed at a handful of high-profile companies (Facebook, Zynga, LinkedIn, Groupon, et al). While it is true that we are now seeing soaring valuations for some very immature companies across the consumer web space, there is little evidence to suggest that this is driven by anything more than healthy competition among investors and by excitement over the rapid pace of innovation. Given the boomlet in new seed stage firms, “super” angels, and in legacy venture firms that have recently augmented their efforts in consumer web investing, this is to be expected.

All this aside, this does not suggest that I am somehow Pollyanna on the current state of consumer internet investing. There are certain areas that I am watching closely and I do have some concerns. As Fred Wilson has suggested, some investor behavior has become alarming. To my mind, certain investors — but still a minority of them — are getting skimpy on diligence and on the need to be methodical in an effort to move quickly to win certain hotly contested deals. Other investors are caving too quickly on terms or agreeing to extremely generous provisions for founding teams in order to win coveted deals. Again, this is just my opinion and is largely anecdotal, but I am hearing enough similar things from other investors that suggests that I am not alone in that view.

I am also wary about the rapid evolution of the secondaries market and with some of the private stock trading platforms that allow early investors/employees to sell their shares. I think these services are, by and large, great tools for investors and for start-ups but some discipline needs to be employed here so things don’t get misaligned. No doubt, regulatory agencies will get more involved as these secondary “paths” get further institutionalized and begin to bump up against current outmoded regulations concerning investor limits and the like. On balance, however, I think these issues, while concerning at times, are self-correcting.

In summation, I think the consumer web is perhaps three or four innings into an extended period of growth with the lion’s share of attention and the highest valuations being accorded companies that are innovating well and rolling out products and services that consumers are passionate about. Jeff Bussgang posited recently in a post that he felt we were in a “bubble,” but that perhaps the question we should ask was where in the bubble cycle we were–perhaps 1996, versus 2000. That is a clever way to nuance the issue although, again, I think employing the term bubble implies that once this market surge cools there will be catastrophic consequences. While there is reason for pragmatism, discipline and caution, given what I am seeing today in the marketplace, I am not finding evidence to support that.

My 2010 Predictions: A Look Back

5 Dec

Around this time each year we in the tech/venture community turn our attention to the year ahead and pick trends and themes that will presumably shape the coming twelve months.

To my mind, no view forward is complete without a retrospective on the year drawing to a close and, with it, a re-examination of themes that were ostensibly to define the year. From that perspective, let’s take a quick look at the trends I identified in my Ten Tech Trends For 2010 post from January and assess how I fared.

1. Green Shoots But No Chef’s Salad. Given an abysmal 2009 by most accounts, that 2010 demonstrated greater activity across the tech landscape—from rising public and private company valuations to overall investment pace—was hardly cause for jubilation. That said, the pace of financings, the froth in early stage valuations, and the continued strength of the M&A market surprised many of even the most bullish of observers. Grade A-

2. Physical Media dies..a little more. On September 23, Blockbuster dropped the other shoe and finally, unceremoniously—and mercifully—declared bankruptcy, thereby joining the ranks of now-defunct juggernauts Tower Records and Virgin Megastore  and putting a very public face on the continued disintegration of physical media.  Grade A

3. Strongest IPO market in (almost) a decade. We began the year with some impressive tech names filing their S-1s, or threatening to do so, but few of the most closely watched companies ended up taking the public exit route in 2010. While the pace of IPOs in 2010 was a significant improvement over that of 2009, Facebook, Zynga, LinkedIn and Silver Spring Networks all remain privately held entities, albeit very successful and very well-funded ones. To be sure, the vigorous secondary market and the continued institutionalization of that market played a significant role in enabling these companies to be cavalier about the prospect of going public. With no shortage of capital available at often sky-high valuations to companies like Facebook and Twitter, a key pressure point for CEOs seriously considering a public exit—providing liquidity to early employees and investors—was largely mitigated. Grade B

4. Entrepreneurs Reign Supreme. Facebook, inarguably the most closely watched privately held technology company, is still helmed by its 26-year old founder despite its torrid growth and its having raised hundreds of millions in capital. Groupon, which this past week reportedly turned down a $6 Billion takeover offer from Google, is considered the fastest-growing technology company in history and will reportedly generate $2 Billion in revenue this year. It’s CEO, Andrew Mason, is all of 29. The story of the ‘return of the entrepreneur’ cannot be told properly without remarking on the revival in consumer internet and how there exists renewed investor comfort and appetite for young founding teams that really understand consumer web services and products. Grade B

5. Changing of the VC guard escalates. Despite a frothy early stage market and big (still private) successes like Zynga and Groupon becoming household names in 2010, fundraising for venture firms remained challenging. One explanation offered in my January post was the lack of distributions from many venture firms for the better part of a decade. The fundraising picture did not particularly improve in 2010, despite a strong M&A market and some decent venture-backed IPOs. While first-time managers have long faced headwinds in the LP community, in 2010 many branded legacy firms struggled to raise follow-on vehicles as well. In cases where established funds were successful in raising follow-on vehicles, many of those vehicles were considerably smaller than their predecessors.  

Venture funds that moved too slowly to adapt to changing market conditions, or who have not managed partner succession adroitly, or who missed the boat on fast-moving areas of investment will continue to struggle to maintain relevancy in 2011. Grade B+

6. Vertical Social Networks Catch Fire. My position that users would “continue to demand rich content, ubiquity and connectivity of social networking platforms” has certainly been supported by the marketplace. However, the predicted boomlet in vertical social networks did not come to pass in 2010, although usage across the category expanded dramatically. That said, there were a number of recent product launches and acquisitions by the large “horizontal” social networking companies that appear to support the notion of offering robust vertical solutions with custom applications idiosyncratic to those vertical markets. Grade C+

7. EnergyTech has its Moment. The clean-tech community rang in 2010 with high hopes that a big-name IPO coming from the space would spur a wave of exits in its wake and finally quiet naysayers that felt the sector was overheated and would not generate returns to overcome the significant investments made there over the past decade. Twelve months in, Silver Spring Networks remains privately held and there is some speculation that investment pace and enthusiasm has cooled in EnergyTech as of late. Grade C

8. Early Stage VC Returns To Form. In perhaps the biggest story of 2010, early stage venture investing—particularly around consumer web, cloud computing, digital media and web services—came back with a vengeance. The year also brought new terms to the venture lexicon such as “Micro-VC”, “super-angel” and “Angelgate.” Personal note: Thankfully the BIN 38 kerfluffle has blown over and I can make the wine bar my regular post-dinner nightcap spot again. I don’t have a problem with what happened there (or didn’t happen there, as many insist.) I just wished the people in attendance that night had chosen an iHOP. Grade A

9. Alternative Fund Models Gain Momentum. 2010 undeniably brought creativity back to the structuring of investment funds. The clearest winner was the Pledge Fund, which never really went away but, rather, benefited from renewed interest in seed stage investing. While the emergence of novel fund models was partly an answer to a tough venture fundraising environment, 2010 also brought new categories of funds that were derived for specific purposes—such as to purchase early employee and angel investor stakes in popular technology companies. Grade A

10. RIP the 2 & 20 Fee Model. Tough fundraising environment or not, the 2 & 20 model is alive and well and remains baked into the subscription agreements of a majority of venture firms. That said, few new venture funds were actually raised in 2010, raising the prospect that should 2011 be similarly difficult for fundraising this debate may re-ignite. Grade C+

In summation, I’ll give myself a B+ average. A few items were clear winners and there were no glaring missteps. Share your thoughts here. In next week’s column I will issue my Top Tech Predictions for 2011.

Email is Dead? – Not So Fast

22 Jun

Facebook COO Sheryl Sandberg gave a speech recently at the Nielson Consumer 360 Conference and made the somewhat unsurprising argument that the dominance of email was under threat by the explosion of both competing and complementary technologies such as SMS and various social networking communications tools. This challenge to email’s pre-eminence, Ms. Sandberg would continue, was most apparent among the young. Now, the occasion of the COO of a leading social networking company sounding the death knell of email should be a shock to no one, but a closer examination of her comments brings into relief some concerns I have long had about how some in the tech community overplay the implications of tech trends and shifting user behavior, particularly among the young.

First, on the merits: As much as we might dread that Monday morning Inbox avalanche there is little beyond anecdotal evidence to support any impending death of email as a leading form of business and personal communication, even among the young and fickle. Ms. Sandberg based much of her ‘Email is Going Away’ dictum on the Pew Internet‘s report on teens and mobile phones study which found that only 11% of teens communicated with their friends via email daily. The operative word here is daily. What it did not state was that teens eschewed email in any obvious way as a communications tool. Indeed, the Pew report went on to conclude that nearly 70% of teens did, in fact, use email “at least occasionally” as a complementary technology to other tools at their disposal–typically, cell phones, instant messaging, and social networking applications.

So, in terms of supporting data, there is little foundation to Ms. Sandberg’s view — at least not in the short-term. Email traffic continues to increase unabated although usage patterns have been fairly stable since the middle of the last decade. To be sure, email will eventually go away much like most consumer technologies eventually go away through a process of innovation and supercession. However, while we are seeing the beginnings of that evolution now, that day is quite a ways off.

To the chagrin of many English professors “always on” technologies and real-time communication has led to communication and time compression and an overall impoverishment of the English language, at least in terms of the written word (or, more commonly, acronym.) To borrow a phrase, why write when you can leave voicemail; why leave voicemail when you can email; and, why email when you can text? Email has clearly supplanted letter writing to such an extent that letter writing almost appears quaint in 2010; either that or it is done as an intentional formality to preserve the record or to establish some documentation foundation — as in the case of nasty letters going back and forth between opposing counsel during litigation. That said, SMS and social networking platforms are not presenting anywhere near the same threat to email as email has challenged traditional letter writing. Email was clearly disruptive to the written letter. SMS and related technologies, on the other hand, appear (at least at this point) to be more of an iteration of email not an elegant replacement for it. Ideally suited for short, quick messages, SMS is the better vehicle for that kind of communication, especially among networks of colleagues and friends where the inherent informality of SMS is not an issue. Predictably, utilizing email as the medium to send such messages will continue to dwindle in favor of SMS. We are already seeing that in our daily email usage patterns. While jokes, pics and other “social” content used to clog our Inboxes a decade ago, those communications have now moved from email to social networking and photosharing sites. [Honestly, when was the last time you received a mass email joke on your work computer?] This is hardly supercession and not indicative of any mortal threat to email.

Where Ms Sandberg makes her greatest miscalculation is in the assumption that — and I am paraphrasing — “to find out what we (adults) will be doing in the next five years, look at what teens are doing today.” I think that is a reasonable statement as it relates to the younger demographic being more comfortable embracing new consumer technologies and being more free about sharing data and waiving privacy concerns, but communication patterns and needs among teens and adults are an entirely different matter.  For one obvious thing, teens do not hold jobs that typically require the kind of formal communication demands that would necessitate email. Texting the boss that you’re going to be late for your shift at The Olive Garden is probably not a career-ending move, I would wager. Collaborating with colleagues when you are 17 usually means deciding when to meet behind the stock room and determining whose turn it is to buy beer. SMS is the technology for you, my friend. Right this way. Additionally, SMS has a nice transient nature to it so there’s little concern that all those messages will be subject to court subpoena years later. So, one could further argue that the value of communications methods are somewhat correlated with their longevity. Like dandelion spores, text messages tend to find their intended target and then disappear into the ether for all time. Courts may challenge that later but I’m unaware of anyone who’s saved a text message for more than a day or so. Email? Most businesses have been caching email since the mid ’90s as part of standard internal document retention policies. That’s not going to end anytime soon.

MySpace On Life Support?

11 Feb

MySpace CEO Owen Van Natta is unceremoniously shown the door nine months into his tenure and GigaOm‘s Om Malik and others begin calling it yet another irrefutable sign of the great and inevitable unwinding of a once-mighty web property. Malik’s piece is both persuasive and blunt. There is little argument that MySpace has been adrift for some time now and that parent NewsCorp‘s interest in shedding most of its web properties has been a poorly kept secret. Regardless of where MySpace goes from here, what should strike fear in the hearts of many Web 2.0 venture investors and acquirers of web properties is the inconvenient truth that once these companies begin to go bad, righting the ship is an almost impossible task regardless of who is deputized with that thankless duty.

A quick chronology of the broad social networking/social media landscape since early last decade bears some examination as it helps underscore a bit of the brutal Darwinism at work here. A “first wave” of Web 2.0 companies like ICQ, eGroups, Evite and others begat a “second wave” comprising companies such as Friendster and LinkedIn. As has been well-chronicled, Friendster captured early leadership in the burgeoning social networking space, going from 6 million to 20 million users in the space of a year and obtaining venture backing (and instant credibility) from storied firms such as Kleiner Perkins and Battery Ventures. During this nascent period, it was not entirely clear what users wanted and valued from a social network platform, so there was a good deal of iteration and guesswork on what features would be most important to users. The conventional view, offered with the convenient benefit of 20/20 hindsight, was that Friendster erred by not offering the rich user experience that users were demanding and had trouble managing its own growth. MySpace came along and effectively leapfrogged past them, offering pix, blogging, message boards, and other features that users were clamoring for. This clash of the Titans was all playing out at a time when Harvard undergrad Mark Zuckerberg was shuttling back and forth between Calculus and English Lit classes with what would later become current industry behemoth Facebook little more than a crude prototype on his dorm room laptop.

What a difference a few years makes. It’s been said that in the web space one lives by the sword and one almost always eventually dies by it as well. In my view, these words were never more true than when discussing social media/networking platforms. The current early obituaries for MySpace may strike some as a bit of gallows humor and crassly premature, but there is little denying that should MySpace succumb to its current troubles or be reduced to a shell of its former self it should serve as a wake-up call for companies such as Facebook and Twitter. MySpace almost assuredly hurried the demise of Friendster, and Facebook and Twitter could well be responsible for many of MySpace’s current woes, but the dynamics behind this Darwinism has not changed in any meaningful way. The ‘hot, new nightclub’ problem I wrote about some time ago that particularly afflicts social media/networking companies remains unabated without any particular company resolving this issue with any satisfaction. Social networking platform users remain tremendously fickle, are completely portable, and will almost assuredly drift to newer platforms, technologies, and devices.  The key question will be, ‘is there a second Act for these companies?’ Can today’s social networking/media juggernauts continue to expand their businesses fast enough so that once an emerging player begins whittling away users (as is surely inevitable) these companies will have successfully built other core products and services to evolve and remain relevant?

 Facebook and Twitter have made enormous advances and should be credited with continually exploring new ways for users to connect, share and (in some cases) transact on their platforms. Still, the elephant in the room gnawing on the ottoman is now starting on the curtains. Even the nicest, swankiest restaurant in town does not remain on top for long. New establishments pop up, cannibalize the business by wooing diners wanting a flashier, trendier experience, and the older restaurant must evolve or close. Savvy restauranteurs know this and always bake into their financial forecasts a honeymoon period of high growth and revenues followed by a twilight period of declining business and, typically, eventual closure of the business. It’s somewhat remarkable to me that social networking platform start-ups continue to pitch me and other venture investors with investor PowerPoints and financial plans that seem to imply that they will never be outmaneuvered by a newer competitor offering a flashier, if not better, mousetrap that will trigger an exodus of their users. They need to start.

Social Climbing in Social Networks

30 Jul

Accepting Uncle Leo's friend request can bring its own set of problems for social network users

I had (briefly) planned to title this post ‘My Facebook friends can beat up your Facebook friends’ but thought better of it. Regular readers of this space will know that I am particularly conflicted when it comes to social networking companies. On the one hand I am increasingly impressed with how viral the better social networking platforms have become, how they can augment communications between broad groups of people, how they can facilitate social group overlap and instant information exchange, and how they can become–broadly speaking–quite robust as a communications tool. On the other hand, I’ve also found most to be vastly overvalued by the capital markets, too focused on branding and customer acquisition without sufficient development of applications and tools to help drive lasting, “sticky” value to users, and too vulnerable to being displaced by other social networks.

All that being said, as a lay consumer, I am endlessly fascinated by how emerging technologies typically alter cultural dynamics–both positively and negatively. We have all heard the lamentations in the popular media about how ubiquitous cell phone usage has turned us into a nation of unrefined bufoons blathering away about that evening’s dinner plans in line at the Post Office. In recent years, that might have prompted unapproving scowls from other patrons, but too often in today’s climate those “other patrons” are now too busy recounting their own details of last night’s cocktail party or their upcoming dental surgery on cell phones of their own to bother pointing out your faux pas. To hear talk radio tell it, it’s all become one big cacophony of jackasses.

Accept that premise of not, it’s hardly surprising to witness the crumbling of social peccadilloes when seemingly everyone is engaged in the same untoward behavior without any particular rebuke from society as a whole. Those of a certain age might remember when it was almost unthinkable for a gentlemen to enter a dining establishment sans blazer…and sometimes even sans blazer and tie. If one did, the penalty was to end up wearing the house blazer they kept in the coat closet, which typically was ill-fitting, came with a silly embroidered crest over the breast pocket, and had some vague coating on the right sleeve reminiscent of dried fettucine alfredo.

But times do change and in the current climate most dining establishments, with the exception of the most formal of restaurants, would fail if they insisted on adhering to that dress code standard today. Nowadays, in any given restaurant in New York, San Francisco or Los Angeles, the guys in the tailored suits are often not the power players—they are the accountants, agents and media consultants who work for the billionaires sitting next to them in the same booth wearing velour track suits, ironic T-shirts, and three-day razor stubble.

In the web 2.0 world, one social “slight” becoming increasingly evident among social networks has become the winnowing or “window-dressing” of Friends’ Lists. It’s subtle, but pervasive. One particularly cynical practice is for a new user to a social network to carpet bomb their friends’ email boxes with friend requests in the interest of getting a critical mass of friends and contacts and, by extension, links to other–ahem–more important friends and contacts. Once established the user then begins to quietly push the first batch of friends outside the herd, if you will. Indeed, de-friending has become such a common issue that a new wave of widget providers are rolling out new tools to manage this practice–secretly, of course.

To be sure, winnowing friends’ lists is to be expected in this new age of social networks. In some cases, it would be inappropriate not to allow the practice–particularly when it comes to removing an ex or former boss whose continued access to your updates and profile would be–gee, I don’t know–awkward? But I am not referring to that practice. Indeed, my comments are specifically around the ‘social climbing’ aspect of social networking. As more people use their social networking page as a business tool, this practice will only become more common. Two independent consultants who work with the tech start-up community confessed to me recently that they window dress their LinkedIn and Facebook pages quite regularly. Their rationale? A lot of their business comes from other VCs and successful entrepreneurs, so they felt that as they were Googled and Facebooked and LinkenIn’d by prospective employers, they wanted those prospective employers to see an impressive array of bold-faced silicon valley VC and CEO names…not crazy Uncle Leo. As such, these advisors strategically “friended” every tech industry notable, bold-faced or not, that they came across in the hope that they might be able to get to other, even more notable, bold-faced “friends” through that contact.

Cynical as it may appear, the practice of window-dressing friends has been going on since time immemorial. People were quietly dropped off the Holiday card lists,  return calls to unwanted parties–when returned at all, that is–were strategically timed in order to get voicemail, messages were conveniently lost by the maid, or the new admin, or due to “bad cell coverage.” We are all, to a certain extent, judged by the company we keep. Guilt by association, if you will. What web 2.0 social networks have done is simply take all the subtlety out of it. Furthermore, truth be told, we all do it to a certain extent. Next time you open your Facebook or MySpace or LinkedIn profile, chances are excellent that you’ve got a few friend requests sitting in your in-box aging like a fine wine. You are not ready to archive them quite yet, but you are not ready to admit them to the party either lest they make an ass of themselves once inside, put wine glasses down on your expensive stereo equipment, and generally embarrass you. So, they stand there behind that red velvet rope, waiting for your decision. I say, admit just about everyone whose call you’d return in normal circumstances. If they don’t merit that level of “friendship”, then listing them as a friend at all rather distorts the entire concept.

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