Social Networking Startup May Become Black Eye for High-Profile Valley Investors

When I was first introduced to San Francisco-based social networking startup, it was 2005 and the nascent company was limiting its service to pre-teen and teenage users. The implicit message was that Tagged would protect its young base from the sexual predators trolling around MySpace (which, at the time was generating a slew of negative press).

Months passed, however, and people continued to flock to MySpace and Facebook. Soon, Tagged wasn’t just allowing in anyone of any age but aggressively signing up new users by nudging them to invite their entire address book as friends.

In the crowded world of social networks, Tagged’s wasn’t a terribly surprising evolution. Apparently, it paid off, too. As of 2007, the company said that it was picking up new users faster than MySpace and that it was profitable to boot.

Yet allegedly, in Tagged’s race to continue growing its user base as quickly as its bigger competitors, the company, which now claims to have 70 million users, has transformed itself again — this time into a full-blown spam machine. Indeed, judging by a story published in yesterday’s Ventura County Star, Tagged has begun sending out email messages with all the measure of machine gun fire — and it has the email address books of non-registered recipients in its sights.

Here’s how it works: Say you receive a Tagged email and it suggests that you check out an acquaintance’s photo by clicking a “yes” tab. If you don’t agree to click through to the Tagged-hosted photo, the contact will know it, the email cutely insinuates, reading: “[He/She] may think you said no.:( “

The manipulation is annoying at worst, but there’s a bigger problem. According to the newspaper, those who click through to see the photos often up at the center of a spam scheme — even perpetuating it. Not only are visitors to the site asked to register first and to fill out numerous fields (fairly standard stuff in social networking land), but even those who back out the registration process are finding that the site has extracted their address books and, unbeknownst to them, sent the same invitation to their friends, acquaintances — everyone in their contact lists.

“It’s a pretty devious use of social networking,” says an official from California Lutheran University, which tells the newspaper that it has blocked 1,500 Tagged emails in the last two weeks alone.

I’ve reached out to Tagged’s cofounder and CEO Greg Tseng for more insight into the story’s claims but he’s traveling and, as of this post, hasn’t returned my phone call. I’ve also emailed Louis Willacy, the company’s general counsel and VP of biz dev, and am waiting to hear back him.

In the meantime, the company’s investors aren’t saying much, either, and some appear already to have distanced themselves from the startup. Former PayPal CEO Peter Thiel, Scott Banister, who cofounded IronPort Systems, and LinkedIn founder and CEO Reid Hoffman were among other high-profile angels who gave Tagged $1.5 milllion back in 2005. All three Banister and Hoffman were on the board at one point. Hoffman, who hasn’t returned a request for comment, is the only angel who has kept his seat. (Thomson Reuters data lists Thiel as an early board member but Tseng says that isn’t the case.)

Tagged also raised $7 million from Mayfield Fund in late 2005, and in fact, managing director Raj Kapoor and venture partner Allen Morgan round out the startup’s board. But when I asked Kapoor to comment on the company and the practices it’s being accused of, Kapoor said he thought it best if I “talk with someone at the company.”

Tagged most recently raised $5 million in venture debt, led by Horizon Technology and Leader Ventures. The funding, which came in December, was intended to “enable to enable the company to accelerate its growth,” said a release at the time.

As the Venture County Star notes in its piece, “there’s a snippet of information all in capital letters in the company’s terms of service — something few people actually read on Web sites — that states users consent to receive commercial e-mail messages from Tagged and agree that their personal information and e-mail addresses may be used.”

The paper goes on to point out that spam is defined as “’unsolicited commercial e-mail.”

It also observes that Tseng — a Harvard graduate who’s on leave from Stanford, where he’s pursuing a Ph.D. in physics –also cofounded Jumpstart Technologies, a company that agreed to pay a $900,000 penalty in 2006 for violating the CAN-SPAM (Controlling the Assault of Non-Solicited Pornography and Marketing) Act.

The settlement, which carried no admission of guilt, is the largest penalty to date for illegal spam, according to the paper.

[Update: A press representative for the company told me yesterday, after I posted this story, that someone from the company would be in touch today. Willacy, the company’s VP of biz dev, asked me this morning to take down his name from this post. After I explained that I was still waiting to hear back from him, he left a voicemail for me, saying “now you have heard from me.” What anyone is still doing on the board of this company mystifies me, honestly.]

[Update of update: I finally spoke with Tseng, about accountability, TechCrunch — which published a related article about Tagged this week — and the future of his company. You can read that interview here.]

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