Last night, I went to an SVASE talk by Geoffrey Moore of MDV. I won the iPod Touch! Thanks SurfaceInk! (Bit of funniness the talk was held at Microsoft’s campus 
)
He gave a work-in-progress talk on his effort to update his “Crossing the Chasm” concept.
One of the problems he faced as a VC is how to “value” a Web 2.0 company that is pre-revenue and maybe hasn’t even a clue on how to make money. How much traffic is needed to be “worth” something?
“Value” v. “Worth”
I think Geoffrey’s fundamental problem is that he confuses “value” with “worth”. I don’t believe they are the same thing.
Lets think about “value”. “Value” is an economic term. If your car was to get totaled in an accident. The insurance company determines its value and sends you a check for the car’s “value”. “Value” can be easily priced. Laws exist to help people recover stolen “valuable” property.
Compare that to “worth”. “What is your life worth?” Can you put this in terms of “value”? Can you or anyone give me a finite number for which they will let me shoot them? Probably not. No reincarnation ala WoW.
How much money (“value”) would you give to never see your significant other again? They are still alive, but you just are not allowed to communicate with them? Once again a mismatch — we think in terms of “worth” for personal (especially deep) relationships. Trying to pin an exact “value” (dollar amount) to such a thing is frustratingly impossible.
Anyone who can is probably a sociopath. (IMHO). (As a side note — this is what the courts really struggle with that makes the “big” news.)
Social network sites have no “value”
Fundamentally, I believe that all the current sites, Facebook, LinkedIn, etc. have no “value”. That is not to say that they aren’t worth anything, it’s just that they have no strong “value” to the user.
Reason #1: Does the site represent friends that will bail you out of jail?
At the meeting, I stated and I continue to believe that the absolute traffic numbers are meaningless (unless they are extremely big). What matters most is how many people that a user knows in “real-life” that they with connected using the service. By “real-life”, I mean people that the user would go do something with (movie, dinner, date, etc.) if they were near each other in the physical world. In other words, how strong is the “friendship”?
Fundamentally, does the user have any economic, strong personal tie to the other users they are “friends” with on the web site.
If the answer is no … then I don’t care how many page views a site has — it has no “value” and I believe monetizing it will be difficult.
Reason #2: Facebook and LinkedIn say they have no “value”!
Lets look at the Terms of Service for Facebook:
We reserve the right, at our sole discretion, to change, modify, add, or delete portions of these Terms of Use at any time without further notice.
It is your responsibility to regularly check the Site to determine if there have been changes to these Terms of Use and to review such changes.
Translation: Facebook can change the rules any time they want – and they can hid the change if they want.
Under Copyright:
When we receive proper Notification of Alleged Copyright Infringement as described in our Facebook Copyright Policy, we promptly remove or disable access to the allegedly infringing material and terminate the accounts of repeate[sic] infringers as described herein in accordance with the Digital Millenium Copyright Act.
Translation: If TimeWarner complains about a user – Facebook will unilaterally, without following any legal procedure or due process, destroy information that the user has entered.
Company has adopted a policy of terminating, in appropriate circumstances and at Company’s sole [italics mine] discretion, members who are deemed to be repeat infringers. Company may also at its sole discretion limit access to the Site and/or terminate the memberships of any users who infringe any intellectual property rights of others, whether or not there is any repeat infringement.
Translation: The user is completely at Facebook’s mercy.
Finally, under the Termination Clause:
The Company may terminate your membership, delete your profile and any content or information that you have posted on the Site or through any Platform Application and/or prohibit you from using or accessing the Service or the Site or any Platform Application (or any portion, aspect or feature of the Service or the Site or any Platform Application) for any reason, or no reason, at any time in its sole discretion, with or without notice, including if it believes that you are under 13, or under 18 and not in high school or college.
Translation: the user account is completely at the mercy of Facebook.
Would you or any sane person buy a car, or a home with this as the ToS?
“We, the bank, think that you are violating the DMCA therefore because TimeWarner complained we are foreclosing on your mortgage. Oh and if you are at work when we foreclose we reserve the right to throw everything into the street and have a semi run over your furniture.”
Reason #3: A user cannot sue to get their Facebook account back
To my knowledge, there has never been a successful case that has argued the economic value of a facebook account. There have however been successful cases arguing the “value” of domain names. Until a Facebook account is recognized as having a legal recognized economic value in the law and in front of a judge, it has no “value”. The irony is that the company lawyers in an attempt to protect Facebook the company from liability are in fact devaluing Facebook the experience.
Reason #4: Facebook,etc has not asked the users to assign a “value”
Yes, I know viralness demands things be free. And yes I know that Facebook (and Myspace) spend hours pimping their profile. And time is certainly valuable. But did the user regard that time as valuable? Maybe they were just going to watch TV, or pick their nose?
If I go to Monster.com and I spend the time pimping my resume, I am doing it to get a better job. My monster.com profile has direct, expected, economic value – even though I haven’t paid for it. (“My next job will be $10K more per year.”)
LinkedIn is better off than Facebook and Myspace in this regards. People pimp and get connections in LinkedIn for a direct expected economic payoff.
Reason #5: A user has no standing in bankruptcy court
If revver.com goes out of business and shuts the doors, do I, as a user, have the same rights in bankruptcy court to get back copies of my videos that I uploaded. If a company rented an expresso machine to revver, that company would have rights in the bankruptcy court system to retrieve their property. Until users have equivalent rights – it is really hard to be “valuable”.
Suggestions to the VC community
For all the reasons above – only foolish users trust internet companies with anything of economic “value” — therefore in general most of what web companies offer is “value”-less!
The VC community can and should change this.
- Get the lawyers out of the way. Say and support in ToS that a Facebook, linkedIn, etc. account has real economic value.
- Use language that makes a user’s account their property – i.e. can sue if they are deprived of their account.
- Don’t unilaterally obey DMCA takedown requests. Insist on court orders and due process because otherwise the service (Facebook, LinkedIn) is depriving the user of something of economic “value”.
- Establish a due process procedure. Create a “court” of dedicated users that will help arbitrate.
- When shutting down a company — go the extra mile and start establishing a precedent that the users’ data has economic value and attempt to return in some manner their “valuable” goods.
- Don’t claim ownership of user-entered content. Ask for permission to use it.
Some thoughts on how to judge the “value” of a site:
- Does virtual actions translate into real-world actions? (Dates, meetings, things of economic value being exchanged)
- Does the user identify with and defend the site?
- Does the site defend the users? (Does the love go both ways?)
[Update: From Wired that further supports this contention. I guess Wine Therapy was not "valuable"]