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Facebook, Friend or Foe?

Badoo’s 135 million registered users in 180 countries—who pay the firm to meet new people online— generate around $150 million a year in revenue. This, naturally, is dwarfed by Facebook.

According to its own statistics, Facebook had 845 million active users at the end of December last year—more than 425 million of whom use the site daily. The company’s reach across languages, cultures and generations has made it a feature of the 21st century web. Its pure scale has led to an almost insurmountable ubiquity. The likelihood of someone being on Badoo but not Facebook is fairly remote.

Facebook’s impending multi-billion dollar initial public offering may be a seismic event for the tech venture-capital industry. The company has become so synonymous with the term social networking that that was the name given to the biopic of its founder, Mark Zuckerberg, but the effect of Facebook’s rise is already apparent in the current crop of technology businesses in Europe, according to venture-capital investors. Badoo’s challenge may well be typical—companies need to do something clearly different from Facebook and, preferably, to ride its coattails.

For investors, the demonstration effect of the latest round of IPOs, which have delivered huge returns for early investors, and the numbers swirling around the Facebook filing, show the potential payouts for those willing to take a punt on emerging technology. The sector, while still risky, is also far less closely correlated to the macroeconomic woes of the euro zone than most other developed asset classes.

Associated Press

“Early-stage investors can see 10 to 100 times return on capital, which is almost unheard of in property or later-stage private equity,” says Charles Grimsdale, partner at early-stage venture-capital investor Eden Ventures. “However, it is of course very risky and average returns are lower, but the opportunity exists for super returns.”

The broader sector’s success through the downturn has also created a core of cash-rich tech giants with multi-billion-dollar war chests for acquisitions, giving venture capitalists a clearer exit route.

“The amount of cash held by the top 10 IT companies is unprecedented, and indeed the technology sector is outperforming any other on the public markets. Where is all this cash going to go?” Mr. Grimsdale says.

Picking the next generation of winners is not going to be easy. Badoo gave up on trying to compete with the big beast of social networking several years ago, shifting its focus away from trying to be a network that connects people who already know one another to one where members can meet new people.


Traditionally Dotcom

There is something traditionally “dotcom” about Badoo’s loft office—how owner Andrey Andreev flits around in a plain white T-shirt and jeans and Chief Marketing Officer Jessica Powell drinks herbal tea out of an ‘I Love Spreadsheets’ mug. However, Badoo’s model is something relatively rare in social networking: people pay directly for a service offered by the company.

The mobile version of the product shows nearby users’ profiles jostling for attention. Clicking on each shows a basic range of interests and a photo. In countries where it is more popular, few make it onto the crucial first page—so users can pay to have themselves pushed up the rankings to a more selective “featured” bar at the top.

Ms. Powell insists that Badoo and Facebook complement one another. Facebook is for people you already know, Badoo is for everyone else, she says. In fact, Badoo uses the Facebook ‘Connect’ system to allow users to log in to both with a single set of information. The company uses a Facebook application to direct traffic back to its own site.

“I think that particular opportunity, for broadly horizontal social networks, is perhaps gone,” Eden Ventures’ Mr. Grimsdale says. “There are a few of those, there’s one particularly dominant one, but I think there’s a lot still to happen in and around social media.”

Like Badoo, the current generation of start-up web companies have to exist in a world where competition is not with Facebook, but on it. For investors, Mr. Grimsdale says, that could mean finding businesses that allow others to understand the social environment better.

“Everybody is struggling to figure out how do we use the massive reach of Facebook and Twitter and the blogging communities,” he says. “There’s a whole area evolving around social media analytics. How do companies track what’s being said about them? How do companies actually use social media more effectively to communicate with their customers?”

Secondly, Mr. Grimsdale says: “Are these social networks going to change the way that people find or buy products? … Could it become the primary interface to a company, in the same way that it’s almost become the primary interface to an individual?”


A Vertical Venture

Eden Ventures has invested in a number of “vertical” social networks, which serve a niche community. These include Doccom, which connects U.K. doctors, and Lookk, which does the same for fashion designers and buyers. Eden Ventures has also invested in start-ups such as Huddle that offer social media services direct to corporations.

“We are going to have a whole generation who have been brought up on Facebook and on other social networks… Vertical networks, even enterprise social networks, we think are really interesting.”

While it is the high-profile one-offs such as Facebook that make the headlines, European venture capitalists, who saw a post-2000 jump in fundraising fall away in the latter part of the decade, can be forgiven for looking for companies that are already cash-generative and have clearer revenue models, rather than those just looking to attract the maximum number of eyeballs on screens.

And though the truly big hits have, in the most part, been in North America, Europe has begun to produce its own global brands. One that generated IPO noise last year was the Finnish game developer Rovio, maker of a game almost as ubiquitous across platforms as Facebook: Angry Birds.

Rovio was backed by Atomico Ventures, the firm run by Skype founder Niklas Zennstrom. Although Rovio’s Angry Birds game began life on the iPhone, the company moved it onto Android, desktops and, recently, onto Facebook.

Mattias Ljungman, a partner at Atomico, said Rovio is an example of the opportunities created for consumer businesses by the breadth of distribution channels like Facebook. The company recently invested in Wrapp, a service that allows users of the social network to send gifts to each other that can be converted into vouchers and discounts in stores.

The post-Facebook environment has already seen its first IPO. Zynga, which created games, including Farmville, for users of the social network, floated on Nasdaq in December 2011, attracting a valuation of around $7 billion. This was some way off the $20 billion that was initially attached to the company, but wasn’t too disappointing for a business built almost entirely on Facebook.

Facebook’s flotation, Mr. Ljungman says, doesn’t mark the end of an era, just another milestone toward the shift to a deeper digital economy, where the socialization of technology allows businesses to move almost any activity online, where costs are lower and their reach can be global.