Social Networks In Search of Business Models
Social networking tool companies are sizzling as start-up venture investments, but can they make money?
Despite skepticism that the buzz around social networking tools is fueled by venture capital-created hype, executives at some of these start-ups insist there’s money to be made from software that connects friends to friends of friends.
Services like Friendster, Tribe Networks, LinkedIn and Google’s Orkut may be growing in popularity but, as Tribe founder Mark Pincus admits, revenues are non-existent and profitability is not even in the equation today.
So why are venture capitalists pumping money into social networking start-ups? “There’s an intended business model in subscriptions, classifieds and even targeted advertising,” Pincus said at a panel discussion in New York this week.
“This is the next generation of online classifieds. CraigsList has shown us there are revenue opportunities once we do this right,” Pincus said, referring to Craig Newmark’s no-frills Web site that serves as a marketplace for millions looking to buy and sell items, find dates and research job opportunities.
CraigsList charges a $75 fee to list job openings and has generated million of dollars in annual revenue. “We can emulate CraigsList,” Pincus declared, pointing to an increase in the number of paying participants in the online classifieds market.
Pincus, a serial entrepreneur who founded and once served as CEO of SupportSoft , believes the interconnectivity of social networks will create lucrative online classified marketers, especially at the local levels.
Reid Hoffman, the former PayPal vice president who founded LinkedIn, sees a hybrid business model for his company. Once the service expands, Hoffman said money will be made in paid subscriptions from members and an advertising service resembling Google’s content-matching AdWords service.
“Are you looking for a lawyer? Well, the advertisement can return a lawyer in the network that is linked to one of your friends,” Hoffman said. “There are lots of business models that can come out of business people looking to connect with each other.”
A subscription fee for premium membership is another option for LinkedIn, which launched late last year with $4.7 million in funding from Sequoia Capital. In the long term, Hoffman believes the social networks can tap into the lucrative online dating business now dominated by companies like Match.com, Yahoo Personals and Lavalife.
The online dating sites lets users create and publish catchy profiles for free but charge a monthly fee to let users contact each other. It is a model now being used by Ryze, which styles itself as a pioneering business networking service. Ryze charges $9.95 per month for gold membership and also makes money from organizing networking events and, according to CEO Adrian Scott, the company is already turning a profit.
New York-based Visible Path is taking a different approach to marketing the service, by targeting enterprises with social networking technology. Visible Path Chief Executive Antony Brydon believes the corporate customer is an easier sell for technology that offer relationship networks that connect them to prospective customers, partners, investors and employees.
At the panel discussion, Brydon announced the closing of a $3.7 million round of funding from venture capital outfit Kleiner, Perkins, Caufield & Byers. Ray Lane, a general partner in the VC firm will take a seat on Visible Path’s board of directors.
