Friendster: Poised for a Comeback

Comebacks can be hard to stage—though not impossible. Just ask George Foreman, Bill Clinton, or the folks at Volkswagen who resurrected the Rabbit. Investors are betting $10 million that social networking site can join such ranks.

Friendster announced its new funding round, led by Palo Alto (Calif.)-based venture capital firm DAG Ventures, on Aug. 21. Two of Friendster's original investors, Kleiner Perkins Caufield & Byers and Benchmark Capital, took part.

Four years ago, Friendster was the first social networking Web site to become a viral sensation by inviting users to post photos and profiles and create links with friends. But as the site crashed or slowed to a crawl amid traffic jams created by its burgeoning user base, frustrated "friendsters" left in droves for faster, more popular sites such as MySpace and The upstarts also gave users more flexibility in making profiles, letting them blog and upload music, for instance.

Friendster became a social network flameout. Last October, the site put itself on the block. When it hadn't found a buyer by early winter, Perkins pulled Friendster out of debt, giving the company the capital to pay its 25 employees and get back on track. Formerly chief financial officer, Kent Lindstrom took over as CEO in January.

PROJECT REDESIGN. Since then, Lindstrom has set out to reverse Friendster's course. He's taken steps to improve the site and respond to user feedback. The latest funding round will feed that effort. "We've been growing rapidly over the past few months, and we want to make sure we have the capital to keep the site reliable," he says.

In the U.S., the number of unique visitors has vacillated between 1 million and 1.5 million all year. But overall, the site had 15.6 million unique monthly visitors in July, largely due to the growing number of users in Asia. Lindstrom says the increase represents a growth in friendsters in countries like Malaysia, Singapore, Thailand, and Australia.

What else is on tap? The company now plans to focus on post-college users, young urban adults looking to connect to people in new cities. The recently redesigned site focuses attention on what users are doing, rather than inviting folks to surf profiles. Friendster will put resources into hiring engineers to make the site more user-friendly. Cool or not cool, Lindstrom believes that former users will come back and new ones will join if it is useful to them.

PATENT 2.0. The site will also try to build its portfolio of patents. Friendster received its first patent, for social networking, on June 27 (see, 7/14/06, "Friendster's Patent Possibilities"). The company is still evaluating how to best use the patent. Meanwhile, it has filed for a dozen more, and Lindstrom says the company has received a notice of allowance on a second patent, which will address user-generated content. Says Lindstrom, "We want one of the great patent portfolios around social networking just as Google (GOOG) has done around search."

Most analysts and investors agree that there's room for many social networks to thrive in this fast-developing field. "You have a lot of networks in life and you don't use them for the same reasons, so why wouldn't you have a lot of digital networks, as well?" says David Card, senior analyst at Jupiter Research. But he is quick to add that once young adults move from teen years to the stage that includes family and career, they don't have as much time for hanging out online.

Turnaround stories for companies that draw on advanced Web technology known collectively as Web 2.0 remain unprecedented, says David Sze, a general partner at Greylock who specializes in consumer Internet companies but does not invest in Friendster. Still, Sze says Friendster doesn't need to have a MySpace-size traffic explosion to turn a profit. Says Sze in an e-mail, "If those users are reasonably valuable and monetizable, I think [investors] can make money on their investment."

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