VCs to Facebook: You’re Blowing It For the Rest of Us

For the last year or so, a wide number of digital media-focused venture firms have had one company in mind when backing applications makers: Facebook. The reason, of course, is that in May 2007, Facebook announced to the world that it was no longer merely a social networking company but a technology platform on which anyone was invited to build applications — and to keep the money made from those apps.

VCs had reason to be cautious — Facebook wasn’t handing over the keys, after all. Still, Facebook CEO Mark Zuckerberg promised that Facebook wouldn’t show its own applications any preferential treatment, so some went a little bananas. Last summer, for example, Bay Partners on Sand Hill Road even launched AppFactory, an accelerated approval program that’s made a handful of investments in new media startups that leverage Facebook’s platform.

This week, that’s looking like a big mistake, as VCs, along with plenty of software developers, are calling bullshite on Facebook. The reason? Its Monday unveiling of users’ redesigned profiles, a redesign that happens to render superfluous one of Facebook’s most popular third-party applications, the “Top Friends” tool from the San Francisco startup Slide. (Kudos to Valleywag for noticing the issue immediately.)

The redesign doesn’t necessarily signal that Facebook will now go after every hugely popular outside application by replicating it in-house, but it does seem to suggest that Facebook will do what it damn well pleases, and that has investors concerned. “If Facebook wants to be a platform, it needs to behave as a platform company,” says Salil Deshpande of Bay Partners, who heads up AppFactory and who additionally believes that Facebook hasn’t treated its developers right by allocating enough for resources for development or support. (A visit to Facebook developer forums paints the same picture.)

Jason Pressman, a partner at Shasta Ventures on Sand Hill Road, is also a little irked by Facebook’s decision to essentially create its own “Top Friends” application. Though Pressman says that Shasta hasn’t backed any companies that are narrowly focused on Facebook, he concedes that at least two startups in its portfolio, Flock, which makes a Web browser, and casual-games maker PopJax, rely heavily on Facebook for their distribution.

Diplomatically, Press tries to see the whole picture when I first bring up this week’s hullabaloo. “I think Facebook is a great company, and I don’t think that it’s being nefarious or trying to screw anyone,” he says. “I think it’s realizing that, hold on, we need to better monetize” what’s happening on Facebook — which, incidentally, has grown from 24 million users in May 2007 to more than 80 million today.

All the same, there’s no getting around recent developments, says Pressman. “Facebook just underscored the risk you have of being disintermediated from its platform. It reminded people that it can build apps that look really similar and it can relegate developers’ applications to second position. And I think that’s going to have a meaningful impact on how the venture investor community views Facebook applications and applications built generally for social networks.”