Simon’s Blog

You’ve no doubt seen the news that AOL is buying social network Bebo for $850 in cash.  By any standards, that’s a great exit for all involved.   Bebo was founded in 2005 and raised a single round of venture capital ($15M for 16% of the company, apparently) in 2006.  They’ve been pretty successful in growing a substantial user base, especially amongst teenagers, for whom Facebook is more than a bit uninspiring to use.

Almost certainly, the Bebo management team and investors faced the following choice: sell now for as high a price as possible (I’m sure they’d have liked to sell it for a billion, but $850 in cash is a good deal); or do another round of financing, and try to build a company with a multi-billion dollar valuation.

Based on Kara Swisher’s information about Bebo’s financials,  AOL has paid 40X revenues, which is a stellar valuation and a useful 9X return for Bebo’s investors. I think the Bebo team made the right call to sell now.  It’s a super-high-risk proposition to go after a multi-billion dollar valuation for a social networking company (or any other type of company!), when you have a term sheet for close-to-a-billion dollar valuation on the table. Especially against a background of:

• Big falls in public company valuations
• A declining interest from consumers in using social networks (certainly most social network users I talk to are spending less time using social network sites today than they were a year ago, even if they remain active users)
• Not being the global leader, or even the number 2, in their category i.e. they’re not the largest or second largest social network
• A growing realisation amongst investors and entrepreneurs that it’s going to be challenging to make social networks a killer application for on-line advertising and marketing

That last point is the most important of all.  The most likely way to drive multi-billion dollar valuations for social networking sites will be to find a way to make them a killer application for on-line advertising and marketing.  Not easy to do, because social networks are actually particularly poor when it comes to monetizing page views. To see just how poor, it seems that Bebo was able to make only $20M in annual revenues in 2007, from around 10 billion pages views a month.   A site where advertising was working well could expect to see more than ten times those revenues, given those kind of page views (based on a rule of thumb that a million pages views a day equals a million dollars a year in revenue).

Thus far, though, the only killer app for on-line advertising is “search”, which is why you see venture capital groups continue to fund new search engines, even in the face of Google’s massive industry dominance.  It’s possible that social networks could become a killer app for selling “virtual goods”, but that very much remains to be seen. Also, it’s unclear what the market opportunity for virtual goods could be, if there was a killer app for them (which there isn’t right now).   That means, there was simply no clear path for Bebo to achieve a multi-billion dollar valuation.

It will be interesting to see what AOL does with Bebo.  For sure, some of the declining interest in spending time on social networking sites that I’m seeing is being accompanied by a resurrgence of interest in using instant messaging (IM) applications.  So, some combination of social networking with IM could well be interesting from a user-engagement point of view…