Justin Phelps, an executive at a computer game company in Silicon Valley, wasn't looking for a new job when a friend in France forwarded him a message posted on a Web site last August. It was for a position as a chief technology officer with Blue-Stream Communications, a telecommunications company based in the British Virgin Islands, with offices in Grenada.
Phelps, 28, sent an e-mail to Blue-Stream and several teleconferences with the company's managers followed. Then, in early November, he received an offer letter to start at the end of December. What made his job search remarkable is that Phelps never met the people who hired him. Instead of using contacts from a fraternity or an alumni association, his introduction to Blue-Stream's executives was through Tribe.net, an exclusive Internet social club based in San Francisco.
“I feel pretty fantastic making a competitive American salary in a beautiful Caribbean country,?? says Phelps, who now lives in Grenada. “I hope to use Tribe a lot more in business relationships.??
Phelps is part of a rapidly growing movement among computer users to join invitation-only Web sites in order to make business contacts, find dates, meet people with the same hobbies or interests, or just chat. Besides Tribe.net, other social networking sites include Ryze.com, Friendster.com, LinkedIn.com, Meetup.com and Emode.com. Unlike mass job sites, like Hotjobs.com or Monster.com, or cyber dating services, such as Nerve.com or Match.com, users of these new Internet social networks have to be invited by a member. Picture them anxiously waiting behind velvet ropes to receive their invitations.
USERS QUICKLY ADOPT SERVICES
Within the past year, more than 3 million users have joined these social networking sites. In contrast to the vaunted dot-com company blueprints of the mid- to late 1990s, these new ventures appear to be gaining both validation and momentum from the ground up as businesses formed around consumer demand versus Wall Street greed.
Tribe Networks Inc. began in March 2003, when its founders invited 100 people they knew to join their online club. It now has 35,000 members, who log on to the site for business and social networking. Or, they can join one of the site's more than 5,000 “tribes?? catering to members' different interests. One executive at IBM Corp. created separate tribes for his church, his son's little league team, his children's school's parent group and his tech geek friends. All members were referrals. “We haven't done any marketing,?? says Mark Pincus, Tribe.net's 37-year-old founder, who admits the site's name was influenced by Ethan Watters' book, Urban Tribes: A Generation Redefines Friendship, Family and Commitment, (Bloomsbury USA, 2003).
These sites have become such a rage among Internet users that Danah Boyd, a doctoral candidate in the School of Information Management and Systems at the University of California at Berkeley, spent a year online investigating them. While researching her 2002 masters thesis at Massachusetts Institute of Technology's Media Lab, Boyd found that early users of these invite-only social sites were college-educated, had what they considered hipster attitudes and were between the ages of 25 and 35. She also found that slightly more of the users were men.
As popular as social networking sites may be among the visitors they attract, the big question still is, can anyone manage to profit from the concept? So far, none of them are in the black, although Ryze.com, which charges membership fees, is breaking even. Friendster.com, LinkedIn.com and Tribe.net are still in their beta phase, the secondary, test phase of a startup when developers see who uses the site and how they use it. During this stage, the sites are free to users.
What makes these ventures different from previous Internet startups is that the founders have learned lessons from the dot-com debacle of the late '90s. This time around, many are investing their own money and running frugal operations. Tribe.net's 13 employees, for instance, receive meager salaries, but they are investors in the company. Pincus, who started two successful Internet companies before the bubble burst says, “I've spent less money starting Tribe.net than I did on my first two. We negotiate special rent deals; we haven't spent anything on furniture. This isn't a throwback to 1995. This isn't a champagne cork-popping dot-com.??
REVENUE MODELS IN QUESTION
While it's still not clear how these sites will generate revenue in the future, they are already attracting interest from investors. Andrew Anker, a venture partner in August Capital of Menlo Park, Calif., thinks the sites have tremendous marketing potential. August Capital was an early investor in Emode, investing $7 million in the fledgling company in March 2000. Among the top social sites, Emode — also based in Menlo Park — is the only one that currently accepts ads. “The interesting thing about these businesses is that you have your customer doing the marketing for you,?? says Anker, 38, who estimates that marketing consumes 70 percent to 80 percent of a business' budget. “When I join, say, Friendster, I'm encouraged to go invite my friends, so that I have a bigger network. If I send e-mail to my 10 best friends saying, ‘Hey, join my network,’ all of a sudden, I've become a de facto marketing agent for Friendster.??
In November, three venture capital firms invested $13 million in Friendster. Kleiner, Perkins, Caufield & Byers, Benchmark Capital and Battery Ventures participated in the financing, reportedly bringing the company's valuation to around $53 million. While Friendster's social network is free, the site plans to introduce revenue-producing premium services — maybe video and sound capabilities. And there are also plans to link to other sites, such as Google and Overture Service Inc., an ad-supported search company.
Although most of the invite-only endeavors don't plan to solicit ads, marketers and advertisers are keeping their eyes on these sites, because their highly engaged user base is growing so fast. Perhaps, in the future, the sites may form sponsorships with other corporations to offset costs. “If they really start looking at the demographics [of their users] and could show that they're up-and-coming people, we could attract a major corporate sponsor [such as] an automotive company that could pay for the whole site and still make it profitable,?? says Lois Geller, president of Mason and Geller Direct Marketing in New York City.
In the meantime, Geller, who's also author of Response: the Complete Guide to Direct Marketing (Oxford University Press, 2002), tracks the Web sites “just to get the buzz.?? She regularly checks in on Friendster to see what people are talking about and how they're saying it. But she understands the site developers' reluctance to permit target advertising. “If people are online discussing a new kind of electronic device and while they're talking about it, an ad pops up, I think it has a negative affect,?? she says. “It smacks of commercialism and it looks like somebody was in on the deal.??
Indeed, the sites do create buzz for products. Urban Tribes' author, Watters, attributes some of the success of his book to social networking sites. “News about ‘Urban Tribes’ went through these networks immediately,?? he says. Watters sees a correlation between the tribes he depicts and these online clubs where people can hook up with their friend's friends. The author used the social networking sites to find interview subjects for the book. “Your individual closest friends, though great, are not that helpful,?? he says, “because they have the same information you do. Groups of friends present the strongest and most powerful network.??
THE JOY OF JOINING
Sunnyvale, Calif.-based Friendster which is primarily a site for socializing, took off like a bullet in May 2003 and now boasts nearly 2 million members. “Friendster spread first mostly among large groups of sort of marginalized people, like the hipster culture, the music culture or the gay culture,?? Boyd says. Friendster became such a phenomenon that it developed a vernacular of its own: fakesters and fraudsters. It also inspired Pretendsters.com, a site that creates comical personal profiles, for anyone who suffers from “network envy?? because his own is, well, small.
Ryze.com, based in San Francisco, was launched in October 2001 with 2,000 users and today has more than 60,000. It is now breaking even, says Adrian Scott, 30, the site's founder. “We have a gold membership, which costs $10.95 a month and lets people do advance searches and create their own branded network on our site,?? he says. “We started out as a business networking site, but a lot of things result from building relationships first.??
LinkedIn.com, in Mountain View, Calif., launched in May 2003 when its founders e-vited 100 friends to join. The site now has over 30,000 professionals as members, says Konstantin Guericke, 36, cofounder and VP of marketing. He contends that members use the Web site primarily for business networking. LinkedIn doesn't track the specific demographics of its users, but Guericke assumes that most of the members are male. “We don't ask for age; what we do keep tabs on is what percentage is executive, meaning vice president or above,?? he says. “That's 24 percent of our user base and there's probably an age correlation that goes with the seniority.??
Emode didn't start out as a social networking site. “It was all about self-improvement and discovery through quizzes,?? Anker says. “Sometimes they'd be very serious, like IQ tests, and sometimes they'd be very funny, like, ‘What kind of dog are you?’ And sometimes the quizzes would be paid for by the advertiser and essentially market research, like, ‘What kind of Volkswagen Beetle would you be?’?? But, Anker says, users are always made aware when that's happening, and always have the option to prohibit their responses from being shared with advertisers. Emode added its social network, called Tickle, in October 2003.
WILL USERS PAY?
LinkedIn, Tribe.net and Friendster all have business plans in which the next phase involves charging users a fee. Guericke projects that LinkedIn might ask for $10 for a successful hiring contract or $100 annual membership fee. But he doesn't anticipate instituting that for another six months or so. “We first want to make sure we have at least a million members,?? he says, adding that so far, “tons of people who've found jobs and contracts and have closed deals through the system.??
Tribe.net's Pincus is also contemplating adding fee-based services. “We hadn't planned on turning on a pay window yet, but we're actually thinking that we should, so that more people understand what our business model is,?? he says. “This is going to be free for you to use to meet and contact people in your network, but if you want to post a listing beyond your personal network and act in a commercial fashion, then you're going to have to pay something. If it's an announcement or an event, it might be 25 cents. If it's a job, it might be $50.??
Distinguishing their startups from dot-coms of yore, the founders of the sites believe they will be able to generate revenue from membership. “The world is underinvested in innovative services that try to bring something new to consumers and to advertisers,?? Pincus says. “We should be taking risks like this. This is what I'm supposed to do as an entrepreneur.??
But even Anker admits that having a desirable audience may not be enough to create a successful company. “Just because you have low marketing cost doesn't mean you have revenue,?? he says. “You still need to figure out other ways to make revenue, and I just don't see how some of these companies are going to figure that out. It's premature to start talking about what these audiences are. LinkedIn is trying to go after only business people. Tribe is trying for the shopping, commerce, classified ad people. And Friendster is going after the dating, social people. I don't think there are three types of people. I think there's one type of people. I think these developers are all going to wake up one day and realize that they're competing for the same people with the exact same features and the exact same revenue base.??
Anker expects networking sites to continue experiencing tremendous membership growth, but cautions that the sites have to figure out a way to become financially viable. As he says: “Show me the money.??