DOPA Threatens Venture Capital for US Social Networking Sites

The moves by the federal government to regulate social networking sites — like MySpace.com and others — may cause venture investors to look overseas, and lead to a drop in early stage investments among such sites in the U.S. The House of Representatives last month passed a bill, called the Deleting Online Predators Act (DOPA), but the Senate has yet to move on the controversial legislation, which is ostensibly aimed at protecting youngsters from sexual fiends lurking on the Internet.

Yet, venture capital investors, which have funded several successful social networking startups in the past, are now looking overseas for new growth opportunities. In recent years, Friendster netted US$13 million from VCs including Kleiner Perkins Caufield & Byers, and Meetup.com obtained millions from eBay founder Pierre Omidyar.

Exploring International Options

“We were there in the early days of social networking on the Internet with Match.com, and we’re capitalizing on the same kind of opportunity today in India,” said Deepak Kamra, a general partner of the Menlo Park, Calif.-based venture capital firm, Canaan Partners.

The firm this week invested $8.6 million in “A Round” financing in the firm BharatMatrimony.com, an Indian social networking site, which was founded in 1997, but has been self-funded for nine years. The Indian firm also produces IndiaList.com, and other social networking sites, in a number of different languages, targeted to an array of cultures in India.

This trend could continue, if the Senate passes, and President Bush, signs DOPA, and it may, essentially, create a prohibition for use of the Internet for minors and other populations considered vulnerable by the government in America. Investors looking to make money would have to eye overseas markets, where social networking is just now catching on.

“In the proposed legislation, the government might as well ban the entire Internet for youth,” said Shervin Pishevar, president and chief operating officer of Freewebs.com, a producer of social networking sites in the U.S., with more than 10 million users.

Updating the Laws

Other social networking entrepreneurs in the U.S. agree. Amending the Communications Act of 1934 to protect youngsters from sexual predators who exploit the Internet’s anonymity is something that probably needs to be done, but not with the current legislation. “Most social networking sites play a little fast and loose in maintaining a sufficient level of oversight,” said Adam Levine, chief executive officer of FunMobility, a provider of social networking sites. “Any site that is used by minors should have more advanced image filters, age verification and even unique, traceable identifiers.”

“Restricting members due to issues with a few is a radical overreaction,” said Kel Kelly, a spokesperson for Gather.com, a social networking site for adults. “It’s like restricting all films because a few have adult content.”

Parental Consent Advised

Legislation should focus on requiring Web sites to obtain parental approval for youths to log on, which is similar to what the motion picture industry requires, i.e., restricting films with an “R” rating to adults or younger folks supervised by adults, said Kelly.

An even more effective idea would be to require sites simply to stop offering anonymity to users, making all contributions capable of being “tracked and visible to all,” claimed Bill Junior, who heads computing services at Purchase College, one of the State Universities of New York (SUNY).

The anonymity feature, common to many social networking sites, is not what primarily attracts consumer or investor interest, he explained. “Successful online communities have members with common interests — mundane or profound — and offer a chance for interaction in both the virtual and material worlds,” said Junior, whose college is introducing its own social networking site this fall.

Still, the concern over the safety of kids is gaining momentum. The national Parent Teachers Association (PTA) is holding a briefing later this month on key back-to-school issues. It views the DOPA legislation as an important issue, dubbing the entire population of today’s school-age children the “MySpace Generation,” spokesperson Brian Wachur said. New research is going to be presented on the impact of social networking sites on youths at the PTA forum in New York City, he added.

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