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$ocial media bleedia?

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My social media friends who think I hate the stuff will only receive confirmation of that misconception from today’s post. But really, this is something they have to think about.

Yesterday’s San Francisco Chronicle reported that there’s been a sharp falloff in venture capital funding for social media companies, which received “only 2 percent of the venture capital headed to Internet enterprises last quarter.”

That was down sharply from the 6 percent (at least) of all venture funding social media companies received in each of the quarters in 2010-2012, with the peak occurring in the third quarter of 2011, when Twitter launched.

Here’s the interpretation from a tech investment guy quoted in the article: “We are certainly in another bubble.” In fact, the article’s reporter, who writes for Bloomberg, compares this slowdown with “the deflating of the Internet bubble of the late 1990s” which led to the dot-com collapse.

No one is saying this defunding of social “bleedia” is going to result in a stock market crash. But it does seem to me that it represents a turning point in the evolution of social media: the moment when the investment community realized that social media–big and important as it is–isn’t as big, and won’t be as big, as some people had hoped.

Where the smart money now is going is to business intelligence, analytics and performance management, advertising, sales and marketing, and anything to do with the cloud.

Having said all this, it’s important to point out that the drop-off in social media funding applies only to new startup companies. It may simply be that the social media field is now mature, stocked with existing companies, leaving no room for new ones. But if use of social media was continuing to skyrocket as it did in 2008-2012, you’d think there would be continuing opportunities for savvy young entrepreneurs to enter the field. But apparently, that’s not what investors think.

It’s true that use of Twitter and of Facebook continues to rise. But both of these companies face revenue and earnings issues, and it’s not clear that they’ll be able to increase income without resorting to some kind of premium service that will turn off millions of current users (as YouTube is experiencing right now), or without getting deeper into advertising, which also is not without problems: Facebook, at the very least, is seriously annoying people with these new popup ads that appear in our feeds, and it’s not clear to me how much more users will take before they revolt.

You would think that these existing problems and challenges confronting Facebook, Twitter and YouTube would encourage young entrepreneurs to come up with alternatives. But I think the venture capitalists have realized that these revenue and earnings problems are endemic to the Internet, and not specific weaknesses of individual companies. Any social media startup will face the same problems.

Which gets us back to where I started: the problems inherent in the social media model seem unsolvable, at least by any means that are now apparent, even to Silicon Valley’s top angel investors. Social media companies can’t figure out reliable ways to earn profits because end users can’t figure out reliable ways to use social media to make money. The great investment bleedia is a clear sign that social media has hit its first significant speed bump, forcing it to slow down.

  1. First, Twitter did not launch in 2011. Twitter launched in 2006. So the peak had nothing to do with the founding of Twitter.

    Second, Funny how despite the dot-com collapse in the late 90s that the Internet is more pervasive in our lives than ever before. Speed bumps don’t mean crashes if you know how to read road signs.

    Thirds, while investment into new SM companies may be slowing, SM isn’t slowing. Venture capitalists funding XYZ.com has nothing to do with how wineries, consumers and even critics are investing time, energy and money into SM.

    You still think that SM is a sales channel when it is not. It is a relationships channel. Yes, the hope is relationships result in sales, but anyone that thinks one must “figure out reliable ways to use social media to make money” is already barking up the wrong tree. If you think really hard about SM (I’m sure Paul Mabray will chime in, but that was your intent, no?) it is more about how a company’s customers use SM than how the company does. Building brand ambassadors is more important than building cashiers.

    Also, one way to describe Social Media “business intelligence, analytics and performance management, advertising, sales and marketing.” So maybe money isn’t being pumped into developing new platforms but into maximizing the current ones…

    Oh, and although SM investment may have dropped, the amount of funding to business and mobile apps increased.

  2. Kyle makes dune great points, as usual; I’m actually surprised that funding for sm companies took this long to slow down (i assumed – incorrectly – that this was the case two years ago, based on issues that mobile apps were having with funding, but sounds as if, based on Kyle’s comment, the mobile arena might have come closer to shaking out the dead wood than I’d thought).

  3. Hello friends! Good points on all fronts. It’s true, that FB is faced with similar woes as Youtube, as far as creating revenue. Now as a result, as Steve mentioned, we see way more ‘opportunities’ to advertise on Facebook. “Promote” I believe the FB button is called. As Kyle also aptly stated, if one thinks they are going to use Social Media to directly correlate to sales, they certainly are “barking up the wrong tree.” It is all about networking, and creating a buzz.
    There are also all of these games, which are initially free, but then as one becomes more addicted, the games offer the opportunity to advance to the next level for a small payment of $.99, or $2.99 or whatever.
    The dot com reference should also be noted…
    MySpace is now in some distant virtual graveyard, because Facebook took over as the new, popular, trendy, “place to be.”
    As of late I have been reading articles stating that 1/2 of Facebook users are taking a hiatus from Facebook… Well where are they?
    I’ll tell you where…They’re on Instagram. But, Facebook saw the writing on the wall and acquired Instagram nearly one year ago.
    That said, I think Facebook execs have their fingers on the pulse of what is coming down the pike, and I don’t think the Social Media frenzy will be reversing anytime soon.
    However, the functionality of Facebook to be used as a networking site and not just an arena for people to be ‘marketed at’ is a delicate balance, and I think Mr. Zuckerberg and Ms. Sandberg are on it.
    Steve, you make a great note saying how investors are now turing toward something more stable and concrete to invest in, like analytics, sales and marketing, etc…
    I think Social media execs would be well advised to take note of that desire.
    In conclusion, who knows?

  4. Ashley Pengilly says:

    SM strategy companies are the ones losing out on VC funding, not the SM companies who provide tools(software)to optimize SM performance. The reason for this being that companies, globally, are internalizing their SM instead of outsourcing to agencies. It costs an outstanding amount of money to outsource SM and because of the vast amount of ‘experts’ now in the field, companies are able to hire talent for a fraction of an agency expense. I don’t blame the VCs for not wanting to invest in another SM agency business when the amount of clients continues to get smaller and smaller.

    What I am curious to see is the specialization of SM software that continues to roll out and how these companies are acquired/evolved. Many SM services that I use have already been acquired by large companies (take Wildfire now owned by Google)and only continue to grow stronger with more channel/strategy/metric integration. VinTank and Hootsuite are some other companies I feel will become even larger players in the SM software/services biz over the next few years while the little guys are whittled out from lack of innovation.

    Just my opinion :)

  5. Social media startups are more reliant upon #leancontent methodologies, such as those demonstrated by Wix.com, whereby they are radically reducing their desire for VC funding. In other words, it is the VC community that is failing to attract the entrepreneurs, rather than the attraction flowing in the opposite (and traditional) direction. Regardless of the level of VC investment, social media companies are in the forefront of metrics and analytics, even if the number of hard currency units going into deals appear to be lower. The strength of vision is in understanding the capabilities that are being exercised and the results that are being accomplished, not the number of dollars that it took to acquire those capabilities and results.

  6. Twitter launched in 2011?

    Obviously not much money being channeled into fact checking also.

  7. Dave Brookes: Twitter launched its IPO in 2011.

  8. Twitter launched an IPO??? I am pretty sure it is still privately held… Facebook launched in May of 2012, but I think you might be confusing a 2011 Twitter IPO with something else…

  9. Twitter is still privately held. There been a lot of speculation as to when it would go public, but no IPO to date.

    http://www.crunchbase.com/company/twitter

    and

    http://techcrunch.com/2013/06/29/as-ipo-nears-twitter-ceo-says-we-think-of-revenue-like-oxygen/

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