Social Networking Bubble? II

This Red Herring article takes a hard look at the social networking space and asks whether we are in a bubble, what are sustainable advertising and revenue models, and will we see consolidation in the space soon?

The amount of VC money pouring into the space is one indication that the industry is becoming saturated, as noted in the article and in our past commentary. Interestingly, since this article ran on Monday, three different social networking sites received funding:

—Much-hyped and fast-growing college social networking site Facebook (described in the Red Herring article) received US$25 million from Greylock Partners, Meritech, and existing investors Accel Partners and Peter Thiel.

—Business social networking service Visible Path raised a US$17 million second round that included Menlo Ventures, Kleiner Perkins and Integral Capital Partners.

—And event management social networking site Renkoo raised a US$3 million second round led by Matrix Partners.

The space is growing fast, driven by demand from users and advertisers. But the fate of the sector will come down to a question of supply. Is the market becoming saturated? A related question is, when will the growth in usage slow down? Money will continue to pour into the sector in the near term, but in the next year we also expect to see some consolidation take hold. In the meantime, look for lots of development of advertising models across the space.