“They don’t need to justify themselves to you or anyone. We will talk to you when we’re ready to announce something. If you run with your story now, when they do have something to reveal, they’re not going to talk to you about it then.” – Path spokesperson
What do a beta version of a Windows Phone app and a new sticker pack introducing “Buckshot Joe, scourge of the Wild West” have in common? They’re the two most interesting announcements made by Path, Dave Morin’s underperforming private social network, over the last six months.
This after the company lost several key senior executives last fall, fired 20 percent of its staff in a self-described “realignment,” and raised just $25 million in a badly needed Series D round funding (from a controversial Indonesian firm) after setting out to raise double that, and at a reported sub-$400 million valuation, fell well shy of its targeted 2X bump over its $250M Series C value.
The best thing you can say about Path today is it’s huge in Indonesia. The worst: The company seems to have accepted this as its fate. It may be the beginning of the end for a company that was once offered $125 million to sell to Google – in a high priced acquihire – less that six months into its existence and before the company even launched.
Questions of Path’s relevance and viability have been around since the company’s earliest days when it launched as an alternative social network in a Facebook-dominated world. It didn’t help matters that Morin is the kind of high-profile founder that critics love to hate (for largely spurious reasons). But as the venture dollars continued to pour in – totaling $65 million to date – and the company’s valuation ticked up into “now we’re talking about real money” territory, it’s become harder to slough off the serious concerns about whether Path would ever become more than a pretty, but largely ignored mobile app.
It’s a brutal position, particularly because Path’s instincts were spot on, if not a little ahead of their time. Today, many people use a combination of Instagram, Snapchat and Life360 for the types of intimate, private conversations that Morin hoped Path could facilitate. The concept of an elegant photo sharing app was worth $1 billion when Instagram did it. Offering users a place to share ephemeral moments with small groups of their closest contacts made Snapchat worth more than three times as much (and counting). Even the comparatively unsexy Live360 is hitting its stride, with tens of millions of families, a larger pile of venture cash, and increasing interest from strategic acquirers. It’s no Instagram, but at least it’s valuation is going in the right direction.
Path had all the money it cared to raise from rockstar investors. It had high valuations and early validation from that Google offer. It had Morin’s Facebook mafia brand and the endorsements of Britney Spears and Ashton Kutcher. And, above all, its thesis was right. So, what went so wrong?
The answer seems to be a combination of poor execution, an excessive focus on design over utility (not to mention differentiation), and a keeping up with the Joneses desire to spend lavishly.
But before we get to all that, it’s important to know that Path isn’t dead. It has users and more importantly – it still has time. But it’s in real danger of becoming something even worse than “big in Indonesia.” It’s in danger of becoming the new Friendster – a pioneer of a new consumer phenomenon that was right on nearly everything except execution.
Path claimed 23 million registered users around the time of its January funding, double its figure from a year earlier. But the company made no mention of how many of those are active users or where they’re located. Even at this small scale, Path’s growth rate isn’t bad in and of itself. The issue is more about where that growth is happening and what it means for the company’s long-term monetization prospects – and thus its ability to return value to its investors.
Path today is largely irrelevant to mainstream US consumers and has become an afterthought among Silicon Valley investors and employees. The app is ranked 135th among social networking apps in the US within iTunes App store, according to App Annie, and is not ranked within the Top 1000 overall. The app ranks 5th among social media apps in Indonesia (10th overall), 15th in Niger (148th overall), and 17th in Saudi Arabia (79th overall), but nowhere else does it crack the Top 20.
Path’s recent product updates, not to mention its fundraising strategy, show a company catering to this emerging market audience with features like sticker packs that are less likely to translate in North America and Europe. The upside, however, is that Southeast Asian users are historically willing to pay up for these types of in-app purchases – Path offers a $14.99 annual Premium subscription, as well as monthly and a la carte options. How big that business can become is another matter, however.
Many of the issues weighing down Path have been of its own making. The company has always been a reflection of Morin, including his obsessiveness over design and his proclivity for spending. For example, Path reportedly built its team with a designer to developer ratio of 1-to-2, as compared to an industry average that is likely closer to 1-to-20 (or even lower, although precise figures are hard to come by). This type of bloat and the company’s flashy office space contributed to a burn rate that was as high as $2.5 million per month at one point, according to sources close to the company.
Some comments we’ve heard in recent months from those close to the company:
“Dave confused the company with himself. He has a certain lifestyle, but the company does not.”
“$60 million should have been enough.”
“When you can see the Golden Gate Bridge from your windows you are spending too much on office space.”
These people argue that some of Path’s biggest advantages – Morin’s Facebook mafia status, its massive investor interest, Kleiner Perkins’ big bet, and most of all that early Google offer – encouraged its dangerous culture. To make matters worse, Path wasn’t fighting a battle that no one won. It was up against Instagram, which had none of those same advantages, and yet won handily.
Kevin Systrom and crew famously grew Instagram to 40 million global users and secured a $1 billion exit on a lean team of just 12 employees and just $7.5 million in Venture Capital (it raised another $50 million less than a month before selling to Facebook).
But maybe Instagram was simply a unicorn among unicorns. Fast forward a few years, however, and Snapchat is on an an even loftier trajectory. It’s already attracted ten-figure acquisition offers with what amounted at the time to a skeleton crew.
It appears that Morin wasn’t alone in pushing Path’s spend your way to success ethos. Kleiner Perkins partner and Path board member Chi Hua Chien was reportedly just as committed toward “going big or going home,” according to Pando’s sources. That mentality, while synonymous with the once-dominant firm he represented, may have ultimately been what cost Chien his job when Path and several of his other deals failed to pan out. It may end up costing Morin his fairy tale ending as well.
The tragic thing about Path is that Morin and company had the right insight, and he had guts — he stood up to his early stage investors when they said he should sell to Google early on. But the company just hasn’t executed it well enough. For all his commitment to design, Morin was much quicker to back down from core elements of his early product vision, caving on Path’s initial 50-person network size limits and then getting distracted by competing around photo-sharing with the more popular Instagram – this despite offering users no functional difference. In other words, he seemed to count on users to provide what would be distinct about the Path platform.
The company may have also been a victim of timing, launching into the abyss between generational social network cycles, before people were ready to look past Facebook and failing to capture the youngest audiences who had yet to even pledge their social platform allegiance.
In that way, Path has a number of parallels with Digg, down to the controversial celebrity founder. Like Morin, Kevin Rose had the right view of market and articulated the message of what Digg would be, but built his product and the business in all the wrong ways, before eventually being supplanted by Twitter, Facebook, and Reddit, among other social news platforms.
A more recent parallel may be Foursquare, which itself has a celebrity founder in Dennis Crowley, who previously sold a predecessor called Dodgeball to Google, only to see the product sunsetted. Foursquare has raised its own warchest of $162 million at ever increasing valuations. But it has faced serious headwinds with recent rounds – while struggling to grow its audience beyond a few million loyal users and to drive real economic value from their location-sharing activity.
Digg, Foursquare, and Path all raced out to lofty valuations and set high expectations. The difference is that Digg was at least on top for a period of time before its rapid fall from grace. And Foursquare still has a primarily North American audience, not to mention heaps of real-time location and intent data to wave in front of advertisers. Path’s apex seems to have been that Google acquisition offer. While many investors talk about the big one that got away, at least one investor told us Path was the high priced deal he most regrets having won. Ouch.
The question now is whether Path can flip the script and be the late bloomer of the bunch who ends up with a meaningful exit. The track record of such turnarounds in the consumer Internet isn’t so great.
As we have outlined in the past, sometimes the number one factor working in the favor of embattled companies is the fact that they have millions in the bank and thus the luxury of time to figure things out. This is very much Path’s situation. The company isn’t going out of business tomorrow and in fact has a modest, but growing user base. It is likely worth something. The issue is that that audience is not in what most US entrepreneurs and investors would consider a desirable market for a consumer internet play.
Path’s challenge, therefore, is to figure out how to monetize this across-the-world audience and to figure out who might like to own a platform of this type. The company wouldn’t be the first social platform to sell to an international buyer after finding its audience in Southeast Asia. Malaysian payments company MOL Global acquired Friendster for $100 million in 2009 (Facebook acquired $40 million in patents from the company less than a year later).
It’s not out of the question that Path could roll out some new product updates that reinvigorates interest in the platform in North America and other western markets. Morin isn’t one to give up. In fact, a company PR spokesperson tells Pando that Morin and his team have a number of near-term updates in the offing and that outside observers would be wise to reserve judgement. But Path has a history of hyped product launches that just haven’t worked. Many of its features, like Path Search, even received critical acclaim after launching, but all have failed to grow usage in key markets.
It will take a Herculean effort on the part of Morin and his team to right this ship and see Path exit at a price north of its most recent valuation. To do so, the company will need to win over all those users who tried Path, or heard about it from their friends and the media, but long ago decided that it offers nothing for them.
While an alternate ending remains possible, Path’s window appears to be closing. With Google moving past social and Facebook more apt to acquire runaway hits than floundering products, it’s more likely than not that the company will be Friendster 2.0, ultimately selling quietly to an international buyer for pennies on the dollar. It seems not even Buckshot Joe could save this one.
Pando reached out to Path for comment on this article, but was rebuffed at every turn. A company spokesperson told us by phone:
They have no incentive to participate in this article. They have nothing to hide and have been heads down for a reason. They’ve been facing doubters and haters since the beginning, so it’s nothing new. The company just raised money not long ago, and growth continues to be solid. There’s nothing more to say at this time.
This spokesperson later threatened Pando, saying:
They don’t need to justify themselves to you or anyone. We will talk to you when we’re ready to announce something. If you run with your story now, when they do have something to reveal, they’re not going to talk to you about it then.
[illustration by Brad Jonas for Pando]
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