Risky business: Building on top of Facebook

Josh Hannah - open but leery about investing in companies on Facebook platform

Later today, I will be moderating a panel at AlwaysOn's Stanford Summit. The panel is called: Beyond Facebook and Twitter. One of the questions I plan to ask each panelist is, "What are the risks of depending and relying on these platforms?"

This same question was raised on a panel Wednesday. The panel, moderated by Packy Kelly of KPMG, was called "New Millennial VCs Take Charge." On the panel were Jeremy Liew, Partner at Lightspeed Venture Partners, James Slavet, Partner at Greylock, Tim Chang, Principal at Norwest Venture Partners and Josh Hannah, General Partner at Matrix Partners.

In this video, Hannah explains that he's suspicious of investing in businesses built on top of Facebook.

"As a venture investor, I'm leery about companies dependent on the Facebook platform," he said. "You don't have control of your destiny." Hannah also gave the flip side of this argument, saying that a decade ago the same concern could have been raised about Google. Yet today, many companies are dependent on Google. In fact, in its early days, Google was once very dependent on AOL for traffic as the provider of its search results. 

Much like Google, Facebook may become part of the Web fabric, he suggested.

Here are some responses to the question about building on top of the established platforms from my panelists, via email:

Max Ventilla: co-founder of Aardvark:

"There is a brand risk in that it might be hard for you to create a clear value proposition that is distinct from Facebook/Twitter.  In addition there is constant drag in terms of resources required to keep tying into these networks.  Finally there is always the risk that the networks suddenly change the rules and leave you needing to scramble (as FB did by totally burying applications in its interface). That said, it seems worthwhile to build on top of these networks in complement to building an autonomous service.

"The most important thing is that you are adding value to the platform and taking some fraction of the value that you add.  Any activity that is basically parasitic (i.e., the kinds of spammy activities that motivated Facebook to scale back the visibility of 3rd party apps) leads the platform to protect itself and to potentially take steps like taxing applications, either to curb behavior or to get their share of value from the relationship."

Clara Shih: CEO of Hearsay Labs and Author of The Facebook Era

"There is inherent risk to entrepreneurs building a business on top of Facebook, Twitter, or actually any web platform, such as being subject to the reliability and performance of these services and their APIs (including outages) and inability to really "own" the customer. But there is also tremendous upside. Over one million developers, including my company Hearsay Labs, have made the decision to build on top of Facebook and Twitter to tap into the incredible data, reach, and referral capability of these services."

Gerry Campbell: CEO of Collecta

The issue is that you have to move very quickly when you are building a business on top of an ecosystem that is itself evolving. All of these open(or semi-open) systems - are creating enormous opportunity. Social networks are driving big user engagement. So it can be worth it if you add real value to the network and have an approach that accommodates that risk.