Friendster gets $10 million

Wow, that's money down the drain. Community destinations on the Web are ephemeral, not assets.

DAG Ventures, Kleiner Perkins and Benchmark Capital have injected another $10 million into Friendster, the first of the social networking systems, after washing out previous value in a $3 million recapitalization earlier this year. I can't imagine to what end.

Places you go to join communities are a dying breed, if you ask me. The fluid populations of online communities, which flowed from Friendster to newer models of community, such as Facebook and MySpace, then Relationships are constantly on the move, fragmenting and, most importantly, demanding new investment.on to sites like YouTube, are forever in motion, so what is it an investor is trying to capture? People? If so, then you have to recognize that people move on and the churn rate for a community site, where Friendster has turned over its entire membership at least twice if not five times since 2002, makes any investment in registered users as an asset you can sell—to advertisers or an acquiring company wanting the relationships—an exercise in depreciation. Sooner rather than later you have to write off the investment in acquiring those customers.

Let's imagine what $10 million buys today. Well, if it takes $10 to attract a customer, then you've purchased one million customer relationships, at first. After six months, churn brings the number of customers down to, say, 600,000. Of course, it may take much less to attract a customer, but the question is, if winning customers costs nothing and you don't earn any money from them upfront, just how valuable will they be to advertisers? 

The dream is the demographic Nirvana, where communities collect so much data about the individual that every advertisement becomes a pre-qualified contextually relevant experience and conversion rates soar. But, so far, no one has seen that actually happen. Ad rates at MySpace and YouTube are abysmally low. In 2005, MySpace, which had more page views than Google, earned only about $30 million in revenue compared to Google's $6 billion.

The problem with the Nirvana scenario is that no community is a complete picture of the user. Community sites represent demographic slices, which is why the adjective "niche" has been applied to community when venture capitalists talk about success these days. So, one is constantly paying for a fragment of that demographic promised land at full Nirvana value. It's a losing business, because the asset—user relationships—are constantly on the move, fragmenting and, most importantly, demanding new investment.

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