XING's SocialMedian acquistion: Thoughts, conclusions

It was announced by Jason Goldberg today that SocialMedian, the website which helps you consume news through your social connections, has been acquired by XING, one of the older social networks that is headquartered in Germany. Here are a couple of thoughts on the very 'social' hook up:

Products With Core Values Rarely Fail: I have been tracking SocialMedian for a while now and have been a user of the website since its early days. Where the site has reached today is a testament to the fact that good products that do something useful for you repeatedly rarely ever fail. Other than the tremendous hours of work that has gone into the website, from what I recollect, the site has done zero advertising, than Jason relentlessly pushing and leveraging his extensive network to spread the word about the product.

SocialMedian took an existing ill-defined solution of filtering and sourcing news through your peer funnel to discover content and news. Normally, this is done through a mix of email, IM, Twitter, various shared lists (Google Reader, Delicious etc), in a haphazard manner. But, this mode of content discovery through P2P has been the silent rising star of the past couple of years. What SocialMedian did was to pick this up and packaged it nicely, making it much more accessible for the average Joe.

The BOT Model: Since we can now safely assume that the era of hot air balloon valuations is pretty much over, businesses and ventures can more or less go back to functioning the way it used to function before. I have written a bit about it here, but this one of the first deals in the Build-Operate-Transfer (BOT) mode of creating new products. Established companies have a problem in trying to come out with innovative products and start ups have a problem in going from 60 MPH to 100 MPH with their products.

The good thing about such acquisitions is that they are unlikely to be acquisitions made to squash the competition (unless you happen to be acquired by Google, of course), it works out well for both parties and the valuations tend to be more realistic. Think of it as buying a car from a showroom. It is fully built, has an engine driving it and is ready to go., Now, where you drive it to, is up to the guys who bought it.

Participatory Product Development: SocialMedian has been largely developed with the active participation of its users. This maybe also because of the basic nature of the site, which requires you to participate to use site to its full potential. But it is also significant that they have asked and listened to their users at every step of the journey. It is refreshing to see actual 'crowdsourcing' being used to do useful things and like it is the case most of the time, good work normally does not have a fancy label or 300 cheerleaders screaming about it. It just goes about quietly, expressing itself only in stellar results.

A Good Exit For Jason & Co.: SocialMedian has been an innovative product, but it is also not a very cheap product to run. The core of the framework involves crawling, indexing and classifying data, of which the last is largely manual or semi-manual. Still, all of those are bandwidth and compute-intensive operations. This introduces a problem in the sense that the more successful it gets, the more expensive the site will get to run as a result of that success.

From what I understand, the site has been largely bootstrapped from Jason's own resources, meaning that the runway they had with the product for liftoff and an exit was always going to be rather limited. What made things even more dicey for the site is the fact that they still have zero revenue. It is hard enough to fill an empty bucket with water in these circumstances, it is even harder to fill a bucket that has a hole at its bottom.

The juncture they were at, SocialMedian had two choices: they could have gone and raised some funds and and carried forward the story or be realistic about it, take the exit-via-M&A route if they could find a partner who was willing to keep the good work going. The first choice is a drag in this environment. For a product with zero revenue, the valuation would almost certainly have come in at a level below what it deserved. I guess this was the reason why they chose the second and hopefully XING should be good to them.

A Note On Outsourcing: SocialMedian was built entirely by Jason Goldberg and True Sparrow Systems, which is a Pune based development shop. The manner in which the product has been executed, working across time zones shows that outsourcing can be leveraged to build tremendous value if it is leveraged right. The difference in SocialMedian's story is also they chose to look at their development set up in India as partners than as a sweatshop or something that was ONLY leveraging better costs. The proof of it can be very much seen in the finished products.

That said, there are major challenges for for XING and SocialMedian:

1. The product has become a bit weak in terms of innovation of late. There is that distinct feeling of it lacking direction and a roadmap. A bit like a dog that chased the car and actually got it, leading to the "now what?" moment. Yes, usage is increasing by any metric, but if they don't continue to innovate, it will become yet another product and not remain special for a long time.
2. Revenue: This is SocialMedian's greatest problem. It is going to be a hard ask to get decent revenue onboard into the system, especially considering that all kinds of advertising is going to be either lower than earlier or flat for at least a year to come means that the site's ability to grow will always have the revenue shadow looming over it. Hopefully XING has enough cash to take care of that situation.
3. Integration: As it is with any acquisition, integrating and reconciling the disparate user bases are going to be a royal pain. XING has a different type of users from SocialMedian and the latter has users who have been rather passionate adopters of the service. This should be interesting one to watch.

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