The age of social networking is upon us. Websites, often conceived by students and university drop-outs, are being sold for hundreds of millions.
When, in 2005, Rupert Murdoch’s News Corporation snapped up MySpace for £580m, cynics crowed that the media oligarch had been duped. Little over a year later Google signed a deal to pay News Corp’s Fox Interactive Media £472m to provide search and advertising on the social networking site – virtually paying off the outlay at a stroke.
Google then picked up online video sharing site YouTube for £883m a couple of months later. So when Yahoo!’s £1bn offer for MySpace rival Facebook was rejected late last year by its 23-year-old founder, eyebrows barely twitched. In the UK money has also been changing hands. Last.fm, a London-based music site, was recently bought from its founders for £140m by the American media giant CBS. All sound business, say the analysts.
Behind the march of the new titans is broadband reaching critical mass and the convergence of technologies – web, mobile, camera, video and audio – making ideas that couldn’t work in the first dot com era a reality now.
With low barriers to entry and cheaper technologies, viral marketing and word of mouth part of a free access culture, as well as the renewed confidence of venture capitalists and buyand- build corporations, green entrepreneurs have seized the day – and dot com veterans have returned for more.
The user is king, with businesses built on the twin towers of eyeballs and advertising.
The rise of social media
Use of these giant forums for interaction, chat, idea swapping and general play spread fast. Last.fm, while not profi table, had amassed 15 million users when sold. Making a profit with that number of users should then be straightforward, goes the theory.
Most of the big social networking sites have so far come out of the campuses of US colleges, where the networks are bigger, the audience more web savvy and there’s less pressure to have financial success. Social networking sites have, quite understandably, made some big headlines. But the journey remains a tough one.
One UK-based business which has managed to overcome initial barriers, is the travel-based site Wayn.com (Where Are You Now). Wayn has built an audience of eight million users. Its founder Jerome Touze conceived of the site while on holiday in California as a way of keeping in touch with friends when abroad. He launched in 2003, following £10,000 of backing from Steve Pankhurst, founder of Friends Reunited.
But close to two years of hard work followed, during which Touze also maintained a full-time job, until the site reached critical mass.
“In February 2005 we had about 45,000 members but by September we had a million,” Touze says. “We had reached a critical mass where existing users brought more users and so on.”
The site has since gained institutional backing and is bringing in revenues from advertising and through travel bookings. Interestingly, founder of Lastminute.com Brent Hoberman, an angel investor and the company’s chairman, announced last month that its subscription fee is being dropped, manoeuvring it in line with other social networking sites.
The London scene
In such a fast-paced scene where great ideas are latched onto immediately, it was inevitable a powerful, in-the-know network would form. Just as with the original internet boom, events are bringing entrepreneurs and investors together. First Tuesday, set up by Julie Meyer, was responsible for many of the internet’s leading lights securing funds. Hoberman and Martha Lane Fox met their backers through First Tuesday and if you pick through the UK’s first successful online businesses there’s a firm chance they went there too.
Today, the vibrancy is back. First Tuesday has been reincarnated as Second Chance Tuesday – ‘a cheeky homage’. Founded by Michael Smith, of dot com success Firebox.co.uk and now Mind Candy, and Judith Clegg of the Glasshouse, it is already having an effect. “We watched this industry implode and it was pretty horrible to live through that,” Smith says. “But then we saw the green shoots appear and decided to create an event for entrepreneurs.”
Second Chance was able to bring senior partners from four private equity houses – Accel, Index Ventures, Benchmark and Atlas Ventures – to speak at one of its 300- strong events held last April.“These are keynote speakers in their own right for an entrepreneurial event, so to have four is remarkable,” Smith says. Meyer also remains a highly prominent figure, through investment intermediary and futuregazing advisory firm Ariadne Capital.
Another networking group, Internet People, also holds weekly mixers and is the intermediary for many recent deals. Its founder, Robert Loch, introduced teen social networking site Bebo to its investor, Benchmark. He also brought together Wayn.com and its future investor Espirit Capital.
Recruitment referral site Zubka also has its origins at an Internet People event. The events are also a great way to hear about new ideas and make those all important contacts. “Contacts are hugely important to your ability to become successful,” says Loch. “It is not just about having a good idea but is dependent on who your team is.”
Some of the early dot com champions have now become investors and may also be found at these events. Hoberman has invested in Wayn.com as well as becoming its chairman. Meanwhile, the leading lights of Cheapflights.com, David Soskin and Hugo Burge, have formed investment vehicle Howzat, which has backed a handful of up-and-coming web businesses recently.
The second wave of the internet is arguably being powered by many of the same characters who were behind the first. It certainly doesn’t take long to get noticed and talked about if you have a great idea. It is all about attending the right events, meeting the right people and, well, networking.
Cashing in on the web
However, making cash out of many Web 2.0 ventures remains a challenge, but not one that many are concerned about, providing the traffic is evident.
Last.fm’s founders famously slept on the roof of their offices in a tent because they had so little money. But once critical mass is achieved the potential for advertising is there. Last year, online ad space in the UK sold for £2bn – over 10% of total spend. The web has already overtaken newspapers and in the next three to four years is predicted to replace TV as the medium of choice.
One UK company enjoying the benefits of this is Nixxie. The company offers the UK’s ‘first truly contextual advertising service’ and is reaping huge revenues as a result, having grown from just over £40,000 in 2004 to more than £11m last year. The company’s software scans a website and ‘understands’ it before suggesting a range of applicable keywords.
The company has partnership agreements with the likes of Yahoo, Kelkoo and Shopping.com and scans their databases for the most appropriate advertising. “We want to be able to deliver the Holy Grail of advertising, which is finding the right user, in the right context at the right time,” says managing director Jason Smith.
Buyer's, sellers and hosts
Social networking might suggest that more traditional forms of commerce are tired. Not a bit of it – but a twist certainly helps. While online retail accounted for £3.4bn in the UK last April, a rise of 55% from the year before, it was the trend started by eBay that has spawned other trade spaces for individuals. eBay revolutionised people’s expectations; no longer did you have to be local or an expert antique dealer or record buyer, you could just sell to an unfathomably big market.
Recently launched site Seatwave enables the sale of unwanted tickets from ‘fan to fan’. Sellers set prices and the site plays host. For that it takes a cut of each deal. The site, which started trading in February and was set up by former Ticketmaster executive Joe Cohen, already boasts more ticket sales than eBay.
“I always felt that the ticket industry offered a very bad consumer experience, particularly in the UK,” Cohen says. Similarly, Zubka is laying down the gauntlet to the recruitment agencies by enabling individuals to offer ‘friends’ as potential candidates in return for a cut of the recruitment fee if the recommendation is successful. “People are realising that there’s money to be made out of the people they know,” says founder Armando Ruffini. “All that recruitment agencies are doing is offering access to their networks. However, we all have networks and this is a kind of intellectual capital.” Another, Zopa, connects individuals who need money with those who want to act as bank.
Right here, right now
So with so many new pretenders, is there still space left for you? The answer is undoubtedly ‘yes’. And with Eastern Europe just a short flight away, there is some useful manpower on our doorstep.
For obvious cost reasons, many UK businesses use programmers and technicians based in areas such as the Ukraine. In addition, there are plenty of bright young and well-educated people at your disposal atatimeofhighimmigration.at a time of high immigration.
But in terms of activity in Europe it’s the UK that’s leading the field – 110 venture-backed companies operate here, compared with second-placed France’s 57, according to Library House figures. Germany, Finland, Sweden and Spain lag behind.
“This dominance of the European web sector by the UK is more pronounced than would be predicted from the relative health of venture capital in the UK versus the rest of Europe,” Library House reports. “Across all sectors, UK companies attract just over 30% of institutional investment in Europe, well below the 46% share taken in web.” If ever the time was right, the time is now.