Fast Company

Why Do VCs Still Love Social Media?

Despite revenue woes and a rocky IPO market, social outfits still score big funding. Bo Peabody, creator of the web's first social network, Tripod, in 1992 (!) and a partner in two venture firms, explains.
Illustration by David Schwen

Social network users aren't there to buy stuff. They're there to communicate with others. We use the phrase social media, but they're really communication services, not media properties.

I remember meeting Foursquare founder Dennis Crowley four or five years ago and thinking, This guy is in the same exact position as I was in the mid-1990s. He is on the cusp of creating something incredible, but how is he going to navigate the money raising, the consumer experience, and the business pressure? One of the reasons I sold Tripod in 1998 is that I was concerned that I was in a business where making money and keeping your consumers happy have sort of an inverse relationship. The more monetization you do on a social network, the worse the consumer experience becomes. It's just remarkable that in 20 years we haven't figured it out. It may be that it's unsolvable.

If monetization is such a problem, why do VCs keep investing in social media? At Greycroft, we're looking for consumer sites that have massive consumer adoption tied with strong engagement. [Greycroft has invested in the video-sharing network Viddy.] These networks, like Instagram, can be fantastic add-ons to companies for acquiring and retaining users. As part of a larger ecosystem, the business can make money from those users elsewhere.

The exception to that rule may be Pinterest. It's a quasi-social network where everything is built around purchase intent. That is a fundamentally better environment to monetize. You're not really communicating with people; you're sharing your interests. It's a subtle but very important difference.

But even more than social networks, there's at least as good a business, if not a better business, in providing tools to companies to help them harness the power of social networks. The biggest winners will be the startups that offer them a way to use social that is brand-safe and additive to what they do.

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