"Catch And Release" Business Models

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

 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

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!