Why Are VC’s Chasing Social?

by Jay Deragon on 06/27/2011

Ever wonder just how much money is being poured into all things social?  Besides wondering how much ever wonder why?

In a Mediapost article by Erik Sass he reports: Private equity and venture capital firms have been pouring cash into social networks like it was their job.  That’s no longer the case, thanks to a research outfit called Social Media Influence, which just released the SMI Guide to Social Media Funding.

$2.52 billion: that’s how much venture capitalists and private equity investors plowed into social media companies in the first quarter of 2011, according to SMI, including $1.6 billion in social networks. Turning to other categories, SMI tallied $65.6 million in funding for social gaming; $420.2 million for social commerce; $110 million for social business; $62.6 million for social data analytics; $109.2 million for social marketing; and $146.1 million for social apps and tools.

Writing in Ad Age, Bernhard Warner of Custom Communication and Social Media Influence pointed out that the $2.52 billion figure is especially impressive when you consider that total VC funding for all private firms in the first quarter came to $5.9 billion, meaning social media accounted for about 43% of all VC funding in this period. Warner also revealed that the second quarter is off to an equally rip-roaring start, with April bringing $1.35 billion in social media VC deals.

Why Is Money Chasing Social?

There is undoubtedly a lot of excitement about social media. As always a few venture capitalist  will generate most of the returns from these investments while the many will loose their shirts.

The Social landscape is a lot like Vegas. It is attractive, exciting, entertaining and represents billions of social currency flowing through the system everyday.  Yet most of the time the house wins while the majority of those hoping to beat the house loose.

Many Venture Capitalist are making bets on people’s ideas for networks, applications and games built on the back of social technology. Money follows money.  With all the hype around Linkedin’s IPO and Facebook’s planned IPO the magnet of attraction increases in strength with the swell of the crowd using, following, investing and believing in all things social.

5 Reasons Money is being thrown at all things social:

  1. Anything that revolutionizes communications revolutionizes everything.
  2. It isn’t about the technology rather it is about people who create innovation with the technology which disrupts old business models and markets.
  3. Money follows money but smart money collects most of the money.
  4. All things social represent rich data pools which lead to information, knowledge and wisdom about people’s intent and desires. Intents and desires represent money to be collected. It represents a revolution in knowledge.
  5. The revolution has just begun. Revolutions represent a shift in power, money, influence and market dynamics. No one with money wants to be left out of this revolution. Yet many who throw money at social opportunities without  knowledge will end up loosing their investment due to their lack of wisdom and understanding of what true value rest in all things social.

Understanding the true value in all things social does not come from applying old knowledge. Most of today’s venture funds came from old money models which created value from old knowledge.  Care to comment?

Previous post:

Next post: