The fairy-tale phase didn’t last very long for new social media network darling Ello.
Currently enjoying a wave of attention thanks to a protest movement over Facebook’s real-names policy, the company has positioned itself as an independent network, with a philosophy of never selling user data. But some users may feel that promise is compromised by the fact that Ello has already made what some would consider a pact with the devil: It accepted $435,000 in seed funding from Vermont based venture firm FreshTracks Capital back in March.
This was brought to most Ello user’s attention Thursday afternoon by none other than Ello user Andy Baio, who checked SEC filings and wrote a post about it on Ello itself. Since the company hadn’t disclosed its funding, most reporters (including myself) thought it hadn’t raised any.
In fact, FreshTracks Capital isn’t hiding the fact that Ello is part of its portfolio – it has it listed publicly on the site. “Seriously, I’ve been sitting here all day long saying, ‘I can’t believe nobody figured this out,’” partner Cairn Cross told me in an interview Thursday.
Cross met Ello co-founder Paul Budnitz a year ago in Vermont. Budnitz pitched FreshTracks on his ad-free social network concept, monetized with a freemium plan where users would pay for added features, and Cross was intrigued.
“I believe you can build something of value here if you can create a big enough network and have a framing model that has some payment features in it for people who want fancier bells and whistles for what they’re doing,” Cross said. “If you think about the gaming industry, the freemium model is not necessarily a problem, it just hasn’t been applied as much to social applications. We think it will work.”
“We can do whatever the hell we want”
The fact that Ello has raised funding is likely to concern fans of the site. Already, the issue has been mentioned in almost every article about Ello, and most of those articles (including mine) have said that its ability to stave off an ad revenue strategy is correlated to its ability to survive without venture. Once investors get involved, most companies are expected to start working towards a scale that will generate big returns, and for social networks — to date — the monetization strategy has almost entirely been based around ads.
But Cross laughed at the thought of his firm forcing ads on Ello. “We practice venture capital in a way that very few people practice it. We’re really small-town venture. We’re patient, we have long exit horizons, we’ve had some successes, we’ve been around for awhile,” Cross said. “This is not Kleiner Perkins.” FreshTracks Capital has funded 30 companies in the past 14 years, focusing on Vermont-based organizations.
Ello co-founder Todd Berger also laughed at me when I asked about the pressure to bring in VC-level returns, and how it could impact the company’s mission.
“There’s seven founders and we own 82 to 84 percent of the company, so we can do whatever the hell we want,” he told me. When asked why Ello didn’t disclose its funding in its manifesto, Berger discounted the information as irrelevant. “That’s not a secret but we weren’t taking the tech company approach and blabbing about it,” he said. “Why would we lead with that story? Who cares about that?”
Of course, the company is taking off – yesterday it was the sixth most-tracked Google search term, and the press stories on it exploded in the afternoon – and the bigger it grows the more money it will need to feed the beast. Berger thinks that although Ello may raise more venture captial, they will not work with any firm who doesn’t back their values. Furthermore, they’re not giving up control. “It’s the dumbest thing we could do,” Berger said. “We’re not going to sell out our soul to grow our company. Maybe it’s hard to believe.”
“VCs aren’t like Kickstarter backers, or even like angel investors”
It’s easy to make such proclamations now, in the early days of this beta site that isn’t even open to the public now. But situations and pressures can change as a business grows, particularly if the company raises more money. As Ello user Baio pointed out in his post about the funding:
VCs aren’t like Kickstarter backers, or even like angel investors. Kickstarter or Patreon backers just want the thing being made. Angel investors may have other reasons to invest beyond equity: fame, insider access, or maybe just the joy of helping something exist.
VCs may invest in things they think are interesting or want to exist, but they primarily invest money in startups to get a return on their investment, on behalf of their limited partners. That return usually takes the form of an exit: an acquisition or an IPO.
Unless they have a very unique relationship with their investors, Ello will inevitably be pushed towards profitability and an exit, even if it compromises their current values.
Since Ello is based outside of Silicon Valley – a distributed team based in both Colorado and Vermont – its investor and the founders themselves are decidedly outside the echo chamber. In fact, that may be why Ello is taking off. Its founding premise – no ads, no selling of customer data – is antithetical to the way the tech scene has done social for a very long time. And it may be that very uniqueness that keeps Ello true to its principles.
If the next big social network to hit America doesn’t come from Silicon Valley, that will say a lot about shifting consumer priorities. “We care less about Silicon Valley. It doesn’t inform our lives in any way shape or form,” Berger said. “We’re totally trying to shift values.”