Offerpal sues Gambit, and why that's a bad idea

I'm all for a company's right to protect its intellectual property, but before that decision to file a lawsuit is made, the executive team must at least give some thought to how the suit will be viewed in the industry among press, vendors, partners, and most importantly - customers and potential customers. Yesterday according to TechCrunch, Offerpal filed suit against competitor and former customer, Kickflip - creator of Gambit. Both companies do business in the alternative payment industry where consumers are given the option of participating in offers and research surveys in exchange for virtual currency or services. Facebook applications have become the key battleground for the industry which also includes SuperRewards, PeanutLabs, and TrialPay (Disclosure - my company uses TrialPay for our payment solution).

Kickflip got started as a developer of Facebook apps and turned to Offerpal to help monetize users. Evidently Offerpal didn't perform and Kickflip decided they could do it better. They did and subsequently created Gambit to take the solution to other developers looking for a better solution. Offerpal evidently has a problem with rejection and has filed suit claiming:

[Kickflip] misrepresented its intentions in forming a relationship with Offerpal, and then used the information and trade secrets learned in the course of the relationship to develop and improve Defendant’s own competing service.

I'm not going to debate the legal merits of the suit since I'm obviously not qualified for that. Instead, I'll focus on the business/marketing/PR issues that I have with Offerpal's decision.

Suing former customers should always be a tactic of last resort. I would not want to be an Offerpal sales guy right now and have to answer questions about this from potential customer. This action would make me very leery of doing business with Offerpal which already suffers from some image problems within Silicon Valley.

Contrary to popular belief there is such a thing as bad press. Alternative payment providers in general are getting lots of mentions in the tech press these days because of Facebook and the need to monetize applications. So this thing is going to stick around a while and I think Offerpal will come out on the losing end in the court of public opinion. The suit makes them look petty and scared of competition. The only thing worse than being an Offerpal sales guy is being the Offerpal PR agency. Good luck next week.

Take responsibility for your shortcomings and get better. Kickflip says that they canned Offerpal because they weren't performing. Instead of taking up valuable company resources and mindshare by suing a competitor, how about making your product better instead? We looked at Offerpal before making the decision to go with TrialPay, and they were a distant fifth behind the other list of usual suspects. Their product just wasn't up to snuff in my opinion, and the feeling is shared by many others in the industry.

If you're going to sue, sue deep pockets. Gambit came out of stealth mode in March 2009 and has raised only an angel round of funding. In short, the company has no money, or at least no money worth suing for. Especially considering that Offerpal recently raised $15 million of its own.

So the net of it is that I just don't get this decision by Offerpal. They're using valuable company resources and time to sue a competitor that is significantly smaller and has much fewer resources and funds. And to top it off, they're likely going to take a beating in the press and on blogs. So far it has all the makings of a bad business decision.

Good news, Piczo is worth $200 million

$200 million, $5 million, evidently that's all the same in the world of TechCrunch financial models. The well-known technology blog has issued a follow-up to it's 2008 post about the valuation of the top 27 social networks, and the new version is just as absurd as the first. I can't argue too much with the top 2 spots as Facebook and MySpace are obviously the two most valuable companies on the the list. The exact valuation can probably be debated 10 ways to Tuesday, but I don't think you'll get much argument about their place atop the rankings.

The rest of the list has big issues. Most notably, it's simple to a fault. In fact, to say the model is simplistic would be the understatement of the year. To get the valuation the TechCrunch team did two things: 1) they looked at any publicly available information on valuation (Facebook, Bebo, etc), and 2) they used Comscore data to make a giant assumption about audience and advertising revenue. Both are flawed for various reasons, but most notably is that the success of one company (e.g. Facebook) cannot be applied to value a much lesser competitor (i.e. Piczo).

The simplistic way of valuing these companies leads to obvious problems:

1. LinkedIn has a lower valuation than Twitter. Really?! The profitable LinkedIn that brings in over $100 million in revenue is less valuable than PR-heavy Twitter that has yet to make a meaningful dime of revenue. I understand investing on potential, but someone please explain to me how that makes any sense.

2. Piczo is worth $200 million. Excuse me? Is this the same Piczo that I worked for for 15 months? Look, I met a lot of great people and learned a lot, but even on its best day, Piczo was worth maybe $50 million. At the end, Stardoll picked up the assets for what had to be next to nothing. I'm thinking less than $5 million. So you would have thought that TechCrunch would have done some basic research to weed out the obviously overvalued companies on their list.

3. All users are not created equal. A big flaw in the model is that it treats all users as if they are monetizable in some way. This could not be further from the truth. Aside form geography, demographics also play a key role. In other words, that 13 year old girl from Norway isn't worth quite as much as the 22 year old in the US. That seems pretty obvious, but the TechCrunch model ignored it completely. That of course led to the Piczo problem previously stated. I know first hand how un-monetizable most of those users were.

4. Far flung enterprises prove to be difficult. By that, I simply mean that companies doing business in dozens of countries may have 10 million unique users per month, but only have 500K in any one country. I'm not sure if TechCrunch specifically looked at the country of origin for traffic, but that's a key piece of the analysis. Again, at Piczo we had users in every country from the US, Canada, UK, Germany, Norway, Turkey, Australia, etc. So we only had a small percentage of users that could be monetized via advertising and that proved to be especially challenging.

The bottom line is that throwing out a headline like Modeling the True Value of Social Networks should not be taken lightly. The word "true" means that there should be some solid rationale behind said valuations. That's definitely not the case here, and I expected better out of the annointed king of tech blogs.