November 11, 2003 11:08 PM PST
Investors snub Friendster in patent grab
The chief executives of Friendster and two similar networking Web sites are commonly thought of as friends. All three--Reid Hoffman of LinkedIn, in Mountain View, Calif.; Marc Pincus of Tribe.net, in San Francisco; and Jonathan Abrams, of Sunnyvale, Calif.-based Friendster--invested early in Friendster, and all began their various networking sites with the understanding that the market would be big enough to let each specialize and not compete with one another directly.
Friendster was to be the purely social site where friends could introduce one another, match make and date. LinkedIn, which on Wednesday is expected to announce a Series A funding round of $4.7 million led by Sequoia Capital, would cater to professionals looking to network and hire. And Tribe.net was meant to integrate a classified ads model with a personal network.
Now that venture capital money and influence is raining on the start-ups, the friendly atmosphere among the three entrepreneurs is beginning to deteriorate.
As Friendster was hammering out details of its most recent cash infusion--a $13 million Series D investment led by Benchmark Capital and Kleiner Perkins Caufield and Byers--Pincus and Hoffman formed a limited partnership without Abrams, in order to purchase the so-called "Six Degrees" patent for $700,000.
"Jonathan and I have a very good relationship because he's doing dating, and I'm doing something for professionals," Hoffman said in an interview. "But Friendster's new investors may think it can be an uber-networking site. Kleiner and Benchmark only invest in very large companies, and I'm sure a dating service is not very interesting to them."
The dating market is lucrative, but less so than the market for corporate recruiting, said Hoffman, a former PayPal executive who funded LinkedIn after eBay bought PayPal. And while Friendster has won a significant advantage by building its user base and brand earlier than the others, Hofmann said there are "more dollars in online recruiting."
Abrams did not answer queries about the Six Degrees patent. Benchmark and Kleiner Perkins did not return calls.
The Six Degrees patent, a method and apparatus for constructing a networking database and system, was sold at auction by YouthStream Media Networks on Sept. 23, along with related intellectual property rights and software.
The patent was originally granted to Six Degrees of Separation, a social networking site that came--and went--a few years before the current crop of sites. YouthStream Media Networks acquired the patent when Six Degrees went out of business.
Tension among investors
In buying the patent, Hoffman deliberately excluded Abrams from the deal.
"I didn't involve Jonathan because I thought Kleiner and Benchmark would try to bid me out," Hoffman said. "It's better to be safe than sorry." Hoffman described the Six Degrees patent as "central to this field."
Now, Hoffman said, he and Pincus are in negotiations with Abrams over the patent--negotiations Hoffman insisted were "friendly."
Tension among the increasingly competitive Bay Area networking entrepreneurs is not exactly new. When Tribe "welded on" a Friendster-type social networking capability, "that created some friction," Hoffman said.
The U.S. Patent and Trademark Office issued the Six Degrees patent Jan. 16, 2001, giving it a healthy head-start to the flurry of patent applications that social networking start-ups have been dashing off to the USPTO in recent months--and with which they have engaged in significant saber-rattling.
After Emode launched a social networking site with a similar look and feel to Friendster's, Abrams warned that it had patents pending that Emode would be found to infringe, should they be granted. Emode countered that it had patents pending of its own.
Spoke Software, a Palo Alto, Calif., company focusing on the enterprise networking space, in September announced that it had a portfolio of 15 patents pending.
Executives and venture capitalists working with the networking sites acknowledge that the patent applications, purchases and threats are, by and large, posturing.
"Everyone wants to protect themselves in whatever way they can, so when it comes time to start arguing, they have something," said one person familiar with the patent battle. "Even if your chips aren't that good, you've got to have something or you can't bluff. On the other hand, that's not how I would have spent $700,000."
But Hoffman insists the Six Degrees patent is no bluff.
"Right now you're hearing a lot of spurious patent threats," he said. "And that's why I moved quickly to get a patent that was foundational."
In the final analysis, Hoffman may face less competition from Friendster and more from other niche players that have staked out corporate turf. These include Spoke, which in April collected $5 million in Series B financing led by Partech International, and San Francisco-based Ryze.
He and others warily eyeing Friendster maintain that the site won't find it easy to shift focus from matchmaking to business networking.
"Maybe I'm overly confident, but I think that it would be very difficult for Friendster to move into the professional arena," Hoffman said. "But I'm not foolish--I do pay attention to these things, and I do know what Friendster's priorities are."