Facebook Fallout: Social Media Start-Ups Try to Stand Out

Social media start-ups find it harder to stand out.

PORTLAND, Ore., Sept. 24, 2011 -- As publicity stunts go, this one's in the vein of Jack Kerouac-meets-fellow-foodies in a social-media setting.

Executives of Bizzy, an online check-in service primarily for restaurants, are traversing the Pacific Northwest, getting in front of customers at local restaurants and bars to introduce themselves and get feedback. The jaunt through Oregon and Washington is an abbreviated sequel to a trek in July that took Bizzy execs from Silicon Valley across the Southwest and Texas and up to Washington, D.C.

The eye-catching publicity swings, while time-consuming, speak to the lengths some social-media start-ups are willing to go to gain traction in a marketplace larded with competition.

After a quick powwow with folks at the Portland Incubator Experiment which nutures new businesses, Bizzy's Ryan Kuder and founder Gadi Shamia host a dinner for foodies, followed by free beer at a popular tap room. About 25 customers and would-be Bizzy users show up for brews — either through Facebook notifications, tweets or old-fashioned word of mouth.

"This is prospecting for us," says Kuder, a former Yahoo marketing executive.

"We want to meet real people using our app, listen to what they want, and create buzz," Kuder says.

Doniree Walker, a food and lifestyle blogger in Portland, is an early advocate because she's been able to "discover great restaurants."

Bizzy's stab at customer development is similar to the sort of barn-storming tour that baseball stars such as Babe Ruth and Willie Mays did in the 20th century to take their wares directly to people amid so many entertainment options.

Indeed, with the economy potentially teetering on the brink of another recession, and a roiling stock market, the pressure is on companies to make a mark — any mark — while dodging a potential bloodletting of social-media players amid the latest Internet bubble.

"There are way too many social and ad networks," says SugarCRM CEO Larry Augustin, who took VA Linux through a $1 billion initial public offering during the tech IPO boom of December 1999. He points to more than a dozen social-networking companies bigger than Google+. "They can't all survive. Some will be bought. Some will fail."

Economic uncertainty and too many social-media companies is a toxic combination, says Adam Goldstein, CEO of online travel service Hipmunk. The rising cost of commercial real estate in the San Francisco Bay Area and slumping consumer purchases could be a death sentence for some businesses, Goldstein says.

Hundreds of domestic companies are focusing their efforts on social technology in pursuit of billions of dollars from businesses and consumers, says Brian Solis, a social-media analyst at market researcher Altimeter Group and author of The End of Business As Usual. Online ad spending in the USA alone is expected to soar 20% to $31.3 billion this year, up from $26 billion in 2010, eMarketer estimates.

"There is money to be made and calculated risks to take," says Alesya Opelt, founder of website Alesya Bags in Charleston, S.C.

There are thousands of social-media-related companies, if you include elements of gaming, mobile applications and online advertising. And they are sprouting — especially in the hotbeds of San Francisco, New York and Los Angeles, says Mark Jensen, managing partner at National Venture Capital Services for Deloitte.

Social media "is like air and connectivity. It is going to be embedded in everything we do in life," says Bill Gross, the titular CEO of apps developer UberMedia and start-up incubator Idealab.

For the first time, social-networking use reached half of all U.S. adults and 65% of adult Internet users, according to a survey conducted in April and May by Pew Research Center's Internet and American Life Project. Pew has conducted the survey since 2005.

"The social Web is turning into the merchant Web: The first company to merge the two is the real winner," says Harry Weller, a general partner at New Enterprise Associates and an early investor in Groupon. "Facebook maybe? Google perhaps?"

But with so many companies floating out there in pursuit of digital riches — did you know there are four companies with a variation of the name "my" and three with "face"? — do consumers even have time to use the services and products?

"There are too many social networks and ad networks," says Augustin, a former venture partner at Azure Capital. "It's not sustainable."

Pete Flint, CEO of real estate search site Trulia, sees a social-media bubble within a stable tech industry. "Aside from Facebook, Google and Twitter, it's hard to catch on," he says.

Making a mark

The volatility comes at a time when so many start-ups are vying for markets that can only support two or three profitable success stories. Should the bubble pop, it would leave plenty of carnage, perhaps on a scale overshadowing the dot-com bust of a decade ago. There will be "a few big winners and lots of losers," says Hipmunk's Goldstein.

That grim prospect has led many start-ups, including Bizzy, to pursue various strategies to make a name (and business) for themselves:

•Align with Facebook. Social-gaming leader Zynga plans a boffo IPO, largely because it hooked up with Facebook and established a customer base of millions.

BranchOut aspires to do the same. The LinkedIn competitor hopes to piggyback Facebook's 750 million members through its application, which is offered directly through Facebook. (LinkedIn, a separate site, is not available through Facebook.)

"You can disrupt a multibillion-dollar industry by hitching your wagon to Facebook," BranchOut CEO Rick Marini says. He says BranchOut is up to 3 million users a month, compared with 300,000 a few months ago.

Commerce start-up Payvment has a storefront application that lets more than 100,000 businesses sell and promote products on Facebook. Though it started as a free app, a premium version is now available for $29.95 a month.

•Grab a slice of a big, established market. The multitrillion-dollar travel industry is big and diverse enough to support multiple firms, Goldstein says. Hipmunk's simple site has earned it plaudits among consumers for aggregating flight details and travel planning.

•Diversify revenue. Sugar, a profitable, 200-person company, gleans its revenue from three main sources: display ads, direct-response ads and consumer purchases. "They feed off each other," says CEO Brian Sugar, who started the women's media network with his wife, Lisa, five years ago.

Without a jaw-dropping distinguishing characteristic, some companies may evaporate — either through acquisition or death, some analysts say. "Expect contraction in the next six months, especially in travel and other consumer-related sites," says Justyn Howard, CEO of Sprout Social, a social-media management firm.

It has started already. Zynga has bought 15 companies in the past 13 months. Facebook plans to make 20 acquisitions this year, compared with 10 last year and just one in 2009.

Winnowing of the market isn't necessarily "a bad thing" if it deters some entrepreneurs from starting businesses, argues David Sacks, CEO of Yammer, a social-networking service for companies.

Plenty of room, so jump in

Still, companies such as Bizzy, which competes with Yelp, are diving into the fray because some venture capitalists dispute the naysayers and argue there is plenty of room for social-media companies.

"It is a vibrant segment of technology, and there are no barriers to entry," says Fred Wilson, who is an investor in Twitter, Zynga and more than a dozen other social-media companies. "New services like Foursquare and Instagram have gone from nothing to many millions of active users in the past couple years. If you have something great, it will get adopted."

Nearly two dozen tech companies went public in the second quarter of 2011, generating $5.5 billion — the highest dollar amount since the Internet boom days of 2000. However, many are trading below their offering prices.

By comparison, only six tech companies went public in 2008, according to the National Venture Capital Association.

The financial promise of the social-media and mobile markets reminds Hollywood super-agent Ari Emanuel of the early stages of the movie and auto businesses, when there were scores of companies before consolidation. "Social is just following the same patterns, but with a bigger audience, less cost constraints and lower infrastructure costs," says Emanuel, who is dabbling in social media.

What's more, economic downturns usually foster an increase in start-ups. "People start companies because they can't find a job, and larger companies often cut back on research, prompting others to fill technology voids," Jensen says.

"I love a bubble. There needs to be one to create an industry like social media, disk drives, PCs," Jensen says.

Bizzy, with its unconventional marketing tours and distinct application for food sophisticates, is pinning its hopes on breaking through. But today's social-media scene is increasingly becoming a numbers game.

"The challenge is so many mobile and social apps have emerged this year, consumers can be overwhelmed with choices," says Michael Gartenberg, an analyst at market researcher Gartner.