Picking Winners
Just as with the dot-com bubble, inevitably many of these companies will fail. But we also expect that careful investors willing to take the plunge will see extremely healthy returns. We have seen a number of companies in this sector with strong business models. Here are some of the important signs an investor should look for:

Diversified revenue sources. Past successful online communities have usually been based on a combination of advertising, sponsorship, premium membership and transactions (e.g. affiliate links or more direct product sales).

Tight privacy controls and a clean privacy track record. Spoke Software recently hired a very experienced chief privacy officer to boost the public’s comfort with its model.

Utilization. Membership numbers might look impressive, but they are meaningless unless most of the members participate. How many of a site’s members have visited at least four times in the last month?

Uniqueness beyond a gimmick. Flickr is a company trying to build a network around sharing photos. However, most people who are technologically savvy enough to download digital photos into their computer are savvy enough to figure out how to upload them into whatever community they want. Flickr needs much more to differentiate itself from all its competitors, such as Tribe.net, which lets members maintain a huge photo gallery. By contrast, a company called Knowmentum is working on integrating ongoing collaboration for small private groups, which is technologically much more complex and distinctive. For example, if two people meet on a site and decide they want to work on a project together, they will want a place to share files and conduct real-time Web conferences and basic project management. Knowmentum is working on offering such tools.