Thursday, May 04, 2006

Whither Friendster?

TheDeal.com is reporting that Friendster, once the social networking site du jour, is backing off its plans to sell its business. The Company had gone so far as to hire Montgomery Securities as its adviser in the sale process.

I still remember when Friendster was being valued in the hundreds of millions. But then MySpace and Facebook took off. Myspace sold to Rupert Murdoch's News Corp (which owns Fox) and Facebook continues to raise money from VC investors. Where does that leave Friendster? Well, it not so good a situation. My buddy wrote about the state of Friendster in his blog: check it out.

Check out the article below:


Friendster finds no love
by David Shabelman in San Francisco
Updated 10:17 AM EST, May-4-2006

Facebook, Friendster Inc. has struck out finding a buyer, leaving the future in doubt for the Internet ??social networking?? pioneer.

Facing an eroding customer base and dwindling funds, Friendster in November hired Santa Clara, Calif.-based investment bank Montgomery & Co. to shop the Mountain View, Calif. company. But a Friendster spokesman said last week that the sales process has concluded, though he gave no additional details. Montgomery & Co. also declined comment.

??People just didn't find it strategically critical to what they were trying to do,?? said one source close to the situation.

Friendster's dimming prospects also is disappointing for venture capital firms Kleiner Perkins Caufield & Byers and Benchmark Capital, both of Menlo Park, Calif., which in 200" name="abody" type="hidden">

Eclipsed by rivals MySpace.com and Facebook, Friendster Inc. has struck out finding a buyer, leaving the future in doubt for the Internet "social networking" pioneer.

Facing an eroding customer base and dwindling funds, Friendster in November hired Santa Clara, Calif.-based investment bank Montgomery & Co. to shop the Mountain View, Calif. company. But a Friendster spokesman said last week that the sales process has concluded, though he gave no additional details. Montgomery & Co. also declined comment.

"People just didn't find it strategically critical to what they were trying to do," said one source close to the situation.

Friendster's dimming prospects also is disappointing for venture capital firms Kleiner Perkins Caufield & Byers and Benchmark Capital, both of Menlo Park, Calif., which in 2003 led a $13 million financing round in the company. Kleiner Perkins, which recently invested an additional $2 million to $3 million in Friendster, did not return a call for comment.

Friendster was one of the first social networking companies when it debuted in 2002 with an online service that links users in a network of friends and acquaintances. But the San Francisco-based company could not build on its early momentum, eventually losing many users because of technical glitches that impaired access to its Web site. Once subscribers left, most didn't return.

According to one industry source who asked not to be identified, several companies that initially expressed interest in buying Friendster were reluctant to take on the company's roughly $6 million in debt. They also balked at the company's relatively modest $10 million asking price, which amounted to a fire sale compared with the $50 million to $100 million Friendster had hoped to get after hiring Montgomery last fall.

"No one wanted to acquire a company that is losing money and will continue to lose money," the source said. "It's one thing to be losing money and gaining market share, but Friendster unfortunately was losing money and losing market share, and that's not a great dynamic."

Despite such woes, David Hornik, general partner with Menlo Park-based venture capital firm August Capital, said Friendster could yet turn things around.

"To a certain extent social networks are driven by popularity and buzz, and that day may already have passed for Friendster," said Hornik, whose firm was an investor in social networking site Tickle Inc., now owned by Monster Worldwide Inc. of New York. "But at the same time they have a large user base, a name people recognize, and they've seen a lot of things that do and don't work. So I don't see why there isn't a good opportunity for them to build a business on."

In September Friendster launched its latest social networking application, Friendster 2.0, which emulated features offered by competitors such as MySpace. News Corp. bought it in September, along with parent company Intermix Media Inc., for $580 million. Friendster is now testing the service.

The upgrade has at least stanched the bleeding. According to Reston, Va.-based online measurement firm comScore Media Metrix, as of March, Friendster had 1.1 million unique site visitors in the U.S., up 9% from 975,000 visitors in March 2005. By comparison, MySpace, which focuses on teens and young adults, had 41.9 million unique users, and Palo Alto, Calif.-based Facebook, which is aimed at high school and college students, had 12.9 million unique users.

Hornik said that despite Friendster's problems and the soaring popularity of the top social networking sites, there is room for other such services to catch on. He cited Bebo.com LLC, Hi5 Networks and Tagged Inc. of San Francisco, along with Santa Monica, Calif.-based Tagworld Inc., as networking sites to watch.

"Friendster was the reigning champ when MySpace got started and quietly built momentum and eventually became a gorilla," he said. "I don't see why the same thing couldn't happen to MySpace. I don't think MySpace is this impenetrable beast that everyone should run from."

With online advertising booming, venture firms have kept their faith in the emerging Internet sector. Tagworld, which offers photo-sharing, social networking, blog publishing and social "bookmarking," in February received $7.5 million in Series A financing in a round led by Draper Fisher Jurvetson. Also that month Mayfield Fund led a $7 million round in Tagged, a site focused on teenagers.

James Scheinman, vice president of business development and sales at Bebo, said his company is in discussions with investors regarding additional funding. The San Francisco company last summer expanded from operating mainly as an online photo-sharing site to offer social networking, with an international focus that included six English-speaking markets.

Scheinman, who previously worked for Friendster, said Bebo already is the top social networking site in the U.K., Ireland and New Zealand, and second in Australia, gaining 6 million unique users a month since launching last summer. Scheinman said his experience at Friendster taught him the importance of having the technological infrastructure to handle such surges in usage.

"The only reason Friendster didn't work was because the site failed," he said. "The most important thing I learned from Friendster is to have a good engineering team to scale the database and servers and the right architecture. It's not easy. It's really hard to scale these sites this quickly."

Social scene

Total number of unique visitors to selected social networking sites, as of March 2006

Website

Unique visitors (in millions)

MYSPACE.COM

41,889

FACEBOOK.COM

12,917

XANGA.COM

7,448

LIVEJOURNAL.COM

4,047

Yahoo! 360°

3,614

MYYEARBOOK.COM

3,613

HI5.COM

2,609

TAGWORLD.COM

2,275

TAGGED.COM

1,668

BEBO.COM

1,096

FRIENDSTER.COM

1,066

Tribe Networks, Inc.

871

43THINGS.COM

661

SCONEX.COM

372

Total Internet audience

171,421


Audience: All persons at U.S. home, work, college/university locations

Source: comScore Media Metrix

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