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Social Media InvestingNECINA Conference on Social Media

November 6th, 2010

Andrew Parker

Spark Capital

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Who Am I?

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Social Media in the Spark Portfolio

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Agenda

5 ReasonsWhy

Social MediaAppeals to

Investors

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5 Tricky Aspects

of Social MediaInvesting

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Appeal of Social Media to Investors

1. Content from the Community

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VS

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Appeal of Social Media to Investors

2. Cost to Deploy and Serve Customers

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VSIn 3 years:

- 14 cities

- Raised >$65MM

- Over 1000 employees

In 3 months:

- 20 cities

- Bootstrapped on $20K

- 2 Employees

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Appeal of Social Media to Investors

3. Altruistic Experts

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VS Over $400/hr

Expert

knowledge.

Free.

Same (or perhaps

better) caliber of talent.

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Appeal of Social Media to Investors

4. Network Effects

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Metcalfe's Law: The value of a

network is proportional to the

square of the number of connected

users of the system (n2).

VS

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Appeal of Social Media to Investors

5.Word-of-Mouth Marketing

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VS Search Ads, Media, etc

Affiliate Program with up to

7% rev share

Spent $680MM in

marketing in 2009 (12% of

Gross Profit).

Over half of referral traffic

from social network sites (at

no cost to Etsy).

No spend on SEM or Media.

Users evangelize on behalf of

the service in order to market

themselves.

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Tricky Side of Social Media Investing

1. Defensibility

Fast Followers

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Tricky Side of Social Media Investing

1. Defensibility (part ii)

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ITInvesting Social Media Investing

Intellectual Property (Patents) Patent Reform, Bilsky

Proprietary Software Development Open Source Off-The-Shelf Stack

Capital Capital Efficient

Captive Distribution Social Distribution

SoWhat Is Defensible in Social Media?

Data Asset

Network Effects

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Tricky Side of Social Media Investing

2. Privacy (part ii)

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Source: Naval Ravikant

http://startupboy.com/2010/10/15/privacy-violations/

Previously private data made public by default by:

Resumes LinkedInLocation Loopt (Foursquare)

Financial Transactions Blippy

Bookmarks Del.icio.us

Photos Flickr

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Tricky Side of Social Media Investing

3. Pricing (on the consumer side) Enterprise will pay.

Consumers not so much:

Finding an endemic business modelrequires time, patience, and capital.

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CompanyM

odelFreemium

Subscription

Attention Arbitrage (aka Ads)

Virtual Goods

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Tricky Side of Social Media Investing

4. Acquisitions Make Less Sense

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VS Buy a router company and

drop it in the Cisco sales

channel. Can lead to 100X

sales growth overnight for

the startup!

Acq-hires

No other obvious reasons

why companies like Flickr

and Del.icio.us should be

inside Yahoo.

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Tricky Side of Social Media Investing

5. Communities Emerge Cant Be Forced.

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VS

Paid contributors, not driven by

altruism.Many part-time employees.

Difficult to sustain.

Organic community that

emerged over a long periodof time.

Self Organized.

Police themselves.

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Thank you

@andrewparker

andrew@sparkcapital.com

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