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Why Facebook’s VCs will Fund Facebook App Developers

Less than 48 hours ago, I laughed-out-loud when I read that Bay Partners would be setting up a separate fund to invest in Facebook Application Developments (which incidentally spells fad, but that’s really just a coincidence).  Don’t get me wrong, I am extremely bullish on Facebook (Facebook 100M users, a matter of when, not if) and if I were a part of the company I could envision a dozen ways to create an Ad Sense-esque revenue stream… but the fact remains, Facebook Apps is no brass ring for third parties.  I’ve written on this here: Facebook OS: Be careful what you ask for.

In fact, by now it’s quite obvious that this is Facebook’s way to not only drum up excitement amongst developers but mainly a way to try to find that diamond in the rough product or application that it can then either develop itself, partner up with or outright acquire in the hopes of it becoming what Ad Sense was to Google: a $10B annual revenue stream within 4 years of launch.

Today Facebook’s own VCs, namely Accel Partners, Greylock and Meritech, got into the fun, stating that they too, had Facebook Apps monies to dole out.  While at face value this seems like even more folly, this really shows three things:

1- Facebook, despite being the hottest privately held company out there in the consumer web space, is probably finding it hard to find a million dollar hit, so it’s hoping that someone else will (which is brilliant, frankly).

2- Facebook’s VCs are willing to finance that one-in-a-million product because like all case studies, it is easier to innovate such a product outside a rapidly growing but already quite large enterprise. 

More importantly, or cunningly, while I’m still not convinced of the merits thereof for Bay Partners to back such ventures, it’s intuitive for Facebook’s VCs.  After all, if any one application works, they will succeed both on their Facebook investment and their application one.  Think of how Sequoia won when Google bought YouTube.  Common area: Sequoia backed both and by selling YouTube to Google it got an exit in the former in an otherwise murky legal situation and strengthened the latter… See my take on the so-called Sequoia/YouTube/Google conspiracy theory here and the missing piece in Google’s puzzle here after it bought YouTube, Doubleclick and Feedburner.

3- Sadly or thankfully, depending on who you ask, the days of good old fashion business development seem to be gone.  Nowadays, the extent of bizdev - what built Web 1.0, basically - is an RSS feed or an API.   This is good in a few ways, but frankly, it’s a lazy and generally fruitless road that has hitherto failed to yield any home runs.  I’m not talking HRs by Web 2.0 standards, I’m talking real stand-alone successful and profitable businesses.  I’m not a ludite: APIs, RSS etc., greatly help some things scale, but devoid of a comprehensive plan to implement any initiatives, most of the so-called innovation will never bear fruit.

Ultimately, Facebook, whose talent is largely a product of Web 2.0, probably shuns the merits of “bizdev” deals and wants a turnkey solution to scale its revenues.  This is a bold and daring strategy, will it succeed?  We shall see.  Note that even Google’s Ad Sense, which generates so much of Mountain View’s profits were negotiated by business development types who actually sent emails and called small, medium and large publishers… Remember, the meek shall inherit the earth, after all.

This is a key nuance in Facebook vs. Google’s modus operandi.  Google did not invent Ad Sense, methinks that Facebook is hoping its strategy will prove to find something similar.

Google, after all, first bought Applied Semantics to get into the contextual ad market and then Sprinks to consolidate the segment… (see our Top 10 Web M&A of all time).  It did not invent anything (let alone the fact that the underlying pay per click model was pioneered by GoTo and even my first web employer Mamma too was doing this in 2000, before Google was a toddler).

In other words, Facebook knows that its user and pageview growth is nothing short than breathtaking, but until it files for an IPO and opens its kimono to the investing community, like Google, it too needs a billion dollar baby… and as a former ad sales executive, looking at their current advertising, I can see that Facebook as a multi-billion dollar going concern is still largely a concept and not a reality.

If the VCs backing this puppy want to see their own investment follow the mythical hockey stick curve, then it is not crazy to dole out relatively small sums to outsiders who want to realize the next case of the innovator’s dilemma.

Related:
- Facebook: IPO vs. M&A.
- Facebook’s 2008 to do list: File for an IPO.
- Should MSFT Turn its Attention to Facebook?
- Peter Thiel: Facebook is Worth $8B.
- Murdoch: “MySpace worth $6B”, if so, then break up FIM!
- Facebook to be worth $2.35B by 2010. 

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Posted By: Ashkan Karbasfrooshan | Jul 12th

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