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.
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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.
A version of this article appeared in the September 2012 issue of Fast Company magazine.