Weekly interest and loan rates | Northwest stock contest 2004 Tax tips | Consumer affairs | Home values

Personal ties, money, history connect three Silicon firms

By Joseph Menn
Los Angeles Times

E-mail this article Print this article Search archive

If there's one place where knowing the right people is as important as it is in Hollywood, that place is Silicon Valley.

There, schmoozing with a chief executive can lead to more than a job; it can land you an introduction to a venture capitalist who will make you a CEO in your own right.

So it was only a matter of time before some elbow-rubbing entrepreneur started thinking about how to put social networking on the Internet and sell it.

That, plus founder Jonathan Abrams' desire to meet more women, is pretty much how Friendster began its public life in March. Since then, 4 million people have signed up with the Sunnyvale, Calif., startup to post their pictures, list their interests and while away the hours browsing online profiles of the friends of their friends.

Users spend an uncommonly long hour and 51 minutes in an average Friendster session, compared with 35 minutes on Yahoo's personals.

Since Friendster was founded on the principle that no man or woman is an island, it figures the company has attracted its share of companion sites. After Friendster pulled in $13 million in venture-capital investments from Kleiner Perkins Caufield & Byers and Benchmark Capital on Oct. 30, other VCs have sprung for pieces of social-networking sites run by San Francisco-based Tribe Networks and LinkedIn of Mountain View, Calif.

The three companies are connected by money, history and personal ties. Like many longtime friends, the founders share some fundamental beliefs while pursuing different business strategies and keeping secrets from each other.

The sites have some obvious differences. Friendster is dedicated to fun and frolic, with a core of users seeking social relationships. Tribe adds a business element. It's centered on shared interests, but classified ads are distributed to people based on their preferences. And LinkedIn's most important function is recruiting for jobs.

Still other networking companies are trying to drum up investors or users, including sales-lead generator Spoke Software, dating site Tickle and contact-management companies Plaxo and GoodContacts Research.

A minibubble?

Although the dollars aren't as plentiful as they were in the late '90s, the influx has prompted skeptics to describe the phenomenon as a mini-bubble.

"There will be a shakeout, because not everybody will keep belonging to all of these networks," said Forrester Research analyst Charlene Li.

Signs of consolidation are already surfacing. Google tried unsuccessfully to buy Friendster in the fall for a reported $30 million. Other giants, from Microsoft to Monster Worldwide, might bid for social-networking startups if they fail to make a go of their own development efforts, analysts said.

Regardless of whether the startups survive, their founders are true believers. Before creating their companies, they all spent time at Ryze.com, a San Francisco networking site that provided inspiration for their later endeavors.

Ryze users organize themselves by interests, location and current and past employers. Most pay nothing, though premium subscribers can search for other users more easily. Largely funded by Ryze founder and private investor Adrian Scott, the site has grown to 80,000 users and — unlike its successors — turns a profit.

Friendster founder Abrams signed up for a fledgling Ryze in August 2001 and helped with its first real-world mixer in Palo Alto, Calif. Soon he was talking to Scott and others about a site simply for dating that would echo the real-world way people meet — through friends.

A serial entrepreneur, Abrams did a substantial amount of work on Friendster alone in his apartment. Then he raised money from a handful of individuals.

Among the first investors were Tribe founder Mark Pincus and his friend Reid Hoffman, who later launched LinkedIn. Both put down an initial $7,500 and now own 5 percent of the company between them.

Friendster gets some revenue from advertisers and aims to turn a profit next year.

"Neither of us thought it was going to be a good investment," Pincus said. But that view changed this spring, when Friendster got him "a really good date," he said. "That made me a believer."

Pincus dusted off an old idea for a classified-ad network that would use peer-to-peer technology, which was popularized by the Napster music service. That idea became Tribe.

Since it opened five months ago, the site has gained 68,000 users who group themselves into "tribes" according to such interests as blogging and the annual Burning Man arts festival.

Financial backing

Tribe Networks earned financial backing from The Washington Post Co. and Knight Ridder, as well as from the Mayfield Fund. It hopes to make money by aiding sales from one user to another. Pincus said it's too early to predict when he could earn a profit.

LinkedIn founder Hoffman and Pincus met when Pincus pitched another business idea to PayPal, the online-payment service where Hoffman was executive vice president.

Pincus also invested in LinkedIn, which launched in May and claims more than 65,000 members. Currently revenue-free, it eventually plans to add a fee-based premium membership.

LinkedIn is all about who else knows the people you know. Users can search out to four degrees of separation and scour profiles to find attributes, such as legal expertise. If a user wants to contact someone, each link in the chain must OK a request before it reaches its intended target.

Dating is not encouraged. "To get the substantial business people in, they want it to be clearly about business," Hoffman said.

Online collision

The tricky part is what happens when online worlds collide. Which business contacts do you invite into a social setting? Which connections are only superficial, and which are deep?

Abrams, Pincus and Hoffman had to wrestle with those questions in their own lives.

Abrams wasn't concerned that Pincus and Hoffman would overtake Friendster when they struck out on their own. But that feeling was put to the test this fall, after a small company claimed ownership of a patent for software connecting people through personal associates and put it up for auction.

The patent is known as "Six Degrees," after the famous theory that everyone on Earth is connected by no more than six intermediaries. Pincus and Hoffman decided to pool their resources and bought it for $700,000.

They said the purchase was a defensive move and that they had no plans to sue to extract royalties from business rivals. But they pointedly left Abrams out of the coalition.

It wasn't anything against their friend, they said. It's just that Friendster's investors, Kleiner Perkins and Benchmark, might have started a costly bidding war.

Abrams said too much has been made about the split.

But to Ryze founder Scott, the divergence demonstrates one of the fundamental flaws in social networking.

"It happens often," he said, "that someone you want to avoid is a friend of a friend."

Copyright © 2004 The Seattle Times Company