Why Venture Capitalists Are Pumping Millions into Anonymous Social Apps

SAN DIEGO, CALIF. (TheStreet) -- In 2014 alone, Whisper, Secret, and Yik Yak, three young smartphone apps for exposing your private thoughts anonymously, have collectively raised more than $80 million. It's a staggering figure for such a high-risk market and the hype is dividing the venture community into believers and skeptics, but those forking over the cash are caught up in the novelty of it, betting this is the next iteration of social networking.

"Just like regular stock investors, VCs are known to chase," Howard Lindzon, CEO of online trader community StockTwits and active angel investor, said of investing in anonymous social apps. "VCs chase metrics. They all look at the same numbers, buy the same data, and see the same exploding metrics." TheStreet is a content partner with StockTwits.

The metrics, according to mostly anecdotal stories from the companies and their investors, seem to suggest that young smartphone users who download Yik Yak, Whisper, or Secret become immediate addicts. Whisper, a mobile confessional app, says users return eight to ten times per day and spend around 30 minutes with the app on a daily basis.

The thrill of the chase -- and more so the catch of the next billion-dollar-plus exit -- is proving so titillating that a bevy of respected venture firms including Lightspeed, Sequoia, Index, Redpoint, and SV Angel, are feverishly buying their way in to the anonymous market and doing so at a pretty premium.

San Francisco-based Secret, which is less than a year old, received a $100 million valuation after its latest funding round, which netted it $25 million in a Series B funding round. For context, it took Facebook (FB) a little more than a year to arrive at a $100 million valuation.

Secret's substantial capital infusion raises the question as to whether investors truly believe that the future of social networking will look more like the identity-free past. The Facebook comparison is no coincidence. Redpoint Partner Ryan Sarver, who led the firm's investment in Secret, told TheStreet that he believes Secret, which pulls contacts from your phone's address-book, and sometimes offers juicy or revealing blind items, can grow to rival the largest social apps for time and attention. "Secret has the opportunity to be the next major social platform," he said.

Two-year-old Whisper, thought to be the largest of the three apps in terms of audience, has raised $60 million in its short life span. The Los Angeles-based company made an early believer out Lightspeed Partner Jeremy Liew, who also led Snapchat's first round of funding. He's particularly fond of Whisper for its ability to hook people for half an hour every day, behavior he says is indicative that youngsters are putting the app on the all-important home screen of their devices.

By comparison, Facebook CEO Mark Zuckerberg said on the company's second quarter earnings call U.S. users spend "40 minutes each day using our service, including about one in five minutes on mobile."

Liew called Whisper's engagement and retention rates "amazing" and "extraordinary," echoing the sentiment of Sarver, who said that Secret's engagement levels and the depth of conversations on the app are something he's never seen before.

Yik Yak, which is about to celebrate its first birthday, will tell a similar tale. The app, which hails from Atlanta, is a digital bulletin board designed by college kids --Tyler Droll, CEO and Brooks Buffington, COO -- for college kids. It's a place for young adults to riff anonymously on whatever they want, be it their peers, campus events, football games, or frat-party conquests. It's not exactly the most educational or inspiring of digital environments. But it is "very college," said early investor Niko Bonatsos, Principal at General Catalyst Partners, and that's a good thing. He, too, is an investor in emphemeral app Snapchat.

"Yik Yak has been the phenomena that figured out how to build something with enormous word of mouth," Bonatasos told TheStreet.

App download data from App Annie suggests he's right. Yik Yak is in the midst of a major back-to-school bump. Buried in Apple's App Store in August, Yik Yak exploded in popularity when students returned to school and ranked as the third most-downloaded app in the US on Sept. 10.

At the heart of Yik Yak is a geolocation feature that limits the 200-character posts you see to those created within a 1.5 mile radius of your location. With this structure, the app propagates from student to student and then from college to college, collecting up to 10,000 students per campus in the process. Yik Yak has a presence on more than 600 college campuses in the US, a company spokesperson said. Auburn, Alabama, Penn State, Florida, and Ohio State are some of the schools with the densest population of Yik Yak users, known as "Yak'ers."

Though Secret, Whisper, and Yik Yak have their distinctions, each of the apps has in common two things: usage numbers that have aroused the private market's senses and less-than-stellar public perceptions as places that encourage bad, sometimes illegal, behaviors.

Spend some time in Whisper, and you'll notice that it can be a melancholy zone where young people voice their unhappiness. The app has also made headlines for its role in allegedly facilitating sex crimes against underage girls. Before introducing a geofencing feature to block high school activity, Yik Yak was the digital burn book for young teenagers and played host to high school bomb threats. Even Secret has a reputation as being the stomping ground of adult bullies.

Each has taken precautions to protect users -- Whisper operates a non-profit to help suicidal youngsters, Yik Yak has tried to kick out high school kids (though maybe not successfully), and Secret stopped allowing users to include real names in posts -- but all are subject to the bad behaviors of people who aren't held accountable for what they say. And it's these less-than-becoming behaviors that have nonbelievers in the VC community avoiding anonymous social apps altogether.

Skeptics like Lindzon, who refers to Secret and its cohorts as "tasteless endeavors," and Union Square Venture's Fred Wilson believe that anonymous apps are more a phase than a phenomenon. Benchmark Partner Bill Gurley, also, in the anti-camp, has said that anonymous apps will be difficult to monetize because of the moody material they house.

"People not invested in this space, can be really smart, but they fail to see the distinctions [between Whisper and other anonymous apps]," Liew said of the critics.

For now, smart moneymen like Liew, Sarver, and Bonatasos are willing to overlook the complications of anonymity. Facebook's real names, Twitter's (TWTR) pseudonymity, and Snapchat's ephemerality were small behavioral changes that had the right mix of mechanics at the right time, Sarver said. It would follow that if one these anonymous apps makes the act of social-networking with people sans identity the new norm, then it too could be worth billions.

As for the tantamount question of whether Secret, Whisper, and Yik Yak can turn their secret playgrounds, atypical and uncomfortable zones for advertisers, into actual businesses, the prevailing line of thought among investors involved is that if these apps reach Web and mobile scale -- tens to hundreds of millions of users -- then they will find a way to monetize.

--Written by Jennifer van Grove in San Diego, Calif.

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