Startups

The Social Media Bubble Is Quietly Deflating


The Social Media Bubble Is Quietly Deflating

Photograph by Mike Kemp/Getty Images

Two years ago, when the craze for social media startups was in full swing, a former Facebook (FB) engineer summed up the situation with a memorable lament: “The best minds of my generation are thinking about how to make people click ads,” the engineer, Jeff Hammerbacher, told Bloomberg Businessweek at the time. “That sucks,” he added.

It might be over.

Social networking companies drew a meager 2 percent of Internet venture capital last quarterSocial networking companies drew a meager 2 percent of Internet venture capital last quarter
Social media companies drew only 2 percent of the venture capital headed to Internet-based enterprises last quarter, according to data published on Tuesday by CB Insights, a research firm that tracks venture-capital investment. In the two-year stretch that ended in the middle of 2012, social media companies took in at least 6 percent of overall venture capital invested in Internet companies each quarter. But for three of the last four quarters, those social startups have brought in 2 percent or less (with the outlier quarter largely the result of a huge investment in Pinterest earlier this year). The peak came in the third quarter of 2011, when social companies led by Twitter took in 21 percent of the total $3.8 billion in Internet deals by venture capital firms.

Here’s how Bloomberg Businessweek’s Ashlee Vance explained it at the height of the social media money boom:

Once again, 11 years after the dot-com-era peak of the Nasdaq, Silicon Valley is reaching the saturation point with business plans that hinge on crossed fingers as much as anything else. “We are certainly in another bubble,” says Matthew Cowan, co-founder of the tech investment firm Bridgescale Partners. “And it’s being driven by social media and consumer-oriented applications.”

If Cowan was right, the air seems to have been released fairly gently—at least in comparison to the Internet bubble of the late 1990s, which shook the U.S. economy. Sure, Zynga (ZNGA) crashed and Groupon (GRPN) burned, but overall tech investment continues at a reliable pace. The total amount of venture investment in Internet companies last quarter was $3.625 billion, close to what it was in the third quarter of 2011—and much higher than it was before then.

New buzzwords have arrived: Big data and cloud companies are grabbing the imaginations of venture capitalists, says Anand Sanwal, founder of CB Insights. Boring companies that make tech products to sell to businesses seem to be in ascendance. But it’s just not the same.

“Social was so unique in that it had taken up a lot of mind-share,” Sanwal says. “Folks were singularly focused on social, and that was unlike anything we’ve seen to date. It was probably most analogous to e-commerce in the last dot-com boom.”

Brustein is a writer for Businessweek.com in New York.

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Companies Mentioned

  • FB
    (Facebook Inc)
    • $74.81 USD
    • -0.48
    • -0.64%
  • ZNGA
    (Zynga Inc)
    • $3.12 USD
    • 0.01
    • 0.32%
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