Social Networks by Revenue and Employees, Facebook Stands Above All

Above: Facebook’s employees hard at work in the open working conditions

As an Industry Analyst my role is to identify trends, market forecasts and publish my findings in research reports. As such, Industry Analysts are different than Financial Analysts, which I’m not. While I cite where I’ve found the data in the comments, I can’t ascertain the accuracy of some of these sometimes 3rd party data sources. Note that the 2012 revenues are reported at a different time from the employee headcount was likely reported (Q1, 2013) The following is not to be considered for investment purposes.

With that caveat behind us, the following analysis takes into consideration the following consumer and public facing consumer social networks.  To see enterprise class and business social business software vendors, see my additional posts on VCs and investing. While many of these startups did not have public available data, I conduct a breakdown of these startups:

Automattic (WordPress), Branch, Digg, Facebook, Foursquare, Gowalla, Groupon, Instagram, LinkedIn, LivingSocial, Pinterest, Reddit, Snapchat, Tumblr, Twitter, Yelp, and Zynga.  Here’s what I found:

2012 Revenue Per Employee
Comparing both revenue per employee, rate, we found some amazing efficiencies, in particular with Facebook, Zynga, and WordPress. Here’s a data table comparing the 2012 reported revenue over employee headcount, found from online public data.

Update: There are many comments coming in about Foursquare revenue, please see comment section, there is additional insights on fundraising, and their focus.

Facebook shows highest revenue per employee
As reported by public available data, Automattic, Zynga, Twitter, and Facebook are all making over $300k per employee, with tech salaries often ranging in 100k range, with additional costs, 300k is a benchmark number for revenue per employee that I often look for. For comparison, Facebook is pushing over $1m per employee, compared to Google (50b revenue for 53k reported employees) is about the same, at $946k per employee.  While WordPress team has a modest $45m their internal revenue per employee stands toe to toe with the big dogs.

Overall industry revenues in billions of dollars
Of these consumer social network, only eight had publically available revenue run rates for 2013, on average, they’re forecasting $3.7b. In total, they’re estimating revenues of $8.3b.  Last year, in 2012, ten of the consumer social network sites had publicly available revenues, which amount of $10.7 billion global revenues, averaged across the ten is $1.7b.

Some social networks boast rapid climb in revenues
These startups saw a rapid climb in revenues, on average these companies started in 2006, just seven years ago.  There were some startling accelerations in revenues, with Facebook achieving $5b in revenues in 8 years, reported by 2012 public revenues. While under business model scrutiny and executive change-up, Groupon started in 2008 and achieved $2.3b in revenues in four years reported in 2012.  Even with this acceleration, Facebook is still far behind Google, which boasts revenues of $50b in 13 years since inception.

Not all startups created equal, some have modest revenues
Many companies are no where near the $1b annual mark, in fact, several players are not on a growth trajectory.  Of the lower revenue performers of the group includes: Foursquare, (a low yield of $2m in revenues 2012), Tumblr blogging software ($13m revenues in 2012), and long time Automattic, the makers of WordPress ($45m revenues in 2012).

Industry workforce, over 28k professionals
We can’t look at revenues alone, as these numbers don’t take costs into accounts, and found that LivingSocial employs 4,500, and surprisingly, Groupon employs a whopping 10,000 employees.  All together, across these 17 consumer social networks, they employed 28,177 professionals.   Obviously, this number doesn’t take into account 3rd party software like social media management systems (SMMS) and digital agencies, consultants, and of course, industry analyst firms.

Coming Soon: Who made returns? Meet the VCs and Investors of the Consumer Social Networks

 
(creative commons usage of image by Jakob Steinschaden)

The Rhythm of The Software Industry Impacts Business Buyers

Above Photo: Like analyzing the rings on a tree stump,  our natural environment gives us clues on where we’ve been, and where we’re going.

Have you ever noticed a set of patterns in the industry that come in sequence?  A series of startups getting funded, or acquired in rapid sequence?  Or perhaps, a series of software suites that offer you the chance to be a lighthouse early adopter client with all the bells and whistles at a low cost?  For the astute, you may be noticing a natural pattern that our industry goes through, every year. Just as our bodies, the planet, and weather go through natural rhythms and cycles, technology markets also have their own set of cadence and flows. While the below patterns aren’t universal, I’ve observed over the years the software space has it’s own natural rhythm, and I’d like to share my industry observations.

• Winter VC vacations influences market moves.  Strangely, much of this stems from when VCs go on vacation. I’ve been spending more time on Sand Hill road, to understanding how their funding impacts the market years out.  VCs have competency in guiding a company, influencing direction, and brokering a sale. The second half of Dec is often the quiet period from Sand Hill as many a VC takes an extended vacation. During this time, deal flow comes to a crawl, and people spend time with their families.   It’s very difficult for a startup to quickly sell if their investors and board of directors are away.  Brands also prepare their budgets in winter, and ready for purchasing or renewing contracts, causing an influx of resources in software startups.
• Spring spurs funding and acquisition talks.  In the second and third month of the year, we start to see some checks being written, and I saw two B rounds funded in my own space, and a handful of others. Often, the corp dev leads start the acquisition hunt in spring, and I witness many a CEO and CTO touring up and down highway 101 where the large blue chip software companies are located, in hopes of striking up partnerships or posturing for a sale. Teams from both sides often end up at local events, or even at meetings in my office, so I can see this particular cycle, first-hand.   Buyers of technology are in roll-out mode of their annual plans, and aligning software to their business goals including campaigns, new product launches, or system integration.
• Summertime focuses on lighthouse customers. A lighthouse customers is an early adopter of a technology that a tech vendor will want to feature in marketing efforts, conferences, and as a customer reference during sales cycles. While last year had a rash of M&A in 2012, we should expect more acquisitions to occur around summer, so the large blue chip software companies can complete their suites, and onboard lighthouse customers. For companies that made mass acquisitions last year, they’re often tearing down the software and rebuilding it in the native software stack, they also onboard lighthouse customers.  This is an opportunity for passion brands to cut deals with software vendors at lower cost, but expect to be amplified and used as a customer testimonial in Fall.
• Fall vendor conference season fosters solution selling. Solution selling is the practice of combining multiple pieces of software, services, and strategy to offer increased value-add to buyers.   These solution messages are the primary banner being waved as the large software vendors initiate their conferences. Often these conferences feature the newly on boarded lighthouse customers and made their acquisitions they prepare for the culmination event which is to tell a solution-based story on stage at their own conferences. The lighthouse customers from the prior bullet can use this as an opportunity for low-cost marketing as the vendors want them to tell their story, or will reference the good work the customers have completed. Expect this above cycle to continue to repeat.

Buyers of Technology Must Watch Market Nuances. 
So there you have it, VC vacation schedule can actually influence how brands are featured on stage at a large conference in the fall. Buyers of technology must understand the rhythm of the space as it will impact the level of service they will receive and pricing of software and services.  It’s important that buyers also know the relationship of the investors of a vendor they choose as they help to indicate a pattern of a company seeking to go it alone to IPO, or a player seeking to be purchased by a larger player, forcing the brand to consider a suite of services that may not be compatible with their existing stack.  System integrators and digital agency shops must also follow these dance moves, as it will cause rifts in technology integration, which yield both pain, but business opportunities to integrate for brands at a cost.  Brands seeking low-cost marketing by leveraging a vendor to tell their story should cozy up to software suites right after an acquisition, in hopes of being featured on the main stage of the software vendor’s fall conference and webinar series throughout the year.

What patterns and cycles do you see in business that have greater ramifications to business? Leave a comment below, let’s have a dialog.

Thank you Lithium CMO Katy Keim for spurring me to write this. 

Winner Circle: The Social Business VCs Who Achieved Material Events

The purpose of this post is to identify investors who have had a material event (IPO or acquisition) in the Social Business Software space. Read my other posts in this series tagged VC.

Our continued research over VCs and investors in the market continues, yesterday, I presented highlights at the Corporate Venturing Innovation conference, and showed the highlights to LPs and Corporate Bankers of who’s making bets –and who’s winning. The following data was also covered in PEHub, and generating interest from entrepreneurs seeking funding. As an Industry Analyst, it’s key that we understand consumer behaviors, business adoption, and startups, but also funding patterns as they influence startup growth or stagnation.

Scope of Research and Methods

• Definition of Social Business Software: SaaS based software companies that provide social software to corporations to use. Popular names include Jive, Buddy Media, Radian6, Lithium, Hootsuite. This does not include consumer social networks like Facebook and Twitter, a report I’ll publish in near future.
• VC, Investor, Angel: These are all investors in the Social Business Software spaces. They often receive money from LPs (Limited Partners) who charge them for investing in markets. On average, VC firms have a 1-3% management fee of overall fund they manage, and have a carry of 10-30% of total take of return from a fund.
• Altimeter conducted analysis of a data set of 55 Social Business Software companies (see list here) in Dec, and has not updated data set to reflect recent funding events, including Sprinklr, Spredfast this week.
• One caveat that applies to all the following data, we cannot determine specific amount of which VC firm or investor has put into each round of investment. Even within the financial S-1 docs there’s cloudy wording on which firm put in what amount.

VCs are a key component of startups, they provide council, open doors, and can even help with auxiliary functions like recruiting, conferences, and biz dev relationships. Savvy VCs are doing value add beyond the check, and are starting to couple their portfolio together to build larger networks. Knowing which investor has blessed a startup is key, as it demonstrates confidence in the business model, executive team, and product roadmap. Buyers of social business should ask five key questions of startups about their investors. With that said, having investors is not a requirement, as one-third of startups did not take in investment as they can often go it alone.

Buddy Media (Acquisition)
Buddy Media acquired for an estimated $689M (source), raised a total of

• $5M WPP Digital
• $1.5M Roger Ehrenberg, James Altucher, Howard Lindzon, Peter Thiel, Mark Pincus
• $6.5M SoftBank Capital, Greycroft Partners, European Founders Fund, Ron Conway
• $23M SoftBank Capital, Greycroft Partners, Institutional Ventures, Bay Partners
• $54M Institutional Ventures, Bay Partners, GGV Capital, Insight Ventures

CoTweet (Acquisition)
Acquired for apparently $8.1m (source)

• $1.1M Founders Fund, Baseline Ventures, First Round Capital, Freestyle Capital, SV Angel, Floodgate Fund

Vitrue (Acquisition)
Acquired for an estimated $300M (source)

• $2.2M General Catalyst Partners
• $3.8M General Catalyst Partners, Comcast Ventures, Turner Broadcasting,
• $10M General Catalyst Partners, Comcast Ventures, Dace Ventures
• $17M General Catalyst Partners, Dace Ventures, Scale Venture Partners, Advent Venture Partners

Wildfire (Acquisition)
WildFire acquired for an estimated $350M, with $100m retention bonus (source)

• $100K fbFund
• $4M Summit Partners, Jeff Clavier, Gary Vaynerchuk, 500 Startups, Felicis Ventures
• $10M Summit Partners

Radian6 (Acquisition)
Acquired for an estimated $326m (source)

• $4M BDC Venture Capital, Brightspark Ventures, Summerhill Venture Partners
• $5M BDC Venture Capital, Brightspark Ventures, Summerhill Venture Partners

Jive (IPO)
Market Cap. at $161M; currently at market cap of $994.91M and $15.47 share price as of 2/1/2013

• $15M Sequoia Capital
• $12M Sequoia Capital
• $30M Sequoia Capital, Kleiner Perkins Caufield & Byers

BazaarVoice (IPO)
Market Cap. at $114M; currently at market cap of $560.19M and $7.84 share price as of 2/1/2013

• $4M Austin Ventures, Constantin Partners, First Round Capital
• $8.8M Austin Ventures, Constantin Partners, First Round Capital, Battery Ventures
• $7.1M Austin Ventures, Constantin Partners, Battery Ventures

There’s 20 other folks listed above, including angels that are too numerous to list, but I’ve segmented funding frequency by round on a prior report.  There doesn’t appear to be any clear lucky streak among this investment class, although First Round has also heavily invested in Gigya in later stage rounds, so it would be key to watch their movements as they continue to grow.  This is just a snapshot in time, and while IPO market is unfavorable now, expect most exits to closely tie to M&A this spring, before the large software companies go on their conference tour of a larger suite.  Expect additional M&A to happen this year, although IPOs will be fewer and far between in 2013 in social business software.

Stay tuned for future analysis on VC impacts on consumer social networks.

 
Photo used under Flickr Creative Commons by Haglundc

Meet the Investors of Social Business

The purpose of this post is to identify which investors are most active in Social Business, and segment them from early to late stage funding.

I frequently provide due diligence calls to VCs, and also advise startups on their growth startup in highly saturated growth markets.  To hone my industry interactions, I’m publishing data on my continued research on funding in the Social Business space (read other posts on the state of funding in social business, and rate of material event or click the VC category to see all posts).  The investors are a key factor in the success of a startup, they advise, provide resources for rapid growth, influence a sale or IPO, or can cause a startup to be stymied by innovation through interfering with the executive team.  To best understand how investors have influenced the Social Business Software space, we’ve conducted analysis to derive patterns of investors.

Summary
Funding in the Social Business Software space spurred market traction over the last 5 years, often creating a set of clones with limited feature differentiation.  Across all stage investments, Austin Ventures showed dominance in frequency of investing in funds, although their total amount of funding is not public record.  As expected, there was a plethora of Angel Investors as companies were just getting out of the garage (sub $1m investment).  In early stage funds ($1-5M), Austin Ventures, First Round, Floodgate, were the most active.  In mid-stage ($5-10m) Battery and First Round showed increased frequency over other investors, in late-stage ($10-20m), Benchmark Capital was frequently involved, and at mature stage (over $20m), Bay Partners and Institutional Ventures were most frequently involved.  Entrepreneurs should use these tables to identify ideal investors per startup maturity to reduce time in seeking institutional funding.

Scope and Method of Research 

• Definition of Social Business Software:  SaaS based software companies that provide social software to corporations to use.  Popular names include Jive, Buddy Media, Radian6, Lithium, Hootsuite.  This does not include consumer social networks like Facebook and Twitter, a report I’ll publish in near future.
• Definition of VC, Investor, Angel: These are all investors in the Social Business Software spaces.  They often receive money from LPs (Limited Partners) who charge them for investing in markets.  On average, VC firms have a 1-3% management fee of overall fund they manage, and have a carry of 10-30% of total take of return from a fund.
• Altimeter conducted analysis of a data set of 55 Social Business Software companies (see list here) in Dec, and has not updated data set to reflect recent funding events, including Sprinklr, Spredfast this week.
• One caveat that applies to all the following data, we cannot determine specific amount of which VC firm or investor has put into each round of investment.  Even within the financial S-1 docs there’s cloudy wording on which firm put in what amount.

Conclusion
While not all startups took funding, the venture community is a key component of the social business software category, accelerating growth, jobs, and innovation. Startups should identify which VCs are best fits for their investment strategy, based on maturity and needs.  Most VCs are segmented by different stages of investing, with different value propositions to startups beyond money.  Buyers who’re purchasing social business software should understand the deeper relationship of investors and the startups in which they’re purchasing.

18% Social Business Software Achieved a Material Event –VCs Not Required

Executive Summary
Research has found that out of 55 Social Business Startups that a majority (69%) have received early and late stage funding, averaging $14m in total funding.  A significant 31% have not taken investor funding, which we’ve listed 6 reasons ranging low costs of operations, self-funding, VC avoidance, and market saturation of startups.  18% of startups had achieved a material event (acquired or IPO) and of them, 40% we’re not funded.  Expect three macro trends in 2013 including: 1) Startups focus on business value to battle software giants, 2) Investors hot on SMMS market, but wary of vendors who lack differentiation, and 3) As Social Business Software market matures, expect growth in late stage investments

Research Background
I’m continuing industry analysis of Social Business Software funding and will do a series of data cuts from my sample of 55 software vendors to tease apart trends, insights, and built a forecast for what is to come. First, read part one on The State of Social Business Software (including methodology of this study), which dissects into funding amounts, averages, and frequency of funding rounds.  I interact with VCs, startup entrepreneurs, software giants, brand buyers, press and media to obtain multiple points of view.

Above: Figure indicates that while two-thirds were funded, a large set of social business software vendors were not funded, a rate greater than I expected to see.

Above: Of the two-thirds who were funded, a majority of them raised a small amount of money, most commonly under $10m, a paltry amount compared to funding rounds in other tech categories in prior decades.

Above:  The industry ratio of 18% of startups achieve a material event, still holds as an industry benchmark.  I found that consumer based startups may have a lower rate of material event, but with larger returns.   Interestingly, 40% of those who achieved a material had no public records of funding from angel, seed, or venture investors.

Key Data Points
After cutting/comparing/probing this data sample of Social Business Startups (not consumer startups like Facebook, Instagram, Twitter) the following data points were discovered:

• A total of 55 Social Business Software Vendors were selected for this sample set.
• 17 (31%) did not take funding per our searchers on public websites, press releases, S-1 filings and Crunchbase.
• 38 (or 69%) were funded in public records listed as Angel, Seed, or various Venture Rounds
• Of the 55 startups, 17 we’re not funded, and the majority who we’re funded (16) received less than $10m in total funding
• 7 startups were acquired by larger corporations (Buddy Media/Radian6 to Salesforce, Context Optional to Adobe, Viture/Involver to Oracle, etc)
• 3 startups achieved IPO (Liveworld, Bazaarvoice, Jive)
• A total of 10/55 (18%) of startups have achieved a material event.
• 6/10 (60%) of the startups who achieved a material event (IPO, Acquired) were funded.
• Of the 6 startups who achieved a material event, they averaged total funding amount of $26.3 million.
• Of the 6 startups who achieved a material event, the largest round raised was Buddy Media’s D-Round at $54 million.

Material Events, defined, debated.
For the purposes of this report I’m defining a material event such as an acquisition by another company or IPO for publicly traded shares.  There have been many arguments made that successful companies do not need a material events, if they can yield consistent dividends to investors.  The challenge is that the venture model requires multiples returned per fund to LPs in order to raise monies for future funds.  VCs tell me “You’re only as good as your last fund” and with fund management being 5-10 years, there’s a time clock on returns, causing pressure on executive teams to achieve a material event.  It’s also worth noting that in some cases, an acqusition occurs because a company is distressed and is auctioned as a fire sale.

Nearly One-Third of Startups Avoided Funding
While over 2/3rds of startups took funding, a surprising 17 (31%) did not take funding in the form of seed, angel, or venture funding (A, B, C, D, rounds).  This number is shockingly high, as in previous decades tech startups were dependent on Sand Hill investors to anoint companies to market.  Today’s market has changed and startups are not dependent on VCs.  Even of those who achieved a material event, 4/10 (40%) did not have funding.  There are six primary drivers why entrepreneurs have confided in my why they don’t take funding

Market Trends: 2013 Social Business Software and Funding
 Expect three macro trends in 2013 when it comes to social business software, their buyers, investors and last year’s activity, they include:

• Startups focus on business value to battle software giants. Have At the high level, social business startups must focus on value creation and market domination as after the rash of M&A in 2012 (Adobe, Oracle, Salesforce, Google), this has left an opening for independents to build value while blue chip software companies re-tool and figure out their suite strategy up until the second half of 2013.  With the IPO exit taking a major beating from Facebook, Groupon, Zynga, and questionable results from Bazaarvoice, social business startups must focus on recurring revenues through business value to clients.
• Investors hot on SMMS market, but wary of vendors who lack differentiation.  While the brand monitoring, community platform, ratings and reviews space has already consolidated, VCs look at SMMS market, despite a handful of acquisitions.  My time on Sand Hill road has yielded excitement and hesitation from VCs examining the fast growing –yet crowded– social media management systems space.  Expect SMMS vendors who can achieve market differentiation and integration with larger blue chip software players to be ideal for investor funding –our findings indicate the market is not strong at differentiation.
• As Social Business Software market matures, expect growth in late stage investments.  There’s room for independent players who’ve not yet been acquired to land and expand their enterprise clients, some claiming 400 year over year growth in revenue run rates as social licenses are spread enterprise-wide.  As these companies seek funding to grow in international markets, hire seasoned enterprise sales and account teams and acquire smaller competitors, they’ll need late stage investing over $10m, which bolsters overall valuation before a material event.

Future reports to come: We’ll explore status of top funded investments, which VCs are most active in funding Social Business Software, and other data cuts.

The State of Funding in Social Business Software

Executive Summary:
Social Business Software vendors (Startups that offer social technology software and solutions for corporations to use to interact with employees, customers, and partners) have raised on average $14m with the most common round being an A-Round at $5.2m.  A few vendors have received large D-Rounds, however most are receiving $5-10m rounds from a series of investors.  Brands must ask vendors at least 5 questions on who and how this money is and will be used, to understand the strategy before buying.

Why this Research: 
As an Industry Analyst, I look at The Three Spheres of Web Strategy of the market to understand it: 1) Consumer behavior (who brands want to reach 2) Brand appetite (customers of software vendors) 3) Technology providers (those who aid brands, like these players).  On a weekly basis I interact with Brands, Media, Software Vendors, and Media to exchange information.  I wanted to bring some hard data to the conversation on the funding aspect which fits in the technology sphere.

Above: Figure 1 indicates that across these 55 startups, the total funding amount was $765. Please read method and scope below to understand this is not the full space.

Above: Figure 2 indicates that on average, Social Business Software vendors have raised $14m in funding.

Above: Figure 3 indicates that on average, the average funded round is the A-Round.

Market Findings:  
After probing the data for hours, I found some interesting trends in the market worth notating.

• Total Funding across these 55 active vendors is $765m.  with most funding occurring in last few years however some vendors like Lithium have been present for over a decade.  This is a relatively small amount of funding in the VC space, as some giants like Andreessen Horowitz are managing over $1b for a fund, and my  finger to the air estimate is that many a Sand Hill VC average around $400m per fund in my space.
• Funding is significantly smaller compared to consumer cousins.  For comparison, Facebook received a total of $2.2b of funding, and Groupon with $1.14b  and Zynga with $860m.  I’d argue that the returns on B2B players revenue (on a percentage basis) may be higher.  While bluechipper Facebook is on track for a potential $4b runrate, but Zynga and Groupon have questionable destinies.  Furthermore, the startup costs for Social Business Software vendors is low with open software, cloud infrastructure, and sometimes virtual workforces.
• On average, vendors raised $14m across all rounds.  On average, these startups took a relatively modest amount of revenue over the lifetime of their companies.  While the scope of startups includes both established and early stage, $14m is a relatively modest amount when software salaries, the high rent in coastal cities, and compared to consumer startup giant funding, is relatively small.  Many vendors boast annual revenue streams of about $5m-$10m of SaaS best repeatable revenues in my interactions over past 5 years, with exceptions on both ends.
• The A-Round is most commonly funded round.  The A-Round investments lead the back, 8 of the total 88 investment events (33%) were at the A-Round at $5.2m.  This crucial round demonstrates to the investors that they’ve received corporate traction in an addressable market, and are ready for faster growth to keep up.   For further momentum, the most common round was a B-Round which comprises of 22 of 88 events, (25%).  Although there are fewer D rounds, the average value exceeded $42m, a goliath size readying the company for a material event.
• D-Rounds lead the largest portion of overall funding dollars. This later stage fund is often ‘double down’ money by VCs who look for companies that have proven their mettle and are ready for expansion at a rapid pace. (product, sales, territory, aboard offices and M&A), or are preparing for sale to third parties (Salesforce, Oracle, IBM, Adobe have rapidly entered this space).  In some cases, late stage dollars increase overall value of software firm to raise valuation amounts before a material event.
• Confusion over terminology of funds makes tabulating not clear. The amorphous term “Venture Round” spanned funding that was pre-A and even post-C (like Gigya).  In some cases, some vendors received only 1 round of funding and titled it Venture Round, which could be assumed as A.  In some cases Venture Round was an extension of a A-C round (Gigya’s latest large round was listed as a venture round, post-C), and while that data is likely listed in the S-1, I chose not to dive into it to dissect for purposes of this industry level data.
• Only 18% of Startups had a Material Event (M&A, IPO).  For some startups the mecca is a reaching a material event, which would involve M&A or IPO. While it may seem like there’s been a rash of M&A activity, in this particular data set, only 7 of the 55 vendors (12%) have been acquired and a notable IPO of Bazaarvoice with the media questioning the performance of stock, also LiveWorld went IPO nearly a decade ago.  So that’s 10 materials events out of 55 companies, a 18% rate. Granted, a few vendors that were acquired did not make this list, but overall, there’s been few material events. (edits made to this section, see footnotes)

Five Questions Brands Must Ask Software Vendors
Brands are making million dollar commitments to these software vendors, and often their careers, and quality of worklife will pin on choosing the right vendors.  Beyond features and functions, buyers must pay attention to the root of funding as it shows financial stability, ability to grow, and credibility from third party investors who also believe in the company. As vendors pitch brands their software and services, it’s important to carefully pay attention to the slide on funding, as it helps to give an anchor point on where the firm has come from, and how fast they may grow in the future.

1. How much have you raised and from whom?  What other software companies are in the VCs portfolio are related?  Find out who has invested and look at their websites for a track record of successful investing in enterprise software.  They’re often key advisors, or make connections for the startup, you’ll want to know every angle.
2. What is that money going to be used for?  How have you used it in the past? How will this help customers? As you look under the hood, find out how they’ve used investor dollars in the past, and look for key acceleration points, if you don’t see this, raise a red flag.  For recent funding, ask how they’ll strategically use this.
3. Do these investors advise your company on a frequent basis? Are they on the board?   Ask specifically what each round was used for, and what were the business impacts.  As firms raise new money, have a frank discussion on how they’ll use it going forward.
4. So you raised a big ton of money, are you going to sell the company? If a vendor has raised significant money as a later stage, have a frank discussion on their exit, while IPO is no longer attractive in today’s market conditions, we’ve seen a number of acquisitions occur which will impact customers.
5. You haven’t raised much at all, why?  If a company has not raised much funding, find out why and how.  Question if they’re going to match growth rates with competitors who have cash on hand to do expansions and potentially purchases of competitors.  In some cases, vendors have inability to raise much money, due to VCs passing up on the deal, due to issues, it’s key you track this.

Methodology and Scope

Social Business Software Vendors Evaluated (55):

• Actiance
• AddThis
• Alterian
• Argyle Social
• Arktan
• Awareness Networks
• Badgville
• BazaarVoice
• Buddy Media
• BumeBox
• Bunchball
• Campalyst
• Context Optional
• Converseon
• ConverSocial
• CoTweet
• Curata HiveFire
• Dialog Solutions
• Echo (Aboutecho.com)
• Engage Sciences
• Expion
• Extole
• FALCON Social
• FeedMagnet
• Friend2Friend
• Gigya
• HearSay Social
• Hootsuite
• HYFN8
• Janrain
• Jive
• Lithium
• LiveFyre
• Liveworld
• Mass Relevance
• Meltwater Buzz
• Nielsen Buzzmetrics
• Radian6
• Shoutlet
• Sociable Labs
• Social Bakers
• SocialVolt
• Spredfast
• Sprinklr
• SproutSocial
• Syncapse
• Targeted Group
• Telligent
• ThisMoment
• TigerLily
• Tracx
• UberVU
• Vitrue
• WildFire

Future Data Cuts I’ll explore:

(Update: I discovered another material event after posting this, and have updated these numbers to correctly list 18% –prior was incorrectly listed at 16%, Jan 10, 2013)

The Startup Conundrum: Scalable vs Services

VCs Seek Scalable Technologies
Lately, I’ve been spending time trading information with one of the most powerful groups in our industries: VCs. They spur innovation by injecting funding into startups, help fuel those that need an accelerated path, and work many deals in the background to connect their investments with the right folks.

Yet despite their power I’m often concerned about one of goals that VCs have of their investments is finding and investing in a company that will quickly scale an an exponential rate then exiting. Their vision is for technology to go from 1 person to 10 people to 100, 1000, 10k and so forth. Then the opportunities for monetization and exit strategies are more at hand.

Yet Enterprises Often Need Service Offerings
I understand why this model makes sense to VCs, but this is often the opposite model that enterprise class companies may need. Some analysts approach the same industry from a different perspective. I’m looking for companies that just won’t scale to reach millions of users, but companies that will help brands and users make a difference, yet often, this requires offering non-scalable offerings, like services.

The Conundrum of the Solution Startups
Take for example the community platform market, a space I’ve been covering for over a year and a half. These vendors sell to large enterprise companies, yet the business case is far different. To be successful in selling to the enterprise, vendors need to have a solution offering that includes services like: education, implementation, custom development, support, analytics services, and community management services. When you couple these services with a technology offering (called a ‘solution sell’), you’re now able to provide value to large brands.

What’s the challenge when vendors offer a solution to enterprises? Services don’t scale in terms of revenue, it’s only an incremental growth in the top line incomes (2-10X). As a result, some VCs may shy away from investments that are heavy services focus, and may instead encourage their portfolio companies to instead focus on scalable technologies.

80/20 Rule of Services/Technology
In the end, you’re going to need both types of companies (scalable technology and solution partners) to help both businesses and users, in fact the most successful companies will often have both. I often encourage my clients (large brands) to look at vendors beyond technology, in fact, most enterprise deployments of social media are only 20% technology and 80% process and labor. So when you’re selecting a vendor, be sure to understand their roadmap, how their investors perceive the direction of the company, and take a long hard look at the services and support they can offer you.

Note: I’ve also heard that some VCs are scaling back their investments in startups, while you continue to hear of funding happening for vendors.

Speaking of community platform vendors, I’ve submitted the community platform wave report to editing, and am anticipating a publish date in early Jan.

The Silicon Valley Transplant CEO

I’m extremely busy these past few weeks, and you’ve noticed a slow down in my posting (have you met our other analysts?), so I’m going to do a series of short blog posts, unlike my longer meaty posts.

I met with Ali Partovi, CEO of iLike today, who told me about a recent trend of what I call “Transplant CEOs” that have addresses in Silicon Valley, are often here for meetings, but their company is located in other tech hubs like Seattle, Portland, Texas, Canada and beyond. Why this pseudo address? two reasons:

1) Running a company in silicon valley is expensive, talent tends to be flighty, and cost of living is high. In other cities, take Seattle for example there’s only a handful of web companies, keeping churn to a minimum.

2) Clients, investors, and prospects tend to want their leaders to be connected to silicon valley so having the CEO in the area makes sense, even if he or she just has a second house here.

It’s amazing that even in this day an age of the digital natives, that location still is important. Well for some this isn’t anything new, way back in 2006 (I know many of you weren’t even born then) the NYTimes had a article showing that most startups had to be 20 minutes driving distance from VCs.