Should you build your business on Facebook?
August 19, 2009
The dead simple answer is NO. This isn’t to say your business shouldn’t leverage social sites like Facebook, it should. I have written about the risks of building your business on other businesses like Twitter and Facebook before, but I thought the iLike example was enough of a cautionary tale to be worth writing about.
MySpace is rumored to be purchasing iLike a popular social music service running on Facebook. The company launched in 2006 and has more than 50 million registered users. The company raised $16.5 million and was valued at $53.2 million in 2006. The company has more than 10 million monthly facebook users. What do you think MySpace is going to pay for the company? $500 million? $100 million? $53.2 million? The rumors are the company will sell for about the same amount of money investors piled into the company - $20 million (just 13.5 million in cash). Ouch.
The company was doing well - i.e. lots of users. What was the problem? David Pakman’s article titled, “Why iLike Sold for Peanuts” is an interesting look at the Facebook economy. He explains, “The recent distressed exit of iLike reminds us of the need to build real value in our startups if we hope to create lasting companies and wealth.” Can you build real value on top of Facebook or Twitter? Maybe not.
Ashkan Karbasfrooshan (really) doesn’t think so and he hits the nail on the head with this comment: “What has pushed iLike’s valuation down is a problem with control. The company’s managers have no way to prove to potential acquirers that their business model has a bright future because they can’t predict from one day to the next which direction Facebook’s Platform will go. The source said that leaders at iLike, or any other company on the platform, are not truly in control of their fate–Facebook’s Mark Zuckerberg is.”
Gawker reminds us that just two years ago iLike’s CEO claimed the company was “MADE” and his investors suggested that iLike was going to be a “billion-dollar winner”! Ryan Tate points to these headlines about the company:
- Wall Street Journal, June 2007: “‘Somebody’s going to end up being the Facebook music service,’ [co-founder Hadi Partovi] says. ‘It’s either going to be us, in which case we’re made, or it’s not.’” (By the time Patrovie gave this retrospective quote, iLike was by far the dominant music service on Facebook.)
- Billboard, July 2007: “The smart money says someone will acquire iLike, and soon. The company’s social media discovery capabilities are a natural extension to any digital music service, particularly iTunes.”
- BusinessWeek, July 2007:”‘Widgets are a fundamentally important idea,’ says Vinod Khosla… who has invested in two widget makers, Slide and iLike. ‘I believe it has the potential to create big billion-dollar winners.’”
- Forbes, October 2007: “Says Khosla [Ventures]’s David Weiden: ‘Widgets are the next kind of media network.’”
- USA Today, November 2007: “The company… has become an overnight sensation… Dave McClure, an angel investor in Silicon Valley, wouldn’t be shocked if iLike… and others eventually go public.”
At the end of the day, this WAS the successful Facebook startup. Investors are hoping to break even. What about the less successful Facebook startups? What should their investors hope for? Fifty cents on the dollar? Less?
