Social Networking's Gold Rush

The movement continues to defy doubters and draw big investments. The latest includes $25 million for a piece of Facebook

Just a few months ago, many experts and investors were inclined to dismiss social networking sites as a mere fad. Regardless of how many members sites such as MySpace (NWS) and Facebook racked up, critics warned that supposedly fickle young Internet users were likely to rush away as soon as the next hot startup came along. And some advertisers were skeptical about the effectiveness of the medium, which features user-created content of a sometimes questionable nature.

Those fears could still turn out to be valid. The sky hasn't fallen yet, though. So with each passing month, investors, big media companies, and advertisers are being forced to seriously consider whether social networking sites can have a viable long-term business model. Whether or not there's a future for social networking, players that are high on the sector's prospects, or simply don't want to miss out on its potential, are pouring in serious money (see BW, 4/10/06, "Socializing for Dollars").


  These days, new deals are made almost daily. Facebook, a site for college and high-school students, plans to announce Apr. 19 that it has raised $25 million in its latest round of funding from venture-capital firms. That same day, Rupert Murdoch's News Corp. (NWS), is expected to announce that it is taking a minority stake in SimplyHired, a job-hunting site with a strong social-networking component.(Murdoch jumped into the sector last year with the acquisition of MySpace, the leading social-networking site with a large number of teenage and young adult users.) Meanwhile, on Apr. 17, social-networking site Visible Path said it raised $17 million in venture capital (see BW Online, 04/18/06, "MySpace For the Office").

Social-networking executives say the deals show that investors have increasing confidence in their business plans. "We think we have something really special here, and I think this investment confirms that belief," says Melanie Deitch, director of strategy for Facebook, which is based in Palo Alto, Calif. The company was started just two years ago by three Harvard students, who were sophomores at the time. It now has 7 million registered users, up from 1 million at the beginning of 2005. It ranks as the seventh-busiest site on the Web.

The company plans to use the $25 million in additional funds to add more features to its site. Deitch wouldn't disclose what the Facebook's management team has in mind, although she did note that just last week it launched a new feature that allows members to access the site from mobile phones. The investors include marquee venture-capital investors Greylock, Meritech Capital, Accel, and Peter Thiel. Accel and Thiel have invested in earlier rounds.

Facebook also offered no hint of how investors valued it. Just a few weeks ago, a media executive told BusinessWeek that the owners wanted up to $2 billion in an acquisition; the company didn't disclose how large a stake it had sold for $25 million. And Deitch said the company hadn't hired bankers or looked to sell itself. She did confirm that it had turned down multiple offers from companies that wanted to buy Facebook, though. "Our focus is to build the business for the long term," she said. Facebook already has attracted major advertisers such as Jeep (DCX) and Microsoft (MSFT). They can purchase traditional display ads or sponsor affinity groups. Local advertisers such as sororities also can purchase "flyers" to promote local events. "We think Facebook has a unique opportunity to reach a crucial demographic at a key point in their lives. And when a site has this much scale and brand recognition, advertisers will come," said David Sze, a general partner at Greylock.


  The SimplyHired deal shows how social networking is being used as a lever for other kinds of Web sites. News Corp. is going in on a $13.5 million investment with Silicon Valley venture firm Foundation Capital. The deal marks the second round of venture money for SimplyHired, which is competing with established job services like (MNST), CareerBuilder and Yahoo!'s (YHOO) Hotjobs.

However, instead of selling advertising directly to firms looking for workers, SimplyHired searches the Internet for job listings at every place from competing job boards like Monster to the help-wanted section of hiring firms' own Web sites and aggregates them on its site. It gets its revenue from selling paid-search ads, both through Google and other ad networks and through its own sales force. Plus, SimplyHired gets referral fees for finding qualified candidates, including payments from larger job boards that need to deliver value to employers who pay them directly.

"We can deliver job seekers for destinations that have employer relationships, so in that sense it's complementary," CEO Gautam Godhwani says. News Corp put in $3.5 million, while Foundation Capital put in $10 million. Godhwani says there are active talks to make SimplyHired the beginning of a classified strategy for MySpace.


  Simply Hired's edge among other jobs sites is clever in its use of social networking, says Greg Sterling, founding principal of Sterling Market Intelligence, a consulting and research firm in Oakland Calif. Through a deal with LinkedIn, users can press a button marked "WhoDo I Know?" that is placed with each job listing. LinkedIn searches the user's network to tell them who they know at the hiring company, or who they know who knows someone at the hiring company.

Says Sterling: "That's really the value-added they deliver that sets them apart." Investors hope it's enough value-added to deliver a big return on their optimism.

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