April 2004

Internetworking

Continued from page 2

By Michael Fitzgerald

You Make $, I Make $

Will cool-and quick-intros for clients translate into cold cash for the networking firms? That's an unanswered question, as most public networking sites are still in some form of beta testing and aren't yet charging for membership or services. LinkedIn, for instance, says it will charge an as yet undetermined amount for referrals and other types of connections. San Francisco-based Ryze, which grew out of a real-world networking club and is the oldest of this second generation of social nets (dating back to October 2001), only charges for premium services, such as access to advanced search tools that can find people by company, university, and interests. It also earns revenue from its real-world mixers and claims to be profitable.

One thing is certain: today's networking sites are growing at a more sustainable pace than their predecessors. Sixdegrees raised $26.5 million and employed 85 people, all working in expensive Manhattan office space, before being shut down at the end of 2000. By contrast, "It's freezing in my offices," says Mark Pincus, founder and CEO of San Francisco-based Tribe.net and a veteran of two bubble-era startups. "I have to wear a coat. I think we might be going too far to the other extreme, being too conservative in spending money."

Veteran venture capitalists agree that things are different with this round of startups. Allen Morgan, a general partner at the Menlo Park, CA, venture capital firm Mayfield-which, along with Knight Ridder and the Washington Post Company, invested $6.3 million in Tribe-points out that users generate the content of the social-networking sites and provide most of the marketing by word of mouth, so the companies can run on the cheap. He calls that "a good bet."

At the same time, other Web businesses from Yahoo! to craigslist, a classified-ad site based in San Francisco that charges $75 to post a Bay Area job listing, have proved that people will pay for certain online services, such as personal ads. The networking sites will likely go after a chunk of that business. "Tribe will cannibalize the online-classified-ads market and a portion of eBay's [auction] market, and LinkedIn will cannibalize both online and offline recruiting," predicts Ross Mayfield (no relation), a technology blogger and CEO of Socialtext, which makes group communications software. Each of these niches generates hundreds of millions of dollars in annual revenue, though to get their share of it, the social-networking companies must still figure out how much to charge, and for what.