Redeye VC

Josh Kopelman

Managing Director of First Round Capital.

espite being coastally challenged (currently living in Philadelphia), Josh has been an active entrepreneur and investor in the Internet industry since its commercialization. In 1992, while he was a student at the Wharton School of the University of Pennsylvania, Josh co-founded Infonautics Corporation – an Internet information company. In 1996, Infonautics went public on the NASDAQ stock exchange.

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"Catch And Release" Business Models

Istock_000002176016xsmall As the success of sites such as MySpace, Facebook, LinkedIn, Classmates, and Geni have demonstrated, viral marketing can be a very effective tool to help build social networks that appeal to a wide range of people for a number of different reasons.   Beyond the specific markets that they focus on, these sites have fundamental differences in how they acquire new users, generate revenue, and grow their business.

But what all of the most successful social networks have in common is that they’ve perfected what I like to call a "catch and keep" model. From the first time a user signs up for a MySpace, or a Facebook, they find themselves sucked into spending hours on the site, and feel compelled to both return on a regular basis, and drag their friends into their network. As recent data demonstrates, the top social networks are among the highest trafficked and stickiest sites on the web.

In sharp contrast, most social networks out there have what I call a "catch and release" model. They can generate buzz, get written up in the blogosphere, and even get 53,651 beta testers, but few of those initial users ever return to the site. There can be many reasons for this. The site may appeal to a group of people that just don’t need to communicate on a daily basis, for example old classmates, or distant relatives. They may have a cool feature set that presents data in some unique or surprising way, but is not enough to compel someone to come back on a daily basis.   [Note - this phenomenon doesn't only apply to social networks -- I've visited Zillow once, but have not found a reason to return...]

The catch and release model often occurs because it’s much easier to get someone to your site with the promise of value -- and much, much tougher to offer those users a compelling reason to return and invite their friends.


A good example of a catch and release business model is Classmates.com.  When it was acquired in 2004, Classmates had a reported 38 million registered users (1.4 million of which were paid). Despite adding 1.5 million new registered users per month, by 2006 the total registered user count had only gone up to 40 million members. Given the amount of money Classmates spends on online advertising ($12.6 million in February 2007 alone) that’s some churn rate!


Classmates User Acquisition Model

Classmates

 The effects of the catch and release business model show up in a company’s valuation. Classmates was acquired for $100 million by United Online in 2004. At the time the site had 38 million registered users, and was generating $72 million in annual revenue. This gives it a 1.4x revenue multiple, and a value of $2.63 per user.

Contrast that with one of the leading catch and keep social networks, Facebook. 
By limiting its initial scope to a select group of universities, Facebook ensured that its first few members were likely to know a lot of other people on the site, and have a lot in common with them (through both shared friends and interests.) Facebook successfully leveraged the connections that were being developed through that initial community to virally expand into other schools, growing rapidly until it had captured 85% of the college market only a year after launching.

Since then Facebook has opened up its network to anyone. The numbers behind their success speak for themselves: 6th most trafficked site in the US, 16 million unique monthly visitors, and 30 billion monthly impressions, all without a penny spent on advertising. Perhaps most impressive is how loyal those users are – 60% access their Facebook accounts every day, and 90% every month. The average user visits the site 24 times a month.
 
Facebook User Acquisition Model

Facebook

Their catch and keep model is reflected in their valuation.  In 2006 it was confirmed that the company had received a $1 billion acquisition offer from Yahoo. At the time, Facebook had a reported 14 million registered users, and was generating an estimated $50 million in annual revenue. This gives it a 20x revenue multiple, and a value of $71.43 per user.


Which type of social network would you rather be?  It's clear that if you’re building a social network or are planning on starting one, it’s important to know whether you have a catch & release business model, or a catch & keep business model. I’m looking forward to seeing how the different social networks will evolve over time.

First Round Capital associate, Mazen Araabi, helped with this blog post.  Thanks Maz!

Comments

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joe

It seems like "catch and keep" is most conducive and applicable in real offline communities... the college campus is a great example - I want and need to communicate with my network on a daily basis.

Also, would you classify LinkedIn under "catch and release?" I have little incentive to visit regularly. Yes its valuation is likely as high (if not higher) than Facebook...

Umesh

I think linked in will have faded away if it werenot for the recruiting value it provided and the hot market. It will be interesting to see if it can stay that way in a few years of bust.

Jonathan

Very interesting and valid points, the facebook model of saturating a (large) niche before expansion is exceptional.

Mike Feinstein

Great ideas. It made me think about what makes a site 'catch and keep' vs. 'catch and release'. I wrote some thoughts on my blog http://www.thefeinline.com

Bilal Hameed

Your categorization of Geni in the catch and keep business model might be a bit early.

Compete is reporting that Geni might be the most hyped entrant of the Catch and Release model.

Check out this post on their blog
http://blog.compete.com/2007/04/16/geni-valuation-family-socail-network/

Anyways, Thanks a bunch for paying a visit to Startup Meme

Dave

i think the point you're talking about boils down to retention.

in other words, how do you engage / interact with the user upon first visit, such that they decide to return to your site later?

there are several techniques for increasing / improving retention:
* awesome user experience
* tying in to periodic behavior / reg user activity
* capturing email addr / email marketing
* (social) bookmarking
* enabling group behavior that will circle back around

however, i will say that most retention marketing succeeds with an initially successful user experience.

in order, i usually suggest people focus on these activities:
* acquisition: getting people to your site
* activation: once they get there, getting them to engage with your site thru various calls to action (CTAs)
* retention: once they have a successful visit, getting them to come back
* referral: once they are a regular user of your site, get them to refer other users to your site
* monetization: lastly, once you've built a successful user experience people come back to & refer others to, look for ways to create revenue

- dave mcclure
http://500hats.typepad.com/

JP

I wouldnt call this "catch and release" a business model. Its a failure. In fact, neither one is a business model. Advertising is a business model. Subscriptions are a business model. Not being able to keep users around long enough to make money is not a business model. Its a failure.

mike b.

Geni.com's a success?! I guess we're not looking at the same traffic data...

Dave Hersh

I agree with Bilal. We're really talking about user retention, and in my mind, the jury is still out about whether or not myspace will be able to retain its audience over the long haul. The problem is that their success is predicated on being the "cool" place to be right now. To say its not a very good website is an understatement, and they really aren't providing much intrinsic value.

Everyone is there because its the cool place to be, and its the cool place to be because everyone is there. A nice little circle, but is it one that can't be broken?

If you ask the folks at FOX, they'll say they've got critical mass to the point where they can't possibly fail. Could be, but bigger fish have fallen from grace before. AOL anyone?

Petteri

You might be intrested in the study we have made

"Ads by Google" and other social media business models

http://www.vtt.fi/inf/pdf/tiedotteet/2007/T2384.pdf

It does not have "catch and release business" models, but same problems are covered in our study.

Summary of our report:
"Social media is becoming more and more attractive to Web users. However, the majority of social media services do not have a clear business model. Typically an innovative idea gives birth to a service, which people can use free of charge. The most common way to create revenue is via advertisements: Google ads appear in many services. In the long run, however, social media has to adopt alternative means for making money.

At the moment there are a few alternative business models, of which four larger themes are reported: Crowd-sourcing, revenue sharing between services and users, developing and selling underlying technologies, and adopting social media tools and approaches for professional use. Some examples of these approaches already exist.

The report also identifies and defines some core concepts of social media, as well as investigates various phenomena co-occurring with social media, namely user activeness, identity, copyrights, mobility, trust, and side-effects. These phenomena should be kept in mind when designing and launching social media products and services."

Robel

Creating value that ensures meaningful association between members is something unique to Facebook-type social networks.
They also tend to balance between the long-term sustainability of the network (i.e maintaining the cohesive atmosphere of friendship) with the robust growth they are experiencing.
One downside (in my opinion) is they tend to grow fast and reach the max size for their market.
Its just my observation,
Would be glad to get commnets
Robel

David Armstrong

If find distribution models to be so much more interesting. Find where the fish already exist...like facebook, or myspace, or maybe both, and then put your service there. A highly adaptable (API) approach wins, measuring site traffic is a waste.

Alan Kelley

Really nice phrases to illustrate which businesses are more likely to generate sustained growth.

International Property Listing

Really good points. The illustration is also nice. using facebook as an example is a good idea. It just shows how facebook catch business. :)

louis vuitton 2010

If find distribution models to be so much more interesting. Find where the fish already exist...like facebook, or myspace, or maybe both, and then put your service there. A highly adaptable (API) approach wins, measuring site traffic is a waste.

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