What's Friendster Selling? Bubble survivor Jonathan Abrams is coy about how he's going to turn his site's eyeballs into cash. If he's smart, that's a problem he won't have to solve.
By John Heilemann

(Business 2.0) – Late last year, when I drove down from San Francisco to Silicon Valley to pay a visit to Jonathan Abrams, I assumed I was about to have an argument on my hands. All over the Valley, the buzz around the boomlet in social-networking startups--of which Abrams's brainchild, Friendster, was easily the most prominent--was rising to a deafening pitch. (Doing its part to contribute to the clamor, this magazine declared social networking its "technology of the year.") I planned to tell Friendster's founder and CEO that the hype was giving me a thumping headache and that my bullshit meter was flashing bright red. But much to my surprise, Abrams beat me to it. "It's like push technology or peer-to-peer," he scoffed. "You've got a bunch of disparate companies getting lumped together, and there's all this excitement and money, and all I can think is, Haven't we learned anything?"

Learn from experience? The Valley's venture capitalists? About as likely as a grizzly bear learning to ride a unicycle. Within a month after Abrams and I talked, a slew of high-end VC firms--Sequoia, Mayfield, etc.--had poured more than $40 million into social-networking startups such as LinkedIn, Spoke, and Tribe Networks. And, whaddaya know, the splashiest of these investments was one involving Friendster: a $13 million deal led by Kleiner Perkins Caufield Byers and Benchmark Capital, which reportedly valued the fledgling outfit at a bracing $53 million.

This turn of events raises myriad questions, but one jumps immediately to the top of the list. A year after making its public debut, Friendster has attracted, according to Abrams, a whopping 5 million users. At the same time, it has yet to generate a dime of revenue. Of all the lessons of the Internet bubble, maybe the most incontrovertible is that metrics such as site traffic and pageviews are meaningless in and of themselves; they matter only in conjunction with a credible plan for turning eyeballs into cash flow. So the question is, Does Friendster have a plan, or is this 1999 all over again?

On first inspection, very little about Abrams reeks of that bygone era. Unlike the bubble boys of yore, he's neither a marketeer nor an MBA nor a facile font of new-economy blah-blah. Instead, he's a 33-year-old Canadian software coder who arrived in the Valley before the bubble and whose experiences during it--being laid off by Netscape, shuffling from one doomstruck startup to another--were nothing but sobering. By the spring of 2002, Abrams says, he was "unemployed, not doing well financially, and certainly not looking to do another startup." Then he came up with the idea for Friendster, hacked up a prototype, and watched in amazement as the thing went viral.

Consistent with his own hard-won sense of realism, Abrams says he's imbued his company with "a postbubble sensibility." When we met, he rattled off a list of attributes that set Friendster apart from the dotcoms of old: Its tiny, threadbare, no-frills offices. (The company has since moved, though its new digs aren't much of an upgrade.) Its tiny, threadbare, no-frills staff--a dozen people at the time. The absence of a marketing budget. The absence of a PR firm. The decision to wait for more than a year before taking VC money. "The people working here come from companies that were not successful, by and large," he said. "We don't have any sense of entitlement."

Some of these qualities may evaporate now that Friendster is swimming in VC cash. And while Abrams may not have a screaming sense of entitlement, he does exhibit some other traits that are sharply redolent of the dotcom heyday. Dismissiveness toward rival startups, say: "I really don't think many social-networking companies besides Friendster are going to achieve a lot of traction." And hubris in the face of deep-pocketed competitors: "Match.com has been around eight years, has 12 million users, and has spent many millions of dollars on advertising to get them. We're a year old, we've spent zero dollars on advertising, and in a year or less, we'll be bigger than them--it's a given."

No, the real difference between Abrams (and his team) and the dotcommies of the 1990s has less to do with their attitudes than with the business context in which they're operating. Fully three years after the bubble burst, the Internet economy has regained some credibility. Thanks to an assortment of thriving e-companies--eBay and Amazon; Google, Yahoo, and InterActiveCorp--viable (read profitable) Internet business models now exist. The question is how, and whether, Friendster can apply them to its brand of social networking.

Abrams makes no secret of Friendster's intention to play the dating game against Yahoo and InterActiveCorp's Match.com. Whereas those outfits make their money by extracting fees from the romantically challenged, Friendster will likely continue to let its users hook up for free but charge them for premium services--the ability to customize their profile pages, say. But Abrams also makes clear that his ambitions extend beyond the realm of online nooky. He hints at an array of value-added services, from friend-based job referrals to classmate searches. And, like any proprietor of a high-traffic website, Abrams plans to tap into the burgeoning Internet ad market.

More interesting, Friendster might also try to play the Google game. Though Abrams is mum on the subject, Bob Kagle, a Benchmark partner who sits on the company's board, recently bandied about (in an interview with Venture Capital Journal) the idea of Friendster becoming a "trusted referral" service. "If you could be one click away from buying something that a number of your friends are actively recommending to you in real time," he said, "that's a pretty high-value service to you." And, potentially, to Friendster--which could partner with e-commerce firms to take a cut of the transactions its referrals generate.

None of these paths is implausible. Yet in the age of Internet consolidation, all present formidable hurdles, not least a clutch of giant, cash-rich, Net-savvy rivals. Match.com may at first have underestimated Friendster, but no company controlled by Barry Diller will stay asleep at the switch very long. Microsoft and Yahoo, spurred on by Google, are devoting vast resources (both financial and technical) to exploring the nexus of search, commerce, and community. And so, of course, is Google itself, which reportedly tried to buy Friendster for $30 million last October, and which stuck its toe in the social-networking waters in January with a prototype Friendster killer called Orkut. As Orkut and a spate of other Friendster knockoffs show, social software is readily cloned. And while its brand and viral nature are real assets, you have to wonder how they will be affected by the service's transition to a model that isn't 100 percent free. In fact, there are already signs, both statistical and anecdotal, that Friendster's popularity may have peaked.

Abrams doesn't seem worried by any of this. His calm is eerie, his self-assurance pristine. When I mentioned that $13 million in capital doesn't seem like much, given his competition, he smiled and said, "Hey, I dunno, maybe we'll just wait until Google goes public and just go public after them." I think he was joking--at least, I hope he was--but it did make me wonder if Abrams was spending more time than he'd admit pondering a different exit strategy for Friendster: getting bought. Certainly his company would be an attractive acquisition candidate for Yahoo, InterActiveCorp, Microsoft, or AOL.

Abrams told me, and Kagle affirms, that Friendster "isn't looking to get bought." But then, what else are they going to say? When I pressed Abrams, he said something that rang closer to the truth: "If someone walked in and offered the right number, sure, we would consider it. Definitely. But the right number goes up every single month."

Maybe it does and maybe it doesn't. Friendster's 20-something clientele is notoriously fickle and faddish; the next few months may hold unpleasant surprises. But either way, it seems probable to me that Abrams and his backers will reach the conclusion that it makes less sense to try to be the next Google or Yahoo than it does to be the next ICQ or Hotmail--Internet software phenomena whose founders decided that what they had on their hands were features, not companies, and happily sold to the highest bidders. God knows there'd be nothing wrong with that. But it would put to rest any vaunted notions about Friendster's--or the Valley's--"postbubble sensibility." The Internet business has changed a great deal. But the siren song of cashing out remains very much the same.