Social networking continues to lure venture capital

LinkedIn, SodaHead, Twitter and I’m In Like With You are among the most recent companies to receive backing in the increasingly crowded social networking sector.

Venture capital’s love affair with social networking continues, despite the sector becoming increasingly crowded. A flurry of venture funding worth some $70 million (€44.5 million) has occurred in recent weeks for sites ranging from professional networking site LinkedIn to “opinion community” SodaHead.

“The reason [social networking] is big is because it’s where people are spending their time,” said Mohr Davidow Ventures (MDV) partner David Feinleib.

David Feinleib

Leading the pack in amount of recently raised capital is LinkedIn, which made public a $53 million fourth funding round on 18 June. The round was led by Bain Capital Ventures and included existing investors Sequoia Capital, Greylock Partners and Bessemer Venture Partners.

Twitter, a social networking and microblogging service, said on 24 June that Spark Capital and Amazon founder Jeff Bezos’ Bezos Expeditions led a second round of funding for the social network. Sparks’s Bijan Sabet also joined Twitter’s board. Existing investors Union Square Ventures in New York and Tokyo-based Digital Garage also participated. The size of the funding round was not disclosed but is rumored to be approximately $15 million.

Spark has also led the $1.5 million Series A round for I’m In Like With You, a social network now shifting towards social gaming. Baseline Ventures, Betaworks, technology investor Ron Conway and Netscape founder Marc Andreessen also took part.

SodaHead, led by MySpace executives Jason Feffer and Michael Glazer, said on 25 June that the company raised $8.4 million in Series B funding. The financing was led by Mission Ventures with prior investor MDV co-investing. MDV led the Series A round of $4.3 million.

You really have to be backing entrepeneurs that you think have cracked the code on user acquisition

David Feinleib

“It’s really a bet on the entrepreneur,” said Feinleib. “You have to find the product visionary and the market visionary who then goes and finds the market.”

It order to become profitable, social networks must achieve enormous scale by attracting tens of millions of users.

“It’s always been a space of a lot of money in followed by a smaller number of really big outcomes,” said Feinleib. “You really have to be backing entrepreneurs that you think have cracked the code on user acquisition.”

Venture firms have also begun to recruit the expertise of social networking executives. Last week, Facebook’s vice president of product management, Matt Cohler, agreed to join early-stage technology venture capital firm Benchmark Capital as a general partner. Cohler, who also helped found LinkedIn, will remain a special advisor to Facebook chief executive Mark Zuckerberg. Benchmark’s social networking portfolio companies include Bebo and Friendster.

As money continues to flow into social networking companies, it is unclear how many more large players the category can support. “It’s conceivable that another social network could break through [but] the category is pretty established now,” said Feinleib. “There are a certain number of sites that are getting the majority of engagement time.”

New entrepreneurs are now taking social networking and viral approaches and applying them to other categories rather than trying to compete, said Feinleib.