What Are Friends For?

By Kristina Dell

If Antony Brydon had used a social-networking application in 2000 to sell EMusic, he might have made an extra $30 million on the deal. At the time, Universal head Edgar Bronfman Jr. had shown interest in purchasing EMusic, a digital-music distribution company then valued at $60 million, but was distracted by his company's merger with Vivendi. It took Brydon four months of searching to realize he had another entree into Universal: an EMusic board member who knew Universal Music president Doug Morris. Once an introduction was secured, they quickly struck a deal for $24 million. But during the time that Brydon overlooked the connection, EMusic's value dropped almost 60%. "We lost $35 million in market capital," Brydon says.

In the end, Brydon learned a valuable lesson--it pays to know who your friends' friends are--and got the inspiration for his newest venture: Visible Path, a company that develops social-networking applications for businesses. Also called relationship-capital management, the software helps people take advantage of their friends, enabling them to see hidden connections two or three degrees away in order to find new clients, new sales and even new jobs. It's Friendster for the corporate crowd: deals vs. dates.

Though the market is small, estimated at below $50 million, social-networking companies are suddenly attracting attention from the ultimate Silicon Valley networkers, venture capitalists. VCs are throwing money at broad-based public networks such as LinkedIn, as well as at specialized, closed systems like Visible Path, used by companies to share employee contacts behind the corporate firewall. Spoke Software, which offers both kinds of networks, already has more than $20 million in funding. Ryze, a public network, and Interface Software, a closed system used mostly by law firms, are out of the VC loop but in the money--both are profitable.

Social-networking firms claim their software can help close sales about 25% faster, assuming they can overcome some workplace resistance. Skeptics are turned off by the notion of software sifting through their electronic Rolodexes, calendars and e-mail; and a rising star flush with contacts might not relish sharing them with a co-worker--particularly one who might be competing for the same promotion.

Some companies are using perks to try to overcome these obstacles. 3i Group PLC, a global venture-capital firm that uses Interface Software, is starting to tie bonuses to the number of contacts employees share with colleagues--and, of course, how much business results. Visible Path has tried to alleviate privacy concerns by having the intermediary remain anonymous. The person seeking an introduction sends an e-mail through the system without knowing who the go-between is; the recipient is free to ignore the request.

Such identity protection is the cornerstone of public networks like LinkedIn, which operates much as Friendster does; most people join by invitation, in turn inviting their friends (and so on). The personal information of everyone but your direct contact remains hidden. Todd Defren of SHIFT Communications, a p.r. firm, has used this social pyramid to close $200,000 worth of new business. Instead of the usual 3% response rate he gets from direct-marketing calls, Defren has elicited a beefy 50% rate courtesy of LinkedIn's referenced referrals. But Defren is careful not to ask for too many favors. "You're limited by your own sense of shame, because you want these people to remain in your network and still be your friends," he says. After all, he might add, when it's finally time for you to sell your company, those friends could really pay off.