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Clearstone's David Stern: "Will MySpace eat its young?"

David Stern
David Stern is a venture partner at Clearstone Venture Partners. We asked him to contribute a "guest post" on the MySpace ecosystem, given his background as founder of M Networks, which operated within that other great ecosystem: eBay's. His firm is investing in consumer-oriented Internet companies. Here's his bio.

Matt writes about VCs "going ape over" MySpace. At Clearstone, we're undoubtedly investing in companies that have MySpace "widgets," because almost every consumer facing internet company these days has a widget tactic as a central part of its customer acquisition strategy. But it got me thinking about the MySpace ecosystem generally, especially having had experience with M Networks and a very powerful ecosystem fostered by eBay (yes, "scalded" is a good term to describe the experience!).

Two related questions popped up as I thought about this: (1) What kind of ecosystem is MySpace really building?; and (2) Can any company that is a part of this ecosystem ever make a venture return?

The eBay ecosystem provides some very good precedents. If you think about eBay as a commerce driven platform or marketplace, they've had a very clear mandate and ability to foster an ecosystem through an aggressive outreach to development partners that support their mandate, e.g. building a community around transactions. If you think of MySpace, which is fundamentally a communications platform, the mandate around fostering an ecosystem is very different and arguably unidentifiable from the outside if you look at its results, e.g. the companies currently leveraging MySpace.

Everything that eBay does in their ecosystem and developer networks supports transactions and growing eBay revenues. And they do this in a very measured way, with very stringent rules that certainly can limit a company's growth potential. Much like the sun, companies are drawn to it, but get too close to it, and you can get burned. The eBay ecosystem is littered with companies, though, that have thrived for a time, but which were reined in any time they got too much traction or too close to the eBay customer. I can recall on many occasions when an M Networks partner company CEO voiced their concern over eBay's investments in similar companies, eBay's development of similar products or services or eBay's mysteriously breaking API's that forced a feeder company to scramble. Having been an early backer of PayPal, our firm should know.

I don't believe MySpace has shown investors a clear view of whether a company in it or dependent on it can every make a venture return. Perhaps that will change as new Fox management takes over at MySpace, but to date, our companies and certainly companies that I've spent time with who have been dealing with MySpace, aren't seeing a clear strategy. And again, it's not like we aren't seeing one or two of these new companies per week! (I believe "MySpace Widget" should be added to the list of obligatory buzzwords for pitching a venture firm!) But again, the reason these companies are out there is a result purely of user acquisition economics. I believe every consumer company has to be looking to MySpace to acquire customers if their users are in the MySpace demographic, especially because to date it has been fairly easy and very successful.

As an investor, there are a lot of risks looking at MySpace "enablers" given the state of the ecosystem. There are enough other risks in funding a company that one should not have to worry whether MySpace will embrace or curtail success of its feeder companies. Today, there are no commonalities among companies leveraging MySpace, except for demographic targeted and using it as a customer acquisition strategy. If MySpace starts creating a more aggressive developer program around either monetization or community building themes (which arguably they have no need to do), it will be very interesting to see whether any company that is playing the "monetization tool for MySpace" game can deliver a venture return given the squeeze MySpace will put on it.

As a result, I'm very cautious about any company that is playing off its success or plan to siphon off 1-4M MySpace users, but VERY receptive to anyone who along with that, has tactically proven in the past that they have the online marketing chops to use MySpace as one arrow in their quiver of online marketing tactics along with many others, e.g. leveraging affiliate networks, creating viral campaigns, etc. If you are one of those trying to build a global consumer internet company on the back of some battle-hardened tactical marketing talent, I'd love to hear your vision.

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From: Menlo Creek Musings
Will MySpace Eat Its Young?
Excerpt: This post is labelled Work. For the 4 of the 5 readers of this blog who hate work-related posts, I'm sorry...bear with me! Take deep diaphramatic breaths and it will be over in a second or go read Sandhill Slave
Tracked: August 14, 2006 12:36 PM


>>..Everything that eBay does in their ecosystem and developer networks supports transactions and growing eBay revenues

mmm, that's a bit of an overstatement.

certainly, prior to being acquired by eBay, those of us at PayPal did not particularly feel like eBay mgmt was being focused on "supporting the ecosystem" while they were shoving Billpoint down their users' gullets. only after it was apparent that PayPal was kicking their own solution's butt did they decide to acquire the company, and then IMMEDIATELY in Q3 & Q4 of '02 after the acquisition, eBay marketplace transaction volume took off and the stock went on a tear for the next 2 years.

however, over the past few years eBay mgmt has certainly shown a fondness for PROFIT growth over REVENUE growth, and has apparently made the decision to optimize for profit in the short-term. this was made evident in their decision to raise pricing twice in the past 2 years, at the same time their own data indicates that growth has been slowing on the marketplace on both US domestic and international fronts.

while i respect David's experience & insights, i would not say that eBay has always shown particularly brilliant judgement in how to support growth in its own market.

imo, the paypal opportunity is still larger outside the eBay marketplace than on it. it will be interesting to see if Meg ever decides that 3% of the entire retail merchandising market is a bigger pie than 7-9% of the [much smaller] auction market.

- dave mcclure

[full disclosure: i used to work for PayPal, an eBay competitor^h^h^h^h^h company]

dave mcclure on August 15, 2006 7:08 AM
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Dave: That's a good point and clearly you should know! The arguably important point I was making though was not that eBay has always suported one or the other or that eBay has been brilliant at all in managing its ecosystem, but rather that at least you know going in after years of analysis that eBay is going to rule companies in their ecosystem in a consistent way. (One where the likelihood that anyone touching their customer could grow to generate a venture return is highly unlikely without a fight) We are certainly familiar with the PayPal saga. The more important point that I was trying to make was that at this point, there are hundreds of companies trying to ride MySpace at this time because MySpace has let them in most cases, probably because they are not core revenue generators Fox plans on unleashing on the community. But I doubt MySpace isn't right now coming up with a strategic framework for beginning to rule their ecosystem much like eBay did, and in a much more consistent manner. So for a venture firm having gone through the eBay-PayPal experience, and personally having had a company struggle within the eBay ecosystem, Clearstone and perhaps other venture firms, would be wise to look to the past when trying to figure out how to sort out the often irrational excitement surrounding any company putting its emphasis on MySpace widgets. Venture returns in these types of companies are highly dependent on the answer to whether the parent really lets the child grow up or not. In eBay's case, there were a lot of "nots". This all doesn't mean you can't build a great company, just that perhaps they aren't venture type investments. Despite the fact we live and work in a venture-centric world here, it isn't necessarily a bad thing!

David on August 15, 2006 8:51 AM
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okay, i agree that's on target analysis.

much as i'm impressed with my ex-paypal peeps over at YouTube kicking butt, i've also been impressed that MySpace videos is doing reasonably well themselves.

i've met the folks down there, and they're a lot more clueful than you'd imagine most large portals / acquisitions to be. i'd agree that MySpace will likely start to extract every possible piece of value from its ecosystem, especially with Ross Levinson (super bright guy) & Rupert running chaperone.

still, for folks that run fast & hard & innovate, i do think there are plenty of opportunities to "draft" off the MySpace ecosystem... just as PayPal did with eBay. in fact, i'd say YouTube could inspire its own group of ecosystem wannabes.

watch this space ;)

- dmc

Dave McClure on August 15, 2006 10:18 AM
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