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Why this angel is not investing in social networks

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I recently had the privilege of speaking at the Technology Tasmania 2010 Conference in Hobart organised by TASICT. The conference was an excellent event, with strong local support and keynote speakers from around the country and overseas.

During the final panel session, a young entrepreneur asked me an interesting question, “If Twitter hadn’t happened yet and you had the chance to invest in it at start-up, would you?”

As it turns out this is quite relevant as I did have the chance to invest in Twitter during a very early funding round through my own networks in Silicon Valley.

I turned the offer down.

Why didn’t I invest in Twitter?

First, the idea of a service that has millions of people streaming their free flow of consciousness onto the Internet in little bite size chunks held little appeal for me.

Second, the even more bizarre idea that there are millions of other people out there spending all their time reading those chunks I still find quite astonishing. (I don’t know where they all find the time!?!)

Now, in hindsight, I know that Twitter has grown well beyond these first impressions and, indeed, of all the major social networks, I suspect that Twitter has the greatest potential to monetise its millions of eyeballs profitably.

Twitter took advantage of the convergence of the Internet and mobile computing, specifically, mobile phones.

A tweet fits within the requirements of the Short Message Service (SMS) which, for many traditional telcos, has become one of their fastest growing and most profitable revenue streams. Those companies just adore the millions of customers who feel compelled to disgorge their daily lives upon the world in 140 character snippets.

Then there are those millions of folks who are busy “following” a tweeter (or ten or one hundred or many more!) and busily retweeting, so that the first SMS tweet can spawn an ever-expanding army of fee-paying repetitions like the proverbial ripples from the pebble in the pond.

These days, Twitter is building new capabilities that will empower companies to make effective use of the Twitterverse for all sorts of commercial purposes from basic word-of-mouth advertising to rapid response customer support and more esoteric fee-for-service ecommerce outcomes.

Having built it, they have come.

Now the folk at Twitter (and their investors) are eager to figure out how to get the cash rolling in from both customers and users.

What about MySpace, Facebook and YouTube?

The other leading social networks also came to prominence by exploiting a trend — an increase in capacity and capability of the Internet that would support stickier interactions.

MySpace and Facebook, shortly after, came to the fore when the opportunity arose to exploit first music and then photos and finally video with YouTube. These approaches made automatic allies out of the companies that get paid for moving the bits and bytes about the Internet. (The same way that Twitter attracted automatic allies.)

To be sure, there were short-term cries of anguish as the infrastructure was stressed but, the network operators all happily built out their infrastructure so those cries were more about missing out on the short-term profits than about opposing the social networks.

Investing in social networks

So, reinterpreting the question in Hobart, will we invest in any new social networking opportunity?

I still see yet another (and another and another) social network play from an Australian entrepreneur every week or two.

Sadly, these tend to be largely me-too type opportunities seeking to emulate one of the two or three major networks with some marginal wrinkle.

For me to get excited about investing and to convince my colleagues to invest, I need to see someone who is going to leverage a very real and sustainable aspect of the changes in technology and do so in a way that co-opts major companies as supporters.

That strategic synergy of making other firms more revenue and profits is essential for an enterprise that is unable to monetise its own services at the outset.

A social network that uses existing technology and simply focuses on an under-served niche market may well succeed. However, it is unlikely to produce the exponential value growth that offers the rewards to match the risk of early-stage investment.

It was a great question and triggered a convergence of my own thoughts.

As an early-stage investor for over two decades, I am inclined to seek opportunities that can make a big difference by introducing or exploiting pervasive technology. On the Internet, I prefer opportunities that have both customers and users over those that only have users.

Similarly, in digital media and software applications I like ventures that are selling a benefit driven value to customers. Advertising is a valid revenue stream but, there are very few businesses that can be born today to grow and survive exclusively on winning a large share of the advertising pie.

Australian entrepreneurs are as likely to give birth to the next Google, Twitter, or Facebook as are any other entrepreneurs. What did I learn from turning down Twitter? The companies that succeed will be the ones that offer value to both users and customers (there is a distinction) and, in doing so, create the most allies.

Jordan Green is an experienced executive, entrepreneur, engineer, venture capitalist and Angel investor. He has over twenty-eight years experience in growing and advising technology oriented companies in Australia, USA, Asia and Europe. A Silicon Valley software veteran, Jordan was a founding partner of one of the best performing venture capital fund managers in Australia, he is co-founder and Deputy Chairman of the Australian Association of Angel Investors and Jordan founded and leads Melbourne Angels Inc.

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