Look Out New Economy, Here Comes The New New Facebook Economy
Posted on July 10, 2007
Filed Under VC Insanity |
The New Economy revolutionized the world during the first .com boom. The traditional rules of business were overturned. Renegade nerds made billions of dollars. The world became a different place. Oh, and lots of people lost shitloads of money.
But apparently Bay Partners, a Silicon Valley venture capital firm, never got the memo that the New Economy was a farce. According to Bay Partners:
When Facebook announced its platform, a set of application programming interfaces (APIs) and services that allow outside developers to inject new features and content into the Facebook user experience, Facebook, in essence, became the Social Operating System. Historically, the creation of an operating system, or a platform, has led to a new economy which includes a marketplace of applications.
Social operating systems. New platforms. Feature injections. New economies. Marketplaces of applications. Oh my!
Yes, if you want to build an application for Facebook’s platform and be part of the New New Economy, Bay Partners will consider giving you $25,000 to $250,000 to build your killer Facebook application as part of its new , which it bills as a “fast-track program supporting entrepreneurs dedicated to developing applications for the Facebook Platform.”
It gets even better. You won’t just get cash:
In addition to the dollars, Bay commits technical and business resources, and a community of “Factory Entrepreneurs,” all part of a program designed to ensure the business success of these application entrepreneurs.
Designed to ensure the business success of these application entrepreneurs? I was always under the impression that there are no guarantees of success in business, but then again, I’m only an entrepreneur, not an application entrepreneur. Application entrepreneurs apparently thrive in the New New Economy, which is a place I don’t dare venture.
Of course, if any of this sounds ridiculous to you, it sounds equally ridiculous to me too, and following the insane valuations given to Geni and Ning, I was left with no choice but to create a new category for some of my posts entitled “VC Insanity.”
There’s clearly a lot of hype around Facebook’s platform, and maybe even some potential, but for a venture capital firm to start a program like this for a nascent platform that has yet to prove that it is capable of enabling the creation of tangible enterprises seems like a sign of irrational exuberance. Why? Five obvious reasons:
- The language Bay Partners uses to describe the opportunity sounds like it may have been generated by bullshitr.
- Creating an application for Facebook is not a significant development undertaking. Many individuals are building applications in their spare time very rapidly. Therefore, it’s questionable as to why outside capital should be required.
- There is no solid evidence that application creators will be able to monetize their applications to a significant extent, especially to the extent that it creates a compelling investment opportunity.
- There is no solid evidence that applications themselves are much more than novelties. In fact, that calls into question just how popular these overhyped widgets are and how much momentum there is in growth.
- What we do have solid evidence of is just how undesirable it is to have a business that is completely dependent on another business. While it’s not an apples to apples comparison, one need only look at the woes of auto parts maker Delphi and auto manufacturer GM. Delphi was the biggest supplier to GM, and its financial woes threatened to cause GM’s collapse. It’s the perfect example of why companies should always avoid significant or complete reliance on third-parties.
Facebook may be the best thing since sliced bread, and maybe it will even turn out to be the very bread that holds the peanut butter together, but any venture capital firm eager to mention a “new economy” has a lot of chutzpah. Personally, I run away from new economies, because I know that my money is safer in my Austrian Sparbuch account. Limited partners in some of these firms might want to consider that. When it comes to the New New Economy, I defer to George W. Bush.
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Drama 2.0 spikes the Web 2.0 kool aid by providing critical analyses of Web 2.0, its people, its startups and its impact on the world of media. Other topics are explored when Drama 2.0 has been drinking too much 1975 Dom Perignon. Read more about the Internet's version of Keyser Söze here.
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I love you Drama. Here’s my recent TC comment below yours:
Sail, I think you’re missing the real problem with Facebook apps. They are getting too crowded. When you’re one of a few, attention is easy. When you’re one of a thousand, attention is hard. Facebook apps have the same problem that all the Web 2.0 companies with baby toy names have - it’s very, very difficult to build a large enough community that you can build something worth monetizing.
Let’s for a second assume that you invest in an “apps” company that employs 4 engineers and 1 business person (if there’s no business person involved, I hope your LPs don’t commit any further funds to your firm). Let’s assume you low-ball on salaries because the engineers are all co-founders and you get them to work for $40,000/year. Make that fully loaded and you’re up to about $60,000/year. For the sake of argument and simplicity, let’s assume the business guy comes at the same price so we’ve got 5 people at $60,000/year fully loaded. That’s $300,000/year in H.R. costs. Now add in $100,000 for using Amazon’s EC2 and S3 and $50,000 for office and $50,000 for legal. You’re up to a $500,000 per year cost structure.
If we are to believe Andrew Chen at Mohr Davidow (http://www.insidefacebook.com/2007/06/24/vc-perspectives-on-the-facebook-platform-andrew-chen-mdv-eir/), we see that Facebook app CPMs should be somewhere around $0.01/CPM.
Now, just to cover the operating costs of the business, we have to hit 50 milion CPMS which is 50 billion views.
Let’s say the average app user logs in 300 times per year (I think I’m being quite generous here), then you need 166 million app installs to just cover costs.
Please do enlighten me how your “portfolio apps companies” plan on getting 166 million Facebook users to install the app given Facebook doesn’t even have that many members?
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