Venture Funding Raises Profile of Social Sites

Wall Street Journal
Septemeber 21, 2006
©2006 Dow Jones & Company, Inc.

By Clancy Nolan

Venture investors are still finding friends in the crowded world of social networking.

Despite the ubiquity of News Corp.'s MySpace.com, venture firms continue to pour money into the Web sites, betting on existing Web sites, new platforms and variations of the social-networking theme. Companies with names like Tagged Inc., TagWorld Inc., Multiply Inc., Engage Corp., Dogster Inc., TripConnect Inc. and Affinity Engines Inc. have won venture funding this year.

Microsoft Corp., with help from venture-capital firm Bay Partners, recently formed Wallop Inc. around social-networking technology it developed. Even Friendster Inc., a social-network pioneer that has faded from supremacy in recent years, attracted $10 million in August from Kleiner Perkins Caufield & Byers, DAG Ventures and Benchmark Capital.

Other well-known names also are getting into the act. Wal-Mart Stores Inc. recently launched "The Hub" a teen-focused Web site where users can create profiles, and add songs and photos. Viacom Inc.'s MTV Networks, in its continuing effort to woo Web-savvy teens, has created "Flux," a social-networking and personalization platform for mobile phones.

In all, at least $80 million has gone into such companies this year, according to data from VentureWire, a newsletter published by Dow Jones & Co., which also publishes The Wall Street Journal.

With the market already crowded with ways for people to share their lives with others, when will the party end? MySpace has an estimated 80% share of the social-networking market, according to industry tracker Hitwise Ltd. MySpace isn't just the most popular for networking -- it is also the most visited domain on the Web, ahead of Yahoo Mail, Google and eBay, according to Hitwise.

"Social networking is probably over-funded if you're going after MySpace," said Redpoint Ventures Partner Geoff Yang, whose firm invested in MySpace before it was acquired by News Corp. last year. "But it hasn't reached its potential if you are thinking about it as a function of what people are going to use [to communicate] online."
Many investors are avoiding entering a headlong competition with MySpace. Instead, those with money to invest are placing their newest bets on start-ups addressing broader markets, or tackling niches and demographics where they believe there is still opportunity.

The key, say many investors, is incorporating the benefits of social networking into a service that also provides other attractive features.

"I think many [companies] are heading for a train wreck if they just want to do social networking versus making a compelling user-experience for a specific demographic," said Mr. Yang.
Newly formed Engage, for example, has incorporated networking features into an online dating service. As a result, social networking is just one component of the site, which plans to generate revenue through subscription fees. Advanced Technology Ventures and First Round Capital were among investors that recently supplied Engage with $5 million in financing.

Other companies, like Gaia Interactive Inc. and IMVU Inc., have incorporated networking features into so-called avatar-based communities, where people create alter egos for themselves. Industrious Kid Inc., which is backed by $6 million from undisclosed investors, aims to carve out a space in the social-networking world by making bloggers out of elementary and middle-school students.

Jobster Inc., an employment and recruiting Web company, has built-in social-networking capabilities that aim to help recruiters and candidates interact more casually. Jobster has landed a total of $48 million in the past two years from investors including Ignition Partners, Mayfield Fund, Trinity Ventures and Reed Elsevier Ventures, the venture arm of publisher Reed Elsevier PLC.

San Francisco-based Tagged is targeting users between the ages of 12 and 18 -- a demographic now dominated by MySpace. "The thesis is not, okay, we need to beat MySpace," said Mayfield Managing Director Raj Kapoor, an investor in Tagged. "I think the question is, 'Are people going to use more than one platform?' And I think there's a good chance they'll use two."

Other firms have opted for less-crowded markets. In July, Multiply Inc. raised $5 million from Transcosmos Investments to move its social networking platform into Asian markets. Multiply, of Boca Raton, Fla., was formed about two years ago and has raked in about three million members -- small potatoes compared with MySpace's more than 100 million members.

From Transcosmos's viewpoint, Multiply has the potential to take a hefty slice of the market in Japan, where some of the biggest competition is Mixi Inc., a Web site that claims about 4.8 million members. Asian markets -- especially in Japan, South Korea and China -- are ripe for competition, said Shin Nagakura, executive vice president for Transcosmos and a Multiply board member. "It is still a year or two behind, but growing," said Mr. Nagakura.