“Winning” SXSW Has Yet To Produce A Winning Business

It’s pretty easy to write yet another post about who “won” SXSW or, if you’re feeling ornery or ambitious, how there are no longer any breakout stars. But there’s an important point lost in this repetitive debate.

SXSW is good at producing cultural phenomena — think apps that take off among a critical mass of digerati, who then fly home and spread these products to other parts of the country or world.

But the conference doesn’t have a track record yet for producing sustainable consumer Internet businesses.

If previous SXSW “winners” Twitter or Foursquare had the revenue growth and the smidge of net income that’s helpful for debuting on public markets, they might have been in the wave of companies that filed for an IPO in the past year.

But they’re still figuring it out. By the time Facebook was as old as Twitter is now, it was already free cash flow positive. Twitter is not quite there, and it will have to grow its revenues a lot to justify an $8 billion valuation (or to even meet Facebook’s revenue multiple based on a $100 billion valuation). Thankfully the company has moved away from vanity metrics, saying in January that it had 100 million users who log in every month. But Foursquare is still talking about registered users, instead of giving numbers that show the exact number of unique people it engages with every month or day.

GroupMe, another SXSW darling, sold to Skype last year, producing a great financial outcome for both the founders and investors. But the company was also in a position where the sale was arguably the best option. If the company had taken another slug of funding, it would have been in some kind of investor-fueled purgatory, sandwiched in a greater struggle between the carriers, Apple’s iMessages and Facebook, which launched Messenger off its Beluga acquisition.

Lastly, look at Highlight. So there’s the hype here, here, here, here and here. Here’s the reality check: it’s still super small (which is fine because it’s sometimes healthier to grow social products slowly). But it’s just much smaller than the hype would suggest. Since Highlight only lets users sign-up for the service through Facebook, you can look at the number of users it has on Facebook to tell how many cumulative sign-ups it has had. It has about 40,000 monthly active users connected to Facebook, so I would bet that it has seen about 50 to 60,000 registered users. If it ends up having mainstream appeal, it runs the risk that Facebook will copy some of its innovations, potentially dampening growth.

All of these companies also face the risk that another faddish app will come along later, wiping out momentum. The consumer web is littered with the corpses of once-hyped social networking products that were deeply engaging, yet never found a solid revenue stream or were eclipsed by a later rival that scaled better or offered a more compelling product. You could argue that Instagram is a substitute for the location sharing that people do on Foursquare. It now has more users than Foursquare does and it’s still only on a single smartphone platform.

Meanwhile there are other parts of the mobile app ecosystem that are sprinting ahead. There are a handful of Android and iOS-based gaming companies that will cross $100 million in revenues this year. With some developers seeing more than 10 million users every single day, they have engagement and revenues that put every other category of mobile apps to shame. (Profit margins are a another story though.)

Now to be fair, I’m not saying that the companies that blew up at SXSW will never be great, sustainable businesses. I’m just saying they’re not there yet.

They have a lot going for them. Foursquare has a wealth of interesting data around how people interact with local businesses, relationships with tons of merchants and brands and Facebook Places didn’t end up crushing the company. The Twitter revenue numbers that Gawker panned last week were a year old and I’ve heard more promising news in recent months about how the company is nailing down revenue per user from ads.

To monetize these products, it just takes years to get brand and local advertisers to understand what they’re paying for. But, if nothing else, they are attractive targets for a certain, very large strategic acquirer that is absolutely desperate to get social networking right or Apple, which could use a social layer that’s embedded into iOS.

The hype shows that SXSW can launch a cultural touchstone like Foursquare or Twitter. But having a highly engaging mobile or web app does not mean you have a business.