Scott Johnson: A Bright Spot in the Economy

One place where there is growth a-plenty these days is good old direct marketing, which search reinvented last decade. This decade, social media is reinventing it once again.

Imagine this: You’re playing a social game like Mafia Wars on Facebook and you want more “credits.” So you type “Drink Dr. Pepper” into a box, and then buy a Home Depot gift certificate for your dad’s birthday, and get enough credits to keep fighting. Doctor Pepper and Home Depot pay the game developer a bounty. Done playing that game for the moment, you see in your Facebook wall a deal at a new restaurant nearby for 50% off. A few clicks later you own it. A local business just got you in their door.

Doctor Pepper, Home Depot, and the Restaurant didn’t buy ads on TV, or in the paper, or list in the Yellow Pages, or even banner advertise or pay for search keywords. Not that those activities are fruitless, but the direct marketing game is going social, and largely explains the Yahoo! board’s desperation, Microsoft’s enormous cash outlay for Skype (a move I applaud), Google’s stagnant stock price, and the lofty valuations Facebook, Zynga, Groupon and LivingSocial have achieved.

Why social? Three important reasons: User experience, scalability, and targeting. The offers are cleverly presented in the context of your normal Facebook activity. You welcomed them, because you needed credits or got a really deep discount. You didn’t click away from something important to chase a blinking banner. You didn’t have your screen covered by some slow loading video ad. There are only so many searches everyday for “restaurants near Cambridge, MA.” So search marketing is inherently gated by customers deciding to look for you, and pricey as all the other restaurants bid against you. And social is highly targeted. You see offers your friends like, and offers that marketers believe you might want based on your profile.

Because the customer acquisition market is so large and accessible, entrepreneurs have always swarmed to it. And the social value chain all sounds pretty simple. In reality, three extremely unlikely things had to happen before you got your credits and your restaurant offer:

1. You actually found, tried, and got hooked on a particular social game,
2. You actually signed up for a particular group buying service, and
3. The deals you saw were compelling enough to act on.

The opportunities here are endless for startups and investors alike. Unsolved problems include stopping all the virtual currency fraud in the offer walls, knowing which users should get which offers, aggregating offers, creating social games, micropayments – and many more we have yet to discover. And the fact that it can all be done on a handheld these days is just pouring gasoline on the fire.

Our firm is placing bets on four companies that are chasing this opportunity: Solve Media, which rewards users just for typing in a brand’s message, ScoutMob, a retailer-friendly daily deal service, Pontiflex which allows users to sign up for services within mobile applications, and Image Space Media, which displays ads within images.

We are looking at a customer acquisition future where Google is important, but no longer so dominant. Thousands of startups will claw their way into a brutal contest of game/content creation, ad placement optimization, demand aggregation, and payment evolution. And companies that get the formula right will shine brightly.

Scott Johnson is a co-founder and managing partner at New Atlantic Ventures, an early stage VC firm investing nationally in digital media, mobile, ecommerce and healthcare. He blogs here and tweets here. Opinions expressed here are entirely his own.