This is a response to Big or Bullshit: Vertical Social Networks, posted by David Cohen’s to his blog, Colorado Startups. Cohen examines vertical social networking, and concludes:

“I think that the vertical social networks will proliferate and become a useful part of the web. But in terms of their potential as an investment – I guess I’ll have to call Bullshit. Look to the aggregators and the toolsets that emerge around identity – I think that will be Big.”

As founder of LibraryThing, I always chafe at the idea that books are a “vertical.” I mean, books are the world. Connecting around books isn’t some marginal activity—it’s practically civilization itself!* But I guess that marks me as a vertical-dweller. Maybe the running people think that books are a luxury, and running the center of life—the Philistines! At least you didn’t compare us to DwarfDate or that network for people who really enjoy sneakers.

I think we’ll find some verticals are a lot more promising than others. A social network for sufferers of gout or mesothelioma—to take the most expensive Adwords term—could be quite profitable.** The network for sufferers of Guinea Worm will not. The situation may end up resembling specialized periodicals. Mainstream magazines go up and down; it’s vicious market. But there are a lot of tiny publications we’ve never heard of that chug along year after year making a killing in smaller, profitable spaces.

But I don’t think we know all the ways social networks can make money. There are surprises in store. You’re assuming the center is advertising.*** But LibraryThing, for example, HAS no advertising. Not only do we offer a service good enough to charge top users, but the data members add–distilled statistically into recommendations and so forth–has a lot of value. A better recommendation algorithm is a force-multiplier for ecommerce. And just a few days we announced our first library license, putting LibraryThing in the online catalog. Libraries aren’t rich, but they spend a lot on technology. And there are more libraries in the United States than McDonalds. I don’t know how this applies to other verticals, but I expect advertising is just the beginning. (And for the sake of our exhausted eyeballs, I hope the ads go away.)

I can’t get behind your enthusiasm for social network aggregators. The verticals are about passion. The Buzz page on LibraryThing is a florilegium of love letters. As a book guy, I understand this. I’d feel the same way if LibraryThing weren’t my baby. But I’ve never gotten excited about belonging to a social-networking aggregator. I don’t know anyone who has. There’s probably a business there, but a low-margin one, like providing free RSS aggregators. And, by definition, you can’t have as much lock-in when you’re not the thing they really want.

I wonder if the interest in aggregators isn’t just a repeat of a familiar pattern, when the internet discovers something outstanding and fun, and VCs later decide that, although fun doesn’t pay, a boring version will rake in the dough. Remember when “business-to-business” ecommerce was going to save the dot-com bubble?

Even if verticals like LibraryThing’s aren’t going to make for “big exits” and–as I also believe—most verticals don’t need VC-level funding****, there’s something going on here that deserves VC attention. Vertical social networks aren’t some fad, but the virtual life of something even deeper than books—the need to connect with like-minded people. If, as Warren Buffet has said, the airplane industry–taken as a whole over the last 100 years–hasn’t made a profit, it still changed the world. A changed world is a world with opportunities.

*Exempting Last.fm is particularly galling. The book industry is four times larger than the music industry! Okay, I made that statistic up. It’s probably the reverse. We need to hire a marketing person who can look that stuff up.
**The gout network would carry a lot of sherry and madeira ads, of course.
***And don’t get me started on affiliate revenue.
****There’s also a neat paradox with “exits.” The most successful verticals will be, like LibraryThing, created by people more interested in the vertical than getting “out” of it. That’s one reason LibraryThing didn’t take VC money, so I’d be the one who went for an exit deal, not you.

Labels: business, social networking, VC, vertical social networks