Clearstone’s David Stern: “Will MySpace eat its young?”

David Stern

David Stern is a venture partner at Clearstone Venture Partners. We asked him to contribute a “guest post” on the MySpace ecosystem, given his background as founder of M Networks, which operated within that other great ecosystem: eBay‘s. His firm is investing in consumer-oriented Internet companies. Here’s his bio.

Matt writes about VCs “going ape over” MySpace. At Clearstone, we’re undoubtedly investing in companies that have MySpace “widgets,” because almost every consumer facing internet company these days has a widget tactic as a central part of its customer acquisition strategy. But it got me thinking about the MySpace ecosystem generally, especially having had experience with M Networks and a very powerful ecosystem fostered by eBay (yes, “scalded” is a good term to describe the experience!).

Two related questions popped up as I thought about this: (1) What kind of ecosystem is MySpace really building?; and (2) Can any company that is a part of this ecosystem ever make a venture return?

The eBay ecosystem provides some very good precedents. If you think about eBay as a commerce driven platform or marketplace, they’ve had a very clear mandate and ability to foster an ecosystem through an aggressive outreach to development partners that support their mandate, e.g. building a community around transactions. If you think of MySpace, which is fundamentally a communications platform, the mandate around fostering an ecosystem is very different and arguably unidentifiable from the outside if you look at its results, e.g. the companies currently leveraging MySpace.

Everything that eBay does in their ecosystem and developer networks supports transactions and growing eBay revenues. And they do this in a very measured way, with very stringent rules that certainly can limit a company’s growth potential. Much like the sun, companies are drawn to it, but get too close to it, and you can get burned. The eBay ecosystem is littered with companies, though, that have thrived for a time, but which were reined in any time they got too much traction or too close to the eBay customer. I can recall on many occasions when an M Networks partner company CEO voiced their concern over eBay’s investments in similar companies, eBay’s development of similar products or services or eBay’s mysteriously breaking API’s that forced a feeder company to scramble. Having been an early backer of PayPal, our firm should know.

I don’t believe MySpace has shown investors a clear view of whether a company in it or dependent on it can every make a venture return. Perhaps that will change as new Fox management takes over at MySpace, but to date, our companies and certainly companies that I’ve spent time with who have been dealing with MySpace, aren’t seeing a clear strategy. And again, it’s not like we aren’t seeing one or two of these new companies per week! (I believe “MySpace Widget” should be added to the list of obligatory buzzwords for pitching a venture firm!) But again, the reason these companies are out there is a result purely of user acquisition economics. I believe every consumer company has to be looking to MySpace to acquire customers if their users are in the MySpace demographic, especially because to date it has been fairly easy and very successful.

As an investor, there are a lot of risks looking at MySpace “enablers” given the state of the ecosystem. There are enough other risks in funding a company that one should not have to worry whether MySpace will embrace or curtail success of its feeder companies. Today, there are no commonalities among companies leveraging MySpace, except for demographic targeted and using it as a customer acquisition strategy. If MySpace starts creating a more aggressive developer program around either monetization or community building themes (which arguably they have no need to do), it will be very interesting to see whether any company that is playing the “monetization tool for MySpace” game can deliver a venture return given the squeeze MySpace will put on it.

As a result, I’m very cautious about any company that is playing off its success or plan to siphon off 1-4M MySpace users, but VERY receptive to anyone who along with that, has tactically proven in the past that they have the online marketing chops to use MySpace as one arrow in their quiver of online marketing tactics along with many others, e.g. leveraging affiliate networks, creating viral campaigns, etc. If you are one of those trying to build a global consumer internet company on the back of some battle-hardened tactical marketing talent, I’d love to hear your vision.