Social ad network Social Media gets funding boost, after strong year

Updated

Social Media, a new-fangled advertising network for applications on Facebook and other “social media” sites, has raised a second round of $6 million from IDG Ventures and existing investor Charles River Ventures.

While some have been skeptical of the value of advertising within social networks, Social Media says it brought in between $15 and $20 million in revenue last year, mainly due to successful sales in the last six months. The company has focused on selling ads to large advertisers — movie studios, Procter & Gamble, Nestle, Coca-Cola, Diesel and others — to help them reach people who might have a special interest in what they’re offering.

Here’s an example of how these so-called “engagement” ads work: Social Media ran a set of holiday ads for Macy’s, asking consumers what kind of Santa they are — “cheap,” “jolly” or “giving.” Then, Social Media ran another set of ads, showing them what kind of Santas their friends told Macy’s they were. While cost-per-impression (CPM) banner ads on social networks bring in pennies, chief executive Seth Goldstein says ads like the ones for Macy’s can run much higher. One reason is scarcity: There are relatively few instances of friends taking actions that a user might want to know about, compared to overall impressions. The other reason, though, is that these ads tie user actions to real decisions — like which department store to go shopping at.

The conventional wisdom is that during a downturn, advertisers cut back on “experimental” ads like what Social Media offers, Goldstein acknowledges. But he says that brands are getting more interested in what companies like Social Media offer. They want to figure out better ways to reach users, and social media advertising inserts brands in situations where people are already going to be talking about them.

While brands may be used to making large purchases on television, they are fully aware of the trends — people, especially younger people, watching less TV and spending more time on social networks. Even if brands prefer the comfort of traditional media advertising in tough times, they recognize they need to follow their users — and continue experimenting.

A variety of other social media advertising companies are working on similar ideas, ranging from social ad seller Appssavvy to ad networks operated by large app-developers like Slide and RockYou, to the social networks themselves. As Goldstein told me in an interview last April:

I’d say that in this next year there’s a $50 million market opportunity — besides what Facebook itself is doing. You’ll see a lot of it backloaded later in the year, like around November and December. Starting in September, you’ll see a lot of people’s hard work now pay off in the form of ad insertion orders and bigger ad budgets.

Assuming that other companies have been successful besides Social Media, its quite possible that his projection has come to pass.

The San Francisco company has previously raised a $3.5 million first round from Charles River Ventures, as well as angel funding. IDG is an international technology media and information conglomerate with a large sales force; Alex Rosen, a managing director of its venture arm, is joining Social Media’s board as part of the funding. This makes IDG a strategic partner in helping to push Social Media’s ad offerings to more advertisers. Social Media also plans to open sales offices in the Midwest, New York, and abroad, Goldstein says, adding that it expects to expand to other mobile and web platforms (think iPhone and Twitter).

[Update: I got some blowback from well-informed readers after posting this article — they claimed Social Media has been making most of its money on cost-per-acquisition advertising like free iPod giveaways, not on branded social ads. Here’s what Goldstein replied with when I asked about that:

Like all major media companies and ad networks (i.e. Facebook, MySpace, Google/Adsense, Platform A, Yahoo!), we run a mix of direct response and brand advertisers. While the performance side of our business is large, we have been pleasantly surprised by the recent growth in our brand business.]