The point that isn’t addressed in your post is just what value is actually being created by RockYou. You can talk about total widgets, pageviews, unique users, minutes per month but that is ancillary to the fact that the “ongoing revenue model for widget companies has not been finalized.” Interesting choice of words. My translation: there is no revenue model right now, and while some people, like yourself, have some ideas, nobody has proven anything on a noteworthy scale. Furthermore, we’re only talking revenues. Nobody is talking about how these companies are going to create *profits*. And nobody seems to be asking the logical question: these services have massive audiences, so what is stopping them from at least testing some sort of business model. How long are investors going to have to wait to see some sort of progress? Until after a third round of $20 million at a $150 million valuation?

I understand that VCs and angels often have a decent rationale to invest in companies/industries where a sustainable business model hasn’t yet been firmly established (as it’s that type of risk that usually leads to the biggest rewards), however it’s a bit disconcerting when companies like RockYou, which should/could have extremely low burn rates, start raising $10 million rounds at valuations that are way beyond what they’d be worth in a sane market. It just seems absurd right now that a potential acquirer or the public markets would value anything like RockYou at $50 million. It generates some revenues but not a cent in profit, faces significant competition in a space with little barrier to entry, has no real defensible technology and could potentially be shut off at any moment by the services that drive most of its traffic. I’m not a VC, but I’m familiar with the criteria that they look for and am I the only one who thinks it fails on most of it?

A lot of people commenting on Web 2.0 and how there’s no sign of a bubble often argue that things are different now because the average rounds being raised these days aren’t as big as they were in Bubble 1.0 and the costs of starting and running Web 2.0 businesses are lower. If this type of funding doesn’t make you think twice about that, I don’t know what will. Let’s not forget that a lot of the huge rounds raised in Bubble 1.0 were for companies that had significant infrastructure requirements (i.e. ecommerce companies like Webvan and Pets.com). I would be interested in seeing a comparison between today’s funding and Bubble 1.0’s funding based on some realistic projected financial needs of the companies. I would not be surprised to see that a significant percentage of companies today are being overfunded at the same relative rate as they were in Bubble 1.0. The rounds today may be smaller, but overfunding is not based upon the total size of the round but rather the amount being put into the business based upon its actual, reasonable needs to achieve some tangible objectives and milestones.

So you are saying that you’re pouring in money in these popular widget companies in the HOPE that the popularity somehow turns into profitability assuming through some kind of acquisition or some unknown method that will bring in positive cash flow?

So any startup that can show you that they’ve gained massive user traction but at the same time losing money and no plan whatsoever of how to turn profitable, you’d be willing to put your money in?

1. Rockyou serves and creates substantially more total widgets than Slide does (though less photo widgets). This is because Rockyou offers a number of other widgets that Slide does not (Glittertext, etc).

2. According to Comscore, Rockyou has greater PVs/mth and minutes/month than Slide does (although it reports lower UU/mth). This may be an artifact of Slide’s desktop app creating a lot of “one and out” PVs when users click on a photo.

3. Rockyou has comparable penetration into Myspace versus Slide, and substantially greater penetration into Bebo.

Unless the metric for leadership is blog and press column inches, these three points would suggest that there is at least some dispute about who leads in this space!

4. Substantially less than 50% of Rockyou’s traffic comes from Myspace. It is, however, the largest traffic source.

5. Rockyou is making revenue, but not profitable. As commentors have pointed out, the ongoing revenue model for widget companies has not been finalized. For those who are interested, I posted on potential business models for widget companies at the Lightspeed blog in January. You can click on my name in comments to read the post

I was curious as I myself am an aspirant to begin an Internet venture but still Business Ideas elude me.

http://www.tekno-world.blogspot.com

Don’t worry about interviewing the VCs.

Here’s the answer.

If Google is willing to pay 1.6B for a business that is losing 1M per month on bandwidth fees. They’ll at least be willing to pay 160M for something like RockYou!

I mean really, doesn’t this look like a crash all over again? Ok maybe none of them will push for a public offering but they still are getting crazy money.

I would really love to interview a few top dogs from the big VC firms and ask them there thoughts regarding funding of companies that have no business model. I really do wonder how these guys pitch their ideas to VC’s.

Mike, maybe you could do an interview with a few answering this question? I’m sure we would all love to see some interviews

I’m not sure the valuation is out of bounds, but it’s a lot of money

-JLB