You’re probably thinking, “Here we go again.” The hype surrounding Friendster, the online social networking site, sounds hauntingly familiar to the buzz around so many dot-coms that dot-bombed. But before you dismiss it out of hand, you should appreciate that Bob Kagle, the 47-year-old venture capitalist behind the deal, backed another hyped Internet company that is now a household name – eBay.
Kagle’s background is in technology (he has a degree in electrical engineering) but he “loves” consumer businesses. “I think they’re the most interesting businesses around,” he says. “The marketing challenges are tremendous, but I think if you can build a meaningful brand by buying a piece of a consumer’s mind, then you’ve got something extraordinarily valuable. Plus you’ve got something you can talk to your friends about at cocktail parties.” He punctuates that last statement with his easy laugh.
Finding the next great consumer company isn’t easy. Kagle has looked at hundreds of deals this year, about 150 of them closely. But the only one he was passionate enough to sell to his partners was Friendster.
Friendster wasn’t even looking for venture money. Kagle cold-called the company’s founder, Jonathan Abrams, back in early August, even before Abrams accepted his first angel investment. Once the two started talking, Abrams warmed to the idea of venture capital, supported by advice he received from Friendster board member and former Yahoo CEO Tim Koogle.
To show Abrams how serious Benchmark was, Kagle pulled in three other partners to help on the deal – Bruce Dunlevie, Kevin Harvey and Bill Gurley. “Bruce took the first lunch with me with Jonathan; I wanted to show Jonathan right away that we’re more than just one guy,” Kagle says. “We’ve been trying to work hard as a team and show him that it’s not just a marketing pitch.”
At the same time, Kagle and his partners worked on due diligence, which can be kind of squishy with a consumer deal. They did the traditional checks on Abrams and looked at hard data about Friendster’s traffic and usage patterns. “We certainly learned a lot about Jonathan through personal references and the like,” he says. “We also had the opportunity to talk to a lot of competitors and would-be competitors because Friendster was beginning to show up on a lot of radar screens and a lot of people are trying to knock it off. That’s a good place to go to people to try to figure out what the soft underbelly is.” Besides Friendster, Kagle took a close look at three other social networking companies that he declined to name.
A key part of his research came from tapping into his friends. “There were a whole bunch of people I could ping about the effectiveness of it,” he says. “There was an EIR here, a guy named Josh Hannah, that tried it out and he used it to refer a candidate for Friendster to me. That showed me within my first week of using it that it had real value beyond dating”.
Kagle also recruited several Benchmark assistants to use Friendster and give him their unvarnished opinions. They’re part of the twenty-something demographic Friendster appeals to. He’d ask them how often they used it, what they used it for and whether it worked, as in, “Did you go out on a date?” he says with a laugh.
It may not sound like traditional due diligence, but it works for Kagle. “In my mind it was the truest form of due diligence because you’re dealing with actual users who didn’t have any bias about what they were suggesting,” he says. Also, since the assistants at Benchmark have equity in the firm’s funds, they have a vested interest in steering partners to what they believe will be successful companies. “When they see something that’s working and we’re not all over it, they try to help bring it to our attention,” Kagle says. “So it was true that I found Friendster, but some of them were using it at the time and I got a lot of encouragement from our support staff to continue to pursue it.”
Subscribers can read the rest of this story (including a Q&A with Kagle) in the the