Cover Story: The New Internet Gamble –

Meet John. He’s a 52-year-old St. Louis native who makes his home in Silicon Valley. He bikes, snaps photos and loves genomics, Internet services and women. John still mourns the passing of Jerry Garcia.

Bob is a friend of John. On Saturday nights, this 47-year-old Bay Area bachelor stays up to watch “Six Feet Under” on HBO. Originally from Flint, Mich., he also enjoys live music, basketball, fly fishing and classic rock.

John and Bob are not just friends. They are two of 3.4 million Friendsters and the most high-profile venture capitalists to gamble on a new generation of online social networks like Friendster. John (Doerr) is a general partner with Kleiner Perkins Caufield & Byers, and Bob (Kagle) is his counterpart at Benchmark Capital. In the last week of October, the duo led a $13 million Series A round in Friendster, giving the startup a $40 million pre-money valuation and sparking a feeding frenzy in the space.

Since Pope John gave his blessing, VCs have rushed to fund two other social networking companies: LinkedIn pulled in $4.7 million from Sequoia Capital, and Spoke Software closed on $11.7 million from DCM – Doll Capital Management, Partech International, Sierra Ventures and U.S. Venture Partners. Meanwhile, Friendster competitor Tickle Networks bulked up with

an acquisition, online party organizer Evite added Friendster-style features to its site, and all of the Internet’s brand names – Google and Monster included – have started planning their own social networks.

“The feature set and product set of sites like Friendster is not hype – it’s a reality,” says Andrew Anker, a partner with August Capital in Menlo Park, Calif., and an investor in Tickle. “Hype is the $53 million [post-money] valuation on a company with no revenue. The classic venture bubble has now hit social networking. The pure play social networking companies are increasingly struggling to build a revenue model.”

At least 50 million people participate in online social networks to connect with friends and meet people for social activities and business. Through Friendster, for example, a user can ask a friend to make an introduction to another friend. Friendster is the middleman between users, making the links between people transparent.

So far venture capitalist have poured $100 million into the space. At least a dozen names fall into the category (see chart, page 30), but the list is growing as the hype builds.

“We’re very cautious, but enthusiastic and passionate about personal networks,” says Joseph Tzeng, a partner with Crystal Ventures, a Silicon Valley investment firm that made a killing off of content plays like CNet.com and About.com. “But they need to find a way to substantiate themselves rather than relying on [investors] to support them.”

One scenario has online social networks evolving into online dating services or e-commerce sites like eBay and Craigslist, which link buyers directly to sellers. Another possibility is that social networks could become next-generation content providers, an encyclopedic collection of personal profiles and Weblogs. Or, the companies could become enterprise software makers, adding versions of their applications to corporate Intranets as a way of linking people and inducing them to collaborate, something that Spoke Software now does.

The underlying belief is that if you can aggregate millions of users you’d be hard pressed to not figure out a way to make money from them.

A safe bet? Hardly.

Subscribers can read the rest of this month’s Cover Story in the protected