A Rationale for Path’s Series A Investment

The company “Path” announced it raised a Series A investment today of $8.5M for what some believe puts the company at a value of between $20-30M. Many folks seem to be baffled how a company with relatively so little traction could raise so much money. To me, however, it’s obvious, and here’s why I believe an investor would find Path to be an attractive investment right now, in Feb 2011, in a nutshell:

• Trends: Folks believe the social graph can be monetized at the extremes. Those with high followings may be willing to pay for that distribution. Path is the other end — the intimate end.
• Scarcity: What other teams are out there focusing entirely on creating a very personal, niche social network?
• Strategic Alpha: Path announced their small iOS-focused Alpha generated two million shared moments. The Series A money is then for their Beta and beyond, hiring, new platforms, etc.
• Team Track Record: Entrepreneurs with demonstrable track records (Facebook, Digg, Napster, etc.) have an easier time raising money, especially when they join forces. This may not seem fair, or prudent, but it’s worth thinking about it from an investor’s point of view, too.
• Access: Sometimes investors also want to network with entrepreneurs and other investors, and sometimes this can justify a higher price. I don’t know if it happened here, but it happens.
• Photo-sharing: Sharing photos is considered by many to be a “key wedge” activity to build out other networks. It also provides many interesting signals, such as location (via @alexcalic) , context and presence (via @eghosao), and a mobile experience (via @joshelman)
• Valuations Are Not Based Entirely on Potential Business Models: Unless a company goes public, or remains independent but private, certain teams may be acquired for personnel and expertise and/or be coveted by larger players who fight a variety of battles of many different fronts, one of which is clearly social. I’m not suggesting Path won’t have a revenue path, but simply dismissing the investment based on a lack of a business model today is potentially short-sighted.
• Market Dynamics: Picplz raised $5M from Andreessen Horowitz in November 2010, where there was already a direct competitor (Instagram) that arguably was more “hot” at that point in time. Based on that, an additional $3.5M for Path, given the team, the scope of the opportunity, and the vision, it may have been priced correctly. UPDATE: So hot, in fact, that after 12 hours of writing of this, Instagram also announced a new round of funding today at $7.5M and a stellar cast of investors, advisors.

** Hat-tip to my buddy @courtstarr for helping me think this through.