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Extraordinary Popular Delusions and The Madness of Crowds

One would think that this should have happened sooner….but, well, there is a human tradition here…Wikipedia currently lists 342 social media apps, emphasizing up front that their list is not exhaustive. I can think of at least two more local social media startups, one of which has just announced significant new investments.  Extraordinary Popular Delusions and The Madness of Crowds, the now legendary book by Charles Mackay, first published in 1841, remains a classic text revered for its insights into social psychology and economic bubbles.
Investors of all stripes are so-called “birds of feather,” meaning that they tend to flock together. The risk averse nature of investing makes this inevitable… Like flocks of birds, the slightest unexpected and unwanted sound can set them off into flight.   This is even more true of much higher risk early venture investors.. The very term “due diligence,” meaning thoroughly investigating everything and anything related to a potential investment, implies “covering your ass,” (CYA).  No high risk investor wants to commit to any investment without partners.  Not being able to recruit other investment partners, suggests that you may be making a poor investment decision, and leaving yourself open to questions about the wisdom of your investment decision, or worse.
Over the years, there have been a number of “hot” venture investment industries, that attracted hundreds of millions of dollars, only to see the investment funds go up in flames, from over enthusiasm..  After these financial disasters, investors, like the birds, were unlikely to return to the same area again, no matter how attractive it may have seemed.  Only one of many examples, would be the “traffic shaping” networking equipment opportunity just before the 2002 Internet bubble. After being burned in this debacle, venture capitalists could not be enticed to invest in new opportunities in this area, no matter how promising..  A local Okanagan company here suffered from this phenomenon and eventually faded away.  It appears that the now very crowded and maturing social media industry may finally have joined other such oversubscribed areas of investment.

It’s About Time!

ON AUGUST 14, 2013
VCs are cooling off their social media fervor. A new study out today surveyed hundreds of investors around the globe. VC’s in 11 out of 13 countries had less confidence in the social networking/new media sectors than last year. That dip was even more dramatic for the US, with VC’s ten percent less sure about social then they were in 2012.
The National Venture Capital Association conducts the “Global Venture Capital Confidence Survey” every year with Deloitte.  They ask general partners at different sized firms from the Americas, Europe, the Middle East, and Asia Pacific how confident they feel about a ton of sectors — clean energy, mobile, cloud computing — and geographies — domestic economy, global economy, emerging markets. This year’s survey took place in May and June 2013 and 35 percent of the responses came from investors in the States.
There’s a lot of interesting factoids to be found in the flood of numbers, but the stat about VCs losing confidence in social jumped out at me. It mirrors a trend others have noted: the social media bubbleis quietly, slowly, timidly deflating. This latest NVCA report shows that confidence is still high in social media compared to other sectors — it’s just less high than it was last year.
Social is not going out in a big pop, and it’s not disappearing anytime soon, but it’s also not what VC’s look to invest in first. CBInsights, a research company that studies VC investment trends, foundthat in the second quarter of 2013, social media companies got only two percent of VC Internet funding. They’re getting a much smaller piece of the puzzle now than they’ve seen in past years.
So why isn’t social the hot kid on the block anymore? I have a few theories: Facebook’s IPO was a bust, the market has gotten saturated, and there’s perpetual questions over mobile monetization of social platforms.
Facebook’s face flop of a public offering made people question whether its valuation was founded on real earning potential. Investors got nervous about social’s money-making potential. And given that Facebook is the biggest social beast of them all, investor anxiety may very well have informed decisions about funding smaller start-ups focused on social.
The market has gotten saturated, some people are tired of social, and there’s a cultural pushback ranging from mocking social media job titles to compiling lists of how social is ruining your life. How many networks can a person possibly join?
And as always, there’s the struggle to monetize social networks on mobile. Facebook and Twitter have gotten small pieces of the mobile ad pie, and Instagram has no mobile monetization plan. Granted, Facebook showed a possible turnaround with its recent earnings report, but it’s by no means out of the woods.
As always looking forward, time will tell whether VC interest in social media picks back up again, or whether they’ve moved on to a new sector love. Last I heard, VCs were the Romeo to cloud computing and big data startups’ Juliet.
[Image courtesy Wikimedia]


Post Author: David Mayes

Founder, Mayo615 Technology Partners Ltd., UBC adjunct faculty, Intel alumnus, technology assessment, international business, cleantech, fly fisherman, native Californian and citizen of France, who has been very fortunate to have traveled, lived and worked all over the globe. My wonderful wife, Isabelle has reintroduced me to my French Provençal heritage.

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