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Can the founder of PayPal strike gold again with his new company, which helps MySpace and Facebook users connect to friends?
Compared with his last Internet venture, Max Levchin's latest company could be seen as frivolous. PayPal, which Levchin sold to eBay (EBAY) for $1.5 billion in 2002, helped spur the e-commerce boom by letting consumers buy products without credit cards. His current endeavor, Slide, helps MySpace and Facebook users make sparkly slide shows.
But the 32-year-old Ukrainian expects the lighter side of the Web to generate serious money, even more than PayPal did, for himself and his investors. "As the competitive type, I compete with myself, so to exceed PayPal in scale and success is important," says Levchin, dressed in shorts, a T-shirt, and baseball cap in his spartan office in San Francisco's South of Market district.
Slide investor David Weiden, a general partner at Khosla Ventures, puts a finer point on it. If Slide cashes out for $1.5 billion, Levchin "would regard it as abject failure," he says.
That's a lofty goal for a company that only entered many Internet users' consciousness a few months ago and generated its first dollars of revenue even more recently.
Fast Off the Block
Slide got its start in 2005 building software widgets for News Corp.'s (NWS) MySpace and other social networks. The small applications let users add pizzazz to their MySpace pages by posting photos with glittery backgrounds and music (see BusinessWeek.com, 7/23/07, "The Next Small Thing"). But Slide and other widget makers got their big break in May, when Facebook opened its pages to third-party applications, and with fewer restrictions than MySpace.
Three months later, Slide lays claim to the two most popular widgets on Facebook: Top Friends, downloaded nearly 13 million times, lets users install a quick link to their closest virtual buddies on their Facebook pages. My Questions, downloaded 7.4 million times, lets Facebook members pose debate-provoking queries.
Awareness of Slide is taking off. In June, it rang up 134 million individual viewers of its widgets, according to market researcher ComScore. As of May, 29% of U.S. Internet users had seen a slide show or other program someone created with Slide, ComScore says.
But there's been almost no money in it because there's no charge for Slide's widgets, and there were never any ads attached to them until just recently. Since it's unlikely users will pay for them, the No. 1 supplier of widget software needs to figure out how to turn that traffic into ad sales without alienating the teens and twentysomethings who have made it popular. Whether it succeeds could provide other entrepreneurs and investors clues as to whether there's a sizable ad market to be claimed by asking users to embed corporate brands in the glitter and flash that adorn their profile pages.
"Will these widgets have the same utility if they have ads associated with them?" says Linda Boland Abraham, an executive vice-president at ComScore. Web users age 18 to 24 "are just nuts about these things." But Slide might lose some of its juju if users view it as just another ad medium. "There are certainly a lot of unanswered questions around monetization," she says.
In July, Slide ran its first ad campaign, for the movie Bratz. On tap now are campaigns for Paramount Pictures (VIA), AT&T (T), the Discovery Channel (DISCA), and Activision (ATVI). These campaigns will enable users to embed characters and music from movies, reality shows, and other media properties into their slide shows. The Paramount ads, for example, will showcase the studio's animated Bee Movie, due out Nov. 2 and featuring the voice of Jerry Seinfeld.
In mid-August, Slide began testing sales of premium features for $4 a pop. These include special effects for slide shows transitions and online photo frames that look like the covers of fashion magazines, news weeklies, and supermarket tabloids.
And now it's pursuing bigger game: Slide wants to strike a deal with a record label that could bring licensed music sales to its widgets. Whether Slide has enough cachet to win over the always-Web-leery music industry is unclear. In May, the company hired PayPal alum Keith Rabois from LinkedIn as vice-president of strategy and business development to negotiate such deals.
But is it really conceivable that Slide could eclipse PayPal's eye-popping value? Aside from Google's (GOOG) $1.65 billion buyout of YouTube, few recent Internet deals have flirted with that kind of money. "Absolutely," says Levchin. "One and a half billion dollars is a very important mark. Once we pass it, I'll feel very happy about what we've done…We should be able to beat PayPal by a large margin."
One way could be through an initial public offering, which Slide is eyeing, though not in 2008, as has been reported. "Max is committed to building a public company," says Rabois. Levchin says an IPO could happen, but he thinks he can keep Slide growing while keeping investors and employees happy, all without pulling the trigger too soon.
Then again, the landgrab for widget technology could help inflate the price tag for would-be acquirers of Slide and others. "This whole thing is happening so quickly that big companies are looking to gain an edge," says Josh Bernoff, principal analyst at Forrester Research (FORR). "You're going to see overpayment for these companies relative to their value."
The dealmaking has already begun. In May, MySpace bought both Photobucket, maker of a photo-sharing widget, for a reported $300 million, and Flektor, maker of a video-editing widget. For Slide and its ilk, potential buyers include not only the likes of Google, Microsoft (MSFT), and Yahoo! (YHOO), but ad agencies such as Publicis Groupe (PUB) and Omnicom Group (OMC), and the social networks themselves, Bernoff says.
Ad Chump Change
But competition and market forces could also derail Slide's early success. Sequoia Capital-backed RockYou! makes slide show, horoscope, and other software for MySpace and Facebook too. VideoEgg, which in 2006 drew a $12 million cash infusion from investors, including the VC firm of Starbucks (SBUX) Chairman Howard Schultz, announced on Aug. 13 that it would broker ads for popular Facebook widget makers (see BusinessWeek.com, 8/14/07, "Facebook's Widget Middleman").
Meanwhile, the social networks that host widget software may eventually insist on a cut of sales—or start making widgets themselves (see BusinessWeek.com, 5/22/07, "Sharing the Widget Wealth"). "There's definitely going to be tension," says Levchin. MySpace has so far barred ad-supported widgets on its site without sharing revenue with News Corp., an arrangement Slide has so far declined to pursue, he says. But MySpace says it's examining ways to balance popular third-party software on its site with users' desire not to be overwhelmed by ads.
And spending on widget-based ad campaigns isn't high. More than half of companies that advertise on social networks spent less than $25,000 on such campaigns in 2006, estimates Emily Riley, an advertising analyst at JupiterResearch. Widget makers "specialize in an extremely niche product right now," she says. What's more, notes Levchin, only half of Slide's viewers live in the U.S., the prime market for Internet ads.
Levchin came to U.S. in 1991 and earned a computer science degree at the University of Illinois in Urbana-Champaign, which also spawned Microsoft chief software architect Ray Ozzie and Netscape founder Marc Andreessen. When he started PayPal in 1998, Levchin says he was "quite penniless" and had to borrow $2,000 to buy his original shares in the company. But later that same year, he cashed in on a stake in a company called LinkExchange that Microsoft acquired for more than $250 million. By 2002, PayPal went public, then sold itself to eBay within months.
Now he's plotting how to top that deal. For Facebook and MySpace to continue growing, Levchin figures they'll need to keep adding specialized content to keep users coming back. MySpace has added sections about movies, TV, and books, while Facebook has added a feature for movie recommendations. "You can outsource that whole thing," he says. "The proposition to the widget makers is amazing."
Maybe so. But while Slide pursues that vision, it will need to fend off the inevitable buyout offers—investment bankers are already ringing Levchin's phone—and hold investors Mayfield Fund, Khosla Ventures, BlueRun Ventures, and the Founders Fund at bay if they agitate to cash out. "I don't have a number in my mind where I say, 'I'm going to throw in the towel now,'" Levchin says. On the other hand, it's "clearly crazy" not to sell at any price, he says.