Marc Andreessen's Ning raises $44M - Social Network on a Freemium business model

Marc Andreessen, former founder of Netscape, and Gina Bianchini, co-founder announced they have raised $44M in Series C funding from Legg Mason. Marc and some of his angel investor friends funded the first two rounds. Mike Arrington at TechCrunch says the pre-money valuation was $170M, making the company valuation now $214M.

In an earlier post "VC Funding - How much is too much?" I quoted Marc as saying "Raise as much as you can, then think, talk, and act like you raised too little. Meaning, stay hungry, don't hire too many people, and manage your cash flow so that you can survive for a long time. With any other entrepreneur or company I would be very nervous raising that much money at that high valuation. But, Marc Andreessen is one of the few people who can effectively manage that situation.

Venture investors expect a 10X return on early stage and at least 5X on later stage investments. That sets the bar for a Ning exit at somewhere between $1 Billion and $2 Billion. I guess with Facebook and MySpace touting multi-billion dollar valuations the Legg Mason people felt comfortable with the valuation. But, Ning has a very different business model (Freemium) and audience numbers (thousands of communities rather than tens of millions of users.

Maybe I don't clearly understand the Ning business model, but it seems that Ning's revenues don't scale commensurately with the communities audience growth. Based on what I read on the Ning web site they do not share in the advertising revenues of its customers communities. They simply charge $20/month for ad serving. Maybe that is OK if you have a million communities all paying you $20/month for ad serving and another $10/month for additional bandwidth.  The latest numbers I saw pegged them at 70,000 communities, mostly of the free variety. They need to do a lot of Freemium conversions to create a healthy revenue stream. My research on Freemium conversions says that on average about 3% convert to a premium service. Ning must be expecting a better conversion rate.

UPDATE: Diego reminds me that Ning does place ads on the free communities and keeps the revenue. Hmmm...two more issues. First, it would seem that advertising revenues for Ning would be capped at around $20 a month for each community since that is the threshold for the community owner to switch over to keeping the ad revenues themselves.

Second, advertising rates for random User Generated Content sites like a Ning community are very low. Facebook, and to some extent MySpace, are different in that they have a very targeted audience demographic. Ning has communities all over the place with no clear audience demographic or subject matter focus. This is the Yahoo problem I have discussed before. Most of Yahoo's traffic is not targeted...it is home page hits and email pages. These page views are very hard to monetize with targeted advertising, as opposed to search engine result pages (SERP) that are targeted to a specific query.

I am sure Ning has good responses and proof points to these issues...I just don't have access to them. Legg Mason does, and felt comfortable investing $44M at a $170M pre-money...so there you go.

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Comments

[Diego]

Hi Don, just a note. While you can pay $20 a month to run your own ads, networks are by default free but ad-supported, and there are tens of thousands of those.

As Marc explains here http://blog.pmarca.com/2007/07/why-ning.html "we plan to support the service by generating revenue from two primary sources: targeted ads, which we run by default on pages throughout the service; and premium services, which let a Network Creator go beyond the boundaries of the free service".

Hope that clarifies things!

[CoryS]

If FeedBurner and MyBlogLog can be viewed as acquisition targets for the platforms they offer, Ning can also be seen as an acquisition for an ad network provider, such as Google, to expand its direct ad delivery while giving more tools to businesses and individuals that are in the long tail.

My forming opinion for online marketing is that industry and brand-based social networks will evolve into a new phase of traffic monetizing efforts. In a hunt for improved payback from UGC, publishers and advertisers will be able to seek to improve upon CPM and PPC/PPA through 3rd party networks by moving towards (e.g. creating or buying networks) being directly involved with 'targeted and engaged' sites over just targeted traffic ad networks provide.

Yahoo and Google's purchases of tools that content creators use, mostly for free, can be seen as a move to ensure both companies stay relevant in the free parts of the market to protect the most profitable divisions, ad delivery.

More on these thoughts here:
http://backseatmarketers.com/2007/07/03/social-web-built-upon-industry-not-ads/

[Gina]

Whether or not ning can justify this valuation, it is good news that the market wants to support more than just Facebook and MySpace. Social networking is different from search and maps which need only one to two leaders. I think there is room for multiple providers who can meet the different needs of groups for privacy, customization, real-time info, flexibility, etc. Check out www.nexo.com for another great service.

[Dan Lester]

Your estimate that the revenue must be capped at $20 per community is a good ballpark, but not necessarily the case.

Suppose a free community generated $50 in ads, but Ning estimate that some communities will only establish themselves if they have no ads - and that those communities would just avoid Ning if they are forced to pay more than $20 for the privilege.

Setting the bar at $50 for an ad-free site would equal zero revenue for Ning! That's down from both $50 and $20...

[Farhan]

With all the numbers I totally can't see Ning as a 2 Billion dollar company - which would give the investors a 10x return. Don't think we're in a bubble, but for those who do this must give them some serious ammo.