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New social networking start-ups are proliferating, often targeted at such narrow markets as to seem implausible. Among them: JewTube, Fuzzster (pet enthusiasts), WeDigYoga (Yoga instructors in New York and L.A.), 18wheelsingles (truck drivers), and there is even Me.com, a Web app for creating other social networks. One need only look to Online Personals Watch or Simple Spark for a litany of new social sites launching almost daily.

I can't help but wonder, however, if the new flush of starry-eyed social Web entrepreneurs, intoxicated by a desire to follow the gilded paths of companies like MySpace, Facebook, Match.com, and YouTube, are aware of some awkward truths at the heart of the social business model.

My own, admittedly rather niche, social networking company (the first personals site for relationship-minded gay men,) has been going for two years now. If Lovetastic has taught me anything in that time, it is this: social networks aren't like other Web applications. Social networks can have tremendous value, but they are not themselves "products" in any traditional sense, and they ought to be handled as the special case that they are.

Give me differentiation, or give me death.

As a general principle, the first businesses to define a new market tend to dominate that space as it grows. Unchallenged, Microsofts and Wal-marts will only grow larger with time. In most industries, however, countervailing market forces tend to cause fragmentation and specialization over time. Small niche companies seize territory by catering to a specific subset of users with specific passions.

This is one of the most aesthetically beneficial side-effects of capitalism: the success of a flavorless mass market generally breeds a host of creative, artistic, and specialized sub-markets. Communities of passionate users spring up. Competitors begin to focus on craftsmanship and taste to attract the more discriminating consumers, and the quality of all products in that realm tends to go up. Innovators like Amazon, 37signals, Tom Bihn, and Target have wrought great companies within existing industries out of this elemental economic drive. As the old Business 101 saw goes: differentiate or die.

In a market loomed over by great mountains like MySpace and Match.com, the path of generic mass appeal is now largely closed off to small social networking start-ups. So we would expect to see the same cascade of successful specialization in social networking that we would see in other industries. Except for one little problem. A paradox at the core of the social business model fundamentally breaks the otherwise universal economic mechanism that makes differentiation a valid business strategy.

The cupcake paradox and a taxonomy of Web applications

Nobody wants to be the only person to show up at a party. Not only does it make you look like a loser, but it undermines the whole point of going to a party in the first place. Nobody gives a damn how good the cupcakes are; if scarcely anybody shows up, your party is a failure. Equally, nobody goes to MySpace or Match for the cupcakes—or, to be more precise, the quality of the user experience. People flock there because that's where everyone else is.

The day that I launched Lovetastic, I knew I had built something that was totally different from any of the other trashy dating sites out there for gay men. It worked elegantly and intuitively; it was beautiful; it had a warm, welcoming aesthetic (in stark contrast to the harsh meat-market feel of our competitors;) and it didn't reduce its participants to a demeaning set of "stats." I thought surely guys would jump at the chance to be a part of something like what we were doing.

On launch day, I found that traffic was very strong, but hardly anybody was signing up. I literally got more e-mails from people saying "what a great site!" than I actually got sign-ups. Same for the following few days. So I decided to try an experiment. I put up a preview screen saying we were taking sign-ups and allowing customers to build their profiles, but I hid the page that allowed site visitors to browse other profiles. In this way, nobody was able to see how many (or, more accurately, how few) other members of the site there were at the time. The next day, sign-ups multiplied by several staggering orders of magnitude.

I learned from this experiment early on a lesson that would repeat itself for the next two years: a social network isn't a product as such. Rather, the product that a social network provides is access to a large pool of other people. Every social network, whether it be a subscription-based dating site or an advertising-funded general community, must grapple with this ineluctable fact. It's what makes the rules for social networks different from utility applications like Basecamp and BlinkSale.

If a new member signs up for Highrise today, she can use the application, put in some contacts, appreciate the app's interface and functionality directly and, if she likes it, leave a happy paying customer. Highrise with one customer is a product with one happy client who might just become an evangelist to others. On the other hand, a social network with one customer, even if it were infinitely better than MySpace in every regard, is a company with one bored and angry customer, which is to say: an utter failure. In the taxonomy of Web applications, social and utility applications are entirely different species.

Niche communities will inevitably form within a large social network as a function of its size, but the value of the network itself rests solely on the diversity and number of potential connections a person can make. This is the tragedy of the network effect. Attempting to address a niche from the outside — to provide an alternative to a large existing network — means you have to start at zero in a market where the only things that matter are numbers. If your objective is to use a social network slowly to build a business around a base of happy, paying customers who sincerely care about your product itself (probably the most noble goal in all of business), then, sadly, you're doomed from the outset.

A race for numbers

And herein lies the tragic paradox for the social networking start-up. If you can't compete on quality, simplicity, beauty, or ease-of-use, you have to compete on numbers, which often translates to costly advertising and PR. It's a race to see who can gather and sustain the largest party. This is why the largest social networks are fetching absurd amounts of investment capital, overshadowing the thousands of floundering competitors futilely attempting to climb the lop-sided distribution that characterizes the traffic of social networks.

As of April 2007, MySpace got 80% of social networking traffic, Facebook just over 10%, and the other top ten social networking sites each hover around only 1% each, and the curve only drops way off from there. The thing about large numbers, of course, is that they are incredibly expensive to gather all at once. It's a very long tail indeed, and it's going to take any would-be competitor a pretty penny in Google Adwords to climb it.

Now that we have thousands of members instead of none at Lovetastic, people aren't quite so reticent to put up a profile as they were when I first conducted my early experiment. But we're still many times smaller than our much larger (and, I would argue, more distasteful) mass-market competitors. We have focused on quality and philosophy rather than building huge numbers fast. Yet we have noted the unfortunate fact that this often leads to a "leaky bucket." People may sign up, they may love the site, they may write us nice letters telling us what a refreshing and wonderful concept it is, but they often also write a month later to ask us to cancel their account because there just isn't enough people on the site "yet."

At Lovetastic, we make some decent money on the sale of what are essentially premium accounts, but in order to keep our numbers-hungry community happy, we have to keep pouring that money back into costly publicity and ads. It's a vicious circle, and quite frustrating to the entrepreneur who is reluctant to either go into a pit of advertising and publicity debt or to sell out to a larger company who can leverage existing access to the target market and drive them to the site.

To compete with a large competitor like MySpace or Match, you have to differentiate and target a smaller niche. But to be a successful social network you have gather as huge and broad a group of people as possible. The two business needs are fundamentally at odds with each other.

And so what is one to do? Bemoan the death of social networking start-ups and let MySpace define the social landscape of the Internet in perpetuity? It's clear that if you want to build a Web application business around a traditional product model then utility apps are the way to go, but are social networks too much an uphill battle to be worth the time? Hardly.

Looking for value

I have always admired the willingness of the folks at 37signals to call out the naked emperors of the Internet. Jason Fried in particular has been reminding us for years that real business is about creating value, not just taking a gamble on a buy-out. Their products are splendid examples. And I agree. So if we're going to take creating a social network seriously, we must do it with a full awareness of all the dangers I've mentioned here. If it's going to be hard to build a water-tight bucket, as it were, without constantly outlaying cash, spamming like crazy, or being absorbed into a larger company, we need to ask precisely what the value is we're trying to create, and whether it's worth surmounting the obstacles that lie in our path.

Value, of course, can be defined in many ways. (Merely planning to sell your company to a bigger sucker is not one one of these ways.) The most obvious perhaps is actually making money. Corkd is very interesting in this regard. They've figured out that a social network around wine will generate affiliate commissions on wine sales, with the added advantage that oenophiles have strong real-world social ties, which help to spread the word about the site organically.

An example of practical product-style value can be found Kevin Rose's new social network Pownce. It layers useful collaborative software functionality on top of the social component in a way that de-emphasizes making new connections and puts the focus on the ways it empowers you to interact with your existing friends (see also Twitter.)

But there are other forms of value, too. Many social networks like Zaadz, MakeMeSustainable and my own were created to address what we saw as social problems. We wanted to give people more socially responsible and personally fulfilling alternatives. In some sense, our very existence is to act as a critique of our major competitors and to empower our users to demand more of the mainstream sites. Huge sites like Gay.com end up being forums for facilitating hook-ups, and at Lovetastic we wanted to offer something more holistic. I got to experience the value of that enterprise first-hand in a way I could never have imagined when I started the company: I met the man who would become my husband on Lovetastic, something that would never have happened on one of the mainstream sites. And I've heard from many other members who have made similar connections. Working to make people's lives better carries its own sort of value.

But this sort of social critique is not entirely a non-business concern. Only recently, we've come around to the idea of potentially selling Lovetastic to another larger personals or media company. We set out to create something of an alternative site with an innovative, appealing interface. So we've realized that if our company goads our major competitors into doing things differently — including by buying and absorbing our site and philosophy into their organization — then we will have succeeded by our original criterion of rallying and serving an under-served niche market that we considered ourselves a part of. This kind of aspiration is different than having a single-minded devotion to getting big fast and selling hard. For companies that want to change the marketplace and create a different sort of value, I think this is as worthy a goal as any other.

My next project will be a utility app, partly for the reasons mentioned here. But I don't regret for a second what we're doing with Lovetastic or the time I will continue to spend on it. We're changing the topography of our little world, and there is plenty of value in that. But, notwithstanding the multi-million dollar headlines we keep seeing, I would caution any entrepreneur who believes social networking is the path to quick riches. It can be a rewarding, and ultimately market-transforming undertaking, but one ought to go into it fully aware of its peculiarities and perils and a clear vision for the precise kind of value one hopes to create.