Chern Jie

SAN FRANCISCO There was a time when David Sze, a venture capitalist at Greylock Partners, could be counted among those skeptical of the millions of dollars pouring into Internet companies building online communities offering business and social contacts.

"Basically, it reminded us a lot of what we saw in the late 1990s," Sze said of the first rush of investment in social networking ventures in 2003. "It was, 'Let's hope some users come, and if they do, we'll figure out how to turn that into a business.' We didn't see a real business model there."

Even now, a year and a half later, the question persists of how these ventures can make money - and justify the millions invested. Still, some of the start-ups have shown such impressive growth in users that they are starting to get backing from skeptics like Sze. And there are some signs that selling classified ads on these Web sites may be a solid business model.

Last October, Sze and Greylock Partners took the plunge as a majority investor when LinkedIn, a social networking company in Palo Alto, California, was seeking an investment of $10 million to expand. The company had raised $4.7 million in venture financing in November 2003, most of it from Sequoia Capital.

LinkedIn had signed up only 40,000 members on its site when its founders first approached Greylock in 2003, Sze said. By last autumn, it had nearly a million members. Today, the site has 2.5 million registered users.

"They're showing the rapid growth you like to see," Sze said.

Like other social networking sites, LinkedIn hopes to create a workable business by capturing a small piece of a classified advertising market estimated to be worth more than $20 billion.

That strategy has been tested in recent months. "A lot of these sites rose with great fanfare, but many are still scrambling to make a go of it," said Greg Sterling, an analyst with Kelsey Group, a market research firm.

The LinkedIn Web site allows business professionals to make contacts for sales leads and the like. Users are encouraged to invite people in their business sphere to join the site and to connect with people they know who are already part of the network. Joining is free, although there is the nonfinancial cost of deciding whether to give permission or deny access every time someone seeks to make a connection through you.

In February, the company announced that it would charge employers $95 to post a job listing for 30 days, the first in a series of revenue strategies. The company would not provide figures, but a search at the site showed that it had at least 1,000 job listings over the previous month.

More recently, the company introduced what it called LinkedIn Services, which invites users to find local lawyers, accountants and other professionals through one's social network.

"People say you shouldn't use the Yellow Pages to find a lawyer, but that's exactly what most people end up doing," said Konstantin Guericke, the co-founder and marketing director of LinkedIn. "This is a way of getting recommendations through trusted contacts."

He said the company was on target to make a profit by the first quarter of 2006.

Another start-up company, Tribe.net, which is based in San Francisco and raised $6.3 million in venture funding in November 2003, is less focused on business contacts than LinkedIn. Members are encouraged to join "tribes" of mutual interest, like mountain climbing or searching for low-priced ethnic restaurants, or to create their own.

Tribe is a free service that charges for classified ads. The company hopes to get enough traffic to have a brisk business in selling classified ads for specific audiences. A San Franciscan selling used climbing gear, say, would direct the ad to the "tribe" for Northern California rock climbers.

Mark Pincus, the company's founder, would not disclose specific revenue figures but said help-wanted ads and apartment listings accounted for nearly all of Tribe's revenue.

"I think Tribe's concept is sound, but they've had trouble executing," Sterling said. The problem is that Tribe does not yet have the kind of traffic needed to sustain a vibrant local marketplace, a point that Pincus concedes.

Tribe had 243,000 unique visitors in March, according to comScore Media Metrix, which measures Internet traffic, compared with the 3.7 million people who turned to Craigslist, a Web site used to find apartments or jobs or sell used items.

But Pincus said that traffic on Tribe had tripled over the past 12 months, and said he expected it to triple again over the coming year.

"Up until now, we haven't spent money on marketing because we've wanted to be conservative," Pincus said. "But with revenues starting to come in, we're now spending money on marketing to get more traffic."

Reference: Finding profit in social networking Web sites ,
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