The lure of social networks

Social networking may not sound like a phenomenon designed to attract today’s web-savvy youth, but the popularity of digital personal content sites such as Facebook and MySpace, snapped up by Rupert Murdoch’s News Corporation for $580 million last year, is also attracting venture capital firms.

Benchmark Capital has invested in three social networking sites, which allow users to create blogs, publish and share videos and photographs and communicate with friends, who are also encouraged to build personal pages.

The first big wave the internet brought us Yahoo! and Amazon and eBay, which have become very big sustainable businesses. We look at social networks in the same way. Barry Maloney, partner, Benchmark Capital

In May of this year, Benchmark joined with Accel Partners in a $15.5 million (€12.1 million) Series B investment in WeeWorld, which provides WeeMee digital identities that reflect their owner’s looks and interests both on the internet and mobile phones, having helped the business get off the ground in March 2005. The same month, the firm put $15.5 million into Bebo, an online community created by British entrepreneur Michael Birch and frequently referred to as the UK’s MySpace.

Benchmark’s interest in social networking dates back to January 2005, however, when it partnered with 3i to invest $23.5 million in Sulake, the Finland-based multimedia creator of Habbo Hotel, which combines the online chat concept with The Sims-style visual representations of users and their habitats.

“We first started to notice the phenomenon when we made our Habbo investment,” says Barry Maloney, a partner in the London office of Benchmark. “Our interest increased as we saw what was happening with MySpace and YouTube and all these other emerging social network sites.”

Naturally, some pundits have questioned the wisdom of venture capitalists current interest in social networking sites so soon after the dotcom crash, but Maloney says things are very different this time around.

“People talk about the bubble, but back then there were business models that had no reason for being on the ’net and that’s why they failed. These businesses, however, have been built on the ’net. From a VC perspective, there is much more efficiency of capital too, you can put £10 million to £15 million into a start-up and grow a valuable business. And with the current technology and open source, you can start cheaper and more efficiently.”

Maloney: a wave, not a fad

Maloney is also quick to dismiss the notion that social networking sites are just another internet fad: “All the research we’ve done suggests that its much more than a fad, it’s a whole wave that’s coming. Much of it is to do with more and more people getting access to broadband, but it is also a generational thing. The next generation of 13 to 25-year olds have taken to this as a method of communication.”

There are a number of ways to make money.

Habbo Hotel’s revenue stream is based purely around digital inventory – users pay cash for the latest ’couch’ or other item of furniture to make their spaces more appealing for friends to visit. Weeworld, on the other hand, “shows that people are happy to pay to download their digital image”. Bebo relies on the more traditional online revenue stream of advertising.

The oldest of the three investments, Habbo Hotel, is profitable today, says Maloney, while “Bebo has been profitable since day one”. Benchmark’s main aim with the latter, he adds, is to expand the business and the site and try and attract market share away from MySpace.

Social networking sites also have potential beyond the teen market, according to a report from US research company eMarketer last month. Approximately 70 percent of mothers online use social networking sites, said the report, with mothers representing 13 percent of MySpace.com’s 48 million visitors.

Maloney agrees. “It’s true to say that Habbo is specifically targeted at 13 to 16-year olds, but both Weeworld and Bebo have demographics up in to the mid-30s and early 40s. All the publicity tends to be geared towards younger age groups and there’s no doubt that that’s where they are starting from and who is initially generating the content, but if you look at how they are being used as community platforms, there’s far more potential than that.”

Having already invested in eBay and Skype, Maloney is confident that social networking sites have the chance to be successful and profitable investments, despite the usual caveats: “The first big wave the internet brought us Yahoo! and Amazon and eBay, which have become very big sustainable businesses. We look at social networks in the same way. But in our business, you never know – it’s a high risk, high reward game, but we’ve made our investments in three of the better companies in this space.”