Over the last three years tens of billions of dollars have been injected into companies developing tools and services for social networks. The US has hundreds of companies like these. The more popular ones, such as YouTube, MySpace, and Facebook, make news almost every day, and millions of people worldwide use the services of Flickr, Slide, and Photo Bucket.
Does all of this amount to a revolution that will change human behavior, or is it a buzz that is set to blow up in investors' faces? As always, answering this question is difficult, and the truth is probably somewhere in between - some companies will be highly successful while many others will swallow up the millions of dollars invested in them, and disappear.
We need something that will catch on
Israel's high-tech industry has also been trying to join the party. Local video sharing site Metacafe recently raised $30 million, and is now aiming to consolidate its status in the video and independent production sector; while eSnips offers social services together with technological tools designed to attract users These are the only two Israeli sites to be rated among the top 30 most viewed sites on the web.
Greylock Partners is one venture capital fund in Silicon Valley which believes in the field. It has invested in LinkedIn, ($25 million, at a value of $525 million, eighteen months ago), Digg.com, Farecast, which was founded by Israeli entrepreneur Oren Etzioni, and My Supermarket, also a company founded by Israelis. Greylock partner Erez Ofer, who also sits on the eSnips board, says his fund is definitely interested in companies in this field.
Globes: What are you looking for?
Ofer: "Something that will catch on and attract users. We believe eSnips is one such company. It offers an entire world, built around the various types of content that the users provide. We have a number of investments in companies in the field, some of which are familiar names and others that are as yet unknown."
Israel hasn't really made its mark on the service sector so far. ICQ, and shopping.com are perhaps the only successes.
"It's true that Israel has made its reputation to date chiefly in classic technology fields, rather than Internet and services. We believe that there is no reason why Israel should not produce good companies in these fields as well. That is why we have invested in Payoneer, which offers digital payment methods, and My Supermarket, which offers a more cordial online shopping experience. To ensure the industry's success in a certain area, you need a critical mass of know-how, managers etc. Israel has already seen this happen in a number of fields - software, security, telecommunications, and networks. I believe the foundations for Internet companies are already in place but it will take time until they start growing."
Can you make money out of this?
"MySpace and Facebook, already have revenue estimated at hundreds of millions of dollars a year. The model is traffic and advertisement sales. You can build a business on this.
Ofer says that Greylock invests in ventures that have already generated a usage momentum. "This field is driven by public interest in the sites. Our investments focus on companies that have an idea, which when launched, could develop into something consistent. When we invested in eSnips, the usage graph showed a tiny bead that was gradually rising, and it is still rising eighteen months later. This is one of the hallmarks of something real.
"Greylock diversifies its risk in the field by also investing in infrastructure companies, but usage is an important factor for companies offering services. The revenue model is advertisement-based, so it's important to reach as wide an audience as possible. It's also important to win an audience that will remain faithful and not jump from site to site - an older audience with buying power. We look for good teams and components that will guarantee an increase in traffic. There are a lot of sites that have only a marginal increase in usage, and they are barely surviving."
Could this be another bubble?
"We obviously don't know yet, but the Internet has already completed one round that left behind many victims. We're trying to apply the lessons from the previous round. So we keep our investments small, until things look mature, and we don't invest too much money in stages that do not give any indication as the company's future prospects. When we invested in Facebook, the writing was on the wall. We believe young and interesting industry is developing here."
Published by Globes [online], Israel business news - www.globes.co.il - on December 13, 2007
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